Were cathodic corrosion-protection contracts taxable property sales or real-property-improvement contracts?

Plain-English summary

The Florida Department of Revenue declined to classify all of this taxpayer's cathodic corrosion-protection contracts the same way. Each project required a case-by-case review of the protected property, permanence, affixation, removability, and predominant contract purpose.

Systems installed deep in the ground, under concrete, or around pipelines and non-water storage tanks with no intent to remove them tended to be real-property improvements. The contractor would generally pay tax on materials rather than collect tax on the improvement charge.

Systems suspended inside water tanks and easily removed tended to be taxable tangible personal property. Bolting a system in place supported real-property treatment, but easy removal without damage pointed the other way. Work on vessels, platform rigs, or other tangible property was taxable on the full sales price, including related engineering and monitoring services.

What this means for you

Cathodic-protection contractors

Do not use one tax treatment for every system. Retain contracts, plans, installation depth, attachment method, removal intent, and evidence of how the underlying property is classified.

Industrial and municipal customers

The same protective function can produce different tax results depending on whether the installed system becomes part of real property or remains removable equipment.

Accountants and tax professionals

Review mixed contracts and separately sold parts or services. The ruling could not decide the taxpayer's defense-contract exemption without project-specific facts.

Common questions

Q: Were permanently buried pipeline systems real-property improvements?
A: The stated facts tended to support that classification.

Q: Were easily removable suspended water-tank systems tangible personal property?
A: The stated facts tended to support that classification.

Q: Did the ruling approve every defense contract as exempt?
A: No.

Citations and references

• Fla. Stat. §§ 212.02, 212.05, 212.06(14), 212.08(17), and 213.22
• Fla. Admin. Code r. 12A-1.051

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 16A-015

Original ruling text

Executive
Director
Leon Biegalski

QUESTION: ARE TAXPAYER’S CONTRACTS FOR REAL PROPERTY IMPROVEMENTS?
ANSWER: THE CONTRACTS VARY AND MUST BE DECIDED ON A CASE BY CASE BASIS.
September 9, 2016
Subject: Technical Assistance Advisement (“TAA”) 16A-015
Sales and Use Tax
Real property improvements; Cathodic protection
Section(s) 212.02, 212.05, 212.06, 212.08(17), Florida Statutes (“F.S.”)
Rule(s) 12A-1.051, Florida Administrative Code (“F.A.C.”)
XXXX (“Taxpayer”)(“Petitioner”)
FEIN: XXXX
BPN: XXXX
Dear XXXX:
This letter is a response to your petition dated May 6, 2016, for the Department’s issuance of a
Technical Assistance Advisement (“TAA”) to Petitioner, regarding whether Taxpayer is a real
property improvement contractor. Your petition has been carefully examined, and the
Department finds it to be in compliance with the requisite criteria set forth in Rule Chapter 1211, F.A.C. This response to your request constitutes a TAA and is issued to you under the
authority of section 213.22, F.S.
Issue
Whether sales made by Taxpayer are for real property improvements or sales of tangible
personal property?
Facts
Taxpayer provides cathodic protection systems and related services, including design
engineering services. These systems are designed to provide corrosion protection to certain
metal and concrete structures, including pipelines, refineries, water and storage tanks, platform
rigs, and other industrial property. Taxpayer’s cathodic protection systems are designed to
prevent corrosion in new structures and mitigate corrosion in existing structures. Taxpayer uses
Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

http://dor.myflorida.com/dor/
Florida Department of Revenue
Tallahassee, Florida 32399-0100

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different types of equipment, products, and services to protect various types of structures. The
systems may include different types of anodes and rectifiers, including those made of different
metals, impressed current anodes, and galvanic anodes. Taxpayer may also provide coating
protection, installation, testing, and monitoring.
XXXX. The cathodic protection devices or items are placed in the ground. Taxpayer may place
them encased in concrete approximately 100 feet deep. In some instances, no concrete
encasement is used. In other cases, the items are placed closer to the ground. The items will not
be replaced. When needed, another similar system will be installed in a similar manner.
Taxpayer provides cathodic protection systems for storage tanks used to store hazardous liquids
and other industrial materials. On existing tanks, the anodes are installed less than 20 feet in the
ground surrounding the existing tank. For new tanks, the anode is placed under the concrete slab
on which the tank is built. The anodes and other items cannot be removed. Taxpayer provides
coating of the tank. Taxpayer also monitors and inspects the systems.
Taxpayer provides cathodic services to water and storage tanks. In some instances, the systems
are permanently installed within the tank. In other instances, the system is suspended or hung
with or without being bolted while submerged in the water contained in the tank. Taxpayer may
remove the current system when installing a new system. In some instances, the system is easily
removed. In some instances, a municipality or other local government unit may be the customer.
Taxpayer furnishes engineering support to the XXXX. The support services include protection
system design, system inspection for corrosion control, cathode installation and augmentations,
protective coating, and cathode protection management. Taxpayer also manages cathodic
protection systems.
Taxpayer also surveys and repairs projects as a primary contractor. XXXX. Taxpayer’s
engineering design services and monitoring services are contracted and billed on time and
materials used. Taxpayer also sells parts direct to customers and contractors.
Taxpayer provided several contracts and/or billings with the request. This documentation relates
only to the pipelines and above ground tanks.
Taxpayer Position
Taxpayer maintains that the sales related to pipelines and non-water storage tanks are real
property contracts. In these contracts, Taxpayer maintains that the tax is based on the
manufactured costs of the anodes and materials used. In regard to water tanks system sales,
Taxpayer maintains the sales are for repairs and installations of tangible personal property.
Taxpayer maintains that cities are exempt on these types of contracts. Taxpayer maintains that
all defense contracts are exempt from the tax, as provided by s. 212.08(17), Florida Statutes
(“F.S.”). Taxpayer maintains that engineering and monitoring services are not subject to sales
tax.

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Applicable Law and Discussion
Section 212.05(1)(a)1.a., F.S., provides, in part, the following:
It is hereby declared to be the legislative intent that every person is exercising a taxable
privilege who engages in the business of selling tangible personal property at retail in
this state ….
(1) For the exercise of such privilege, a tax is levied on each taxable transaction or
incident, which tax is due and payable as follows:
(a)1.a. At the rate of 6 percent of the sales price of each item or article of tangible
personal property when sold at retail in this state, computed on each taxable sale for the
purpose of remitting the amount of tax due the state, and including each and every retail
sale.
Section 212.02(10)(h) and (14)(a), F.S., provide, in part, the following:
(10(h) “Real property” means the surface land, improvements thereto, and fixtures, and is
synonymous with “realty” and “real estate.”

(14)(a)“Retail sale” or a “sale at retail” means a sale to a consumer or to any person for
any purpose other than for resale in the form of tangible personal property …. A sale for
resale includes a sale of qualifying property. As used in this paragraph, the term
“qualifying property” means tangible personal property, other than electricity, which is
used or consumed by a government contractor in the performance of a qualifying contract
as defined in s. 212.08(17)(c), to the extent that the cost of the property is allocated or
charged as a direct item of cost to such contract, title to which property vests in or passes
to the government under the contract. The term “government contractor” includes prime
contractors and subcontractors. As used in this paragraph, a cost is a “direct item of cost”
if it is a “direct cost” as defined in 48 C.F.R. s. 9904.418-30(a)(2), or similar successor
provisions, including costs identified specifically with a particular contract.
Section 212.06(14), F.S., provides, in part, the following:
(14) For the purpose of determining whether a person is improving real property, the term:
(a) “Real property” means the land and improvements thereto and fixtures and is
synonymous with the terms “realty” and “real estate.”
(b) “Fixtures” means items that are an accessory to a building, other structure, or land and
that do not lose their identity as accessories when installed but that do become permanently
attached to realty….
(c) “Improvements to real property” includes the activities of building, erecting,
constructing, altering, improving, repairing, or maintaining real property.

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Section 212.08(17), F.S., provides, in part, the following:
(17) (a) Subject to paragraph (d), the tax imposed by this chapter does not apply to the
sale to or use by a government contractor of overhead materials. The term “government
contractor” includes prime contractors and subcontractors.
(b) As used in this subsection, the term “overhead materials” means all tangible personal
property, other than qualifying property as defined in s. 212.02(14)(a) and electricity,
which is used or consumed in the performance of a qualifying contract, title to which
property vests in or passes to the government under the contract.
(c) As used in this subsection and in s. 212.02(14)(a), the term “qualifying contract”
means a contract with the United States Department of Defense or the National
Aeronautics and Space Administration, or a subcontract thereunder, but does not include
a contract or subcontract for the repair, alteration, improvement, or construction of real
property, except to the extent that purchases under such a contract would otherwise be
exempt from the tax imposed by this chapter. (Emphasis added)
(d) The exemption provided in this subsection applies as follows:

4. Beginning July 1, 2003, the entire sales price or cost price of such overhead materials
   is exempt from the tax imposed by this chapter.
   The exemption provided in this subsection does not apply to any part of the cost of
   overhead materials allocated to a contract that is not a qualifying contract.

Rule 12A-1.051, Florida Administrative Code (“F.A.C.”), provides, in part, the following:
(1) Scope of the rule. This rule governs the taxability of the purchase, sale, or use of
tangible personal property by contractors and subcontractors who purchase, acquire, or
manufacture materials and supplies for use in the performance of real property contracts
other than public works contracts performed for governmental entities, which are governed
by the provisions of Rule 12A-1.094, F.A.C….
(2) Definitions. For purposes of this rule, the following terms have the following
meanings:
(a) "Fabricated cost" means the cost to a real property contractor of fabricated items, as
defined in the following paragraph. The elements of cost included in fabricated cost are set
forth in Rule 12A-1.043, F.A.C….

(c)1. "Fixture" means an item that is an accessory to a building, other structure, or to land,
that retains its separate identity upon installation, but that is permanently attached to the
realty. Fixtures include such items as wired lighting, kitchen or bathroom sinks, furnaces,
central air conditioning units, elevators or escalators, or built-in cabinets, counters, or
lockers.

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2. In order for an item to be considered a fixture, it is not necessary that the owner of the
   item also own the real property to which the item is attached. A retained title provision in a
   sales contract or in an agreement that is designated as a lease but is in substance a
   conditional sales contract is not determinative of whether the item involved is or is not a
   fixture. Similarly, the fact that a lessee or licensee of real property rather than the
   lessor/owner enters into a contract for an item to be permanently attached to the real
   property does not prevent that item from being classified as a fixture.
3. The determination whether an item is a fixture depends upon review of all the facts and
   circumstances of each situation. Among the relevant factors that determine whether a
   particular item is a fixture are the following:
   a. The method of attachment. Items that are screwed or bolted in place, buried
   underground, installed behind walls, or joined directly to a structure’s plumbing or wiring
   systems are likely to be classified as fixtures. Attachment in such a manner that removal is
   impossible without causing substantial damage to the underlying realty indicates that an
   item is a fixture.
   b. Intent of the property holder in having the item attached. If the property holder who
   causes an item to be attached to realty intends that the item will remain in place for an
   extended or indefinite period of time, that item is more likely to be a fixture. That intent
   may be determined by reviewing all of the property holder’s actions in regard to the item,
   including how the item is treated for purposes of ad valorem and income tax purposes. For
   example, if a property owner reports the value of the item for purposes of ad valorem
   taxation of the realty and depreciates the item for tax and financial accounting purposes as
   real property, that indicates an intent that the property is permanently attached as a fixture.
   c. Real property law. If an interest in an item arises upon acquiring title to the land or
   building, the item is more likely to be considered a fixture. For example, if the seller of
   real property would be expected to leave an item behind when vacating the premises for a
   new owner without the contract specifically requiring that it be left, that item is likely to be
   classified as a fixture.
   d. Customization. If items are custom designed or custom assembled to be attached in a
   particular space, they are more likely to be classified as fixtures. Customization indicates
   intent that the items are to remain in place following installation.
   e. Permits and licensing. If installation of an item requires a construction permit or
   licensing of the contractor under statutes or regulations governing the building trades, that
   item is more likely to be regarded as a fixture.
   f. Legal agreements. The terms of any purchase agreement, deed, lease, or other legal
   document pertaining specifically to an item may be relevant in determining whether that
   item is a fixture of real property.
   The foregoing list of factors relevant to determining whether an item is a fixture is
   intended to be illustrative only. Additional factors may exist in any particular case, and the
   weight to be given to the factors will also vary in each case.

(h)1. "Real property contract" means an agreement, oral or written, whether on a lump
sum, time and materials, cost plus, guaranteed price, or any other basis, to:

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a. Erect, construct, alter, repair, or maintain any building, other structure, road, project,
development, or other real property improvement;
b. Excavate, grade, or perform site preparation for a building, other structure, road, project,
development, or other real property improvement; or
c. Furnish and install tangible personal property that becomes a part of or is directly wired
or plumbed into the central heating system, central air conditioning system, electrical
system, plumbing system, or other structural system that requires installation of wires,
ducts, conduits, pipes, vents, or similar components that are embedded in or securely
affixed to the land or a structure thereon.

Real property is defined by s. 212.02(10)(h), F.S., to include surface land, improvements, and
fixtures. Section 212.06(14)(c), F.S., provides that improvements include activities of building,
erecting, constructing, altering, improving, repairing, and maintaining real property. Section
212.06(14)(b), F.S., provides that fixtures include an accessory to the building and land that does
not lose its identity as an accessory when installed. Industrial machinery or equipment is not
considered to be a fixture. To the extent that the systems put in place by Taxpayer include
primarily equipment, then Rule 12A-1.051, F.A.C., does not apply.
Rule 12A-1.051(4), F.A.C., provides that generally real property improvement contractors are
the ultimate consumers of materials and supplies they use to perform real property contracts and
must pay tax on their costs of those materials and supplies. Also see Rule 12A-1.051(10),
F.A.C., regarding the calculation of use tax on fabrication costs. If Taxpayer’s cathodic system
projects involve a combination of real property improvements and the sale of tangible personal
property, then Taxpayer’s agreements with its customers may be mixed contracts. See Rule
12A-1.051(8), F.A.C.
The primary issue identified by the request is whether Taxpayer is improving real property or
selling tangible personal property for different types of transactions. Section 212.05, F.S.,
provides that the sale of tangible personal property is subject to sales tax. Sales tax also applies
on the sales price for the sale, installation, and repair of tangible personal property. It also
applies to engineering or monitoring services that are part of the sale of tangible personal
property. For example, design engineering and installation labor are part of the sale of tangible
personal property when the contract is in regard to the sale, repair, or fabrication of tangible
personal property. When Taxpayer’s sales are performed on vessels, platform rigs, or other
items clearly involving tangible personal property, then Taxpayer must collect sales tax on the
full sales price, including monitoring and engineering services that are part of the sale of the
system. However, if the installation or repair is done so the property sold is permanently affixed
to real property, then the charge may qualify as a real property improvement of which the charge
for the improvement is not subject to sales tax, as provided by Rule 12A-1.051, F.A.C.
To the extent that the system installed is predominantly equipment or machinery, then the
charges are for installation of tangible personal property. Also, services, such as coating
performed on pipeline or other tangible personal property prior to installation with a real
property improvement, are considered as fabrication to tangible personal property that is subject

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to sales tax. In addition, you should note that cathodic protection systems used in relation to
electricity production were considered to be related to tangible personal property. See
Jacksonville Electric Authority v. Department of Revenue, 486 So.2d 1350 (Fla. App. 1st DCA
1986).
Specific activities classified as real property contracts typically involving an improvement to real
property include drilling, steel and concrete installation, foundational work, cement and concrete
work, and coating such as painting and waterproofing. Also included are electrical system
installation and repairs, including structural wiring and cabling, meter boxes, switches,
receptacles, wall plates, and similar items. Other examples are included in Rule 12A-1.051(17),
F.A.C. To the extent that Taxpayer’s activities are those identified by this Rule, then the activity
is related to a real property improvement.
Although Rule 12A-1.051, F.A.C., does not identify the characterization of water tanks,
pipelines, and storage tanks, this type of property could be construed as real property, since these
items are typically considered to be fixtures. The installation of a cathodic protection system
could be construed as a real property improvement for sales tax purposes if the systems do not
predominantly include a device, equipment, or machinery.
Response
Section 212.05, F.S., provides that the sales tax must be imposed on the sale of tangible personal
property. Section 212.21(2), F.S., provides, in part, the following:
(2) It is hereby declared to be the specific legislative intent to tax each and every
sale, admission, use, storage, consumption, or rental levied and set forth in this
chapter, except as to such sale, admission, use, storage, consumption, or rental as
shall be specifically exempted therefrom by this chapter subject to the conditions
appertaining to such exemption….
All sales of tangible personal property are taxable unless the items are specifically exempt from
the tax. Wanda Marine Corporation v. Department of Revenue, 305 So.2d 65 (Fla. 1st DCA
1974).
Rule 12A-1.051(17), F.A.C., provides, in part, that the determination whether any particular job
involves a contract for an improvement to real property will be based on criteria set forth in
paragraphs (c), (d), (e), (g), (h), (i), and (j) of subsection (2). In this instance, the criteria
established in paragraph (c), F.A.C., should be determined for each type of contract by Taxpayer.
Although the request did not provide all facts related to each criterion for each contract provided
with the request, the response is being made limited to the facts provided.
Taxpayer must maintain documentation to support exempt transactions for a minimum of three
(3) years. See ss. 212.13(2), 213.35, and 95.091, F.S. Consequently, under Florida law, the
burden is on Taxpayer, as the party claiming the exemption, to establish from its books and

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records that it is clearly entitled to a particular exemption when making a sale. This includes
exemption certificates used to support an exempt sale. It also includes documentation regarding
the criteria established for Rule 12A-1.051(2)(c), (d), (e), (g), (h), and (i), F.A.C. Therefore, a
review of documentation, including proposals, purchase orders, billings, agreements,
characterization of the property for federal and local tax purposes, and other relevant
information, should be reviewed for each type of contract.
Although the documents provided regarding specific pipeline and non-water storage tanks do not
provide clarification of the circumstances, the request provides general information regarding
these two types of projects. The request provides that Taxpayer will install the cathodic system
into the ground, and/or sometimes, within or beneath the concrete foundations. The request
provides that in some instances, the system is placed in the ground at substantial depths below
the surface or below items that are protected by the cathodic system. The request provides that
for all projects, the intent is to never remove the cathodic system put in place. Even when a new
system is required, the old system is not removed. These circumstances tend to demonstrate that
the criteria identified by Rule 12A-1.051(2)(c)3.a. and b., F.A.C., are satisfied to establish that
Taxpayer is acting as a real property improvement contractor for these projects.
In regard to the above ground water storage tanks projects, Taxpayer did not provide any
documentation regarding the criteria provided for by Rule 12A-1.051(2)(c), F.A.C. The request
provides that Taxpayer will install the cathodic system in one of two manners. Taxpayer may
simply hang the system submersed in the water contained in the tank. Taxpayer may attach the
cathodic system to the tank.
In both instances, the intent will be to replace the old system with a new system, which will
result in the removal of the old system. Removal in either instance will be easily done without
damage to the tank. When the cathodic system is installed by hanging in suspension with the
intent to remove it at a later date, then these circumstances tend to demonstrate that the criteria
identified by Rule 12A-1.051(2)(c)3.a. and b., F.A.C., are satisfied to establish that Taxpayer is
acting as a seller of tangible personal property.
When Taxpayer bolts the system in place, this tends to demonstrate that Taxpayer is acting as
real property improvement contractor. However, since removal will not cause damage to the
tank, as indicated in the request, this will also tend to demonstrate that Taxpayer is selling
tangible personal property. When Taxpayer’s customer is a local governmental entity, then
Taxpayer may accept the exemption certificate provided by the customer, including the ones
included within the request. Taxpayer is required to provide proof of the method of affixation
and removal.
In regard to Taxpayer’s defense contracts, no information or documentation regarding a
particular project was provided. Therefore, a specific response cannot be made. To the extent
the Taxpayer can establish that the criteria provided by s. 212.08(17), F.S., can be confirmed,
then Taxpayer sales may qualify for the exemption. You should note that real property
improvements contracts are not qualifying contracts for purposes of the exemption. See s.
212.08(17)(c), F.S.

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Technical Assistance Advisement

This response constitutes a Technical Assistance Advisement under section 213.22, F.S., which
is binding on the Department only under the facts and circumstances described in the request for
this advice, as specified in section 213.22, F.S. Our response is predicated on those facts and the
specific situation summarized above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the statutes or rules, upon which this
advice is based, may subject similar future transactions to a different treatment than expressed
in this response.
You are further advised that this response, your request and related backup documents are public
records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions
of section 213.22, F.S. Confidential information must be deleted before public disclosure. In an
effort to protect confidentiality, we request you provide the undersigned with an edited copy of
your request for Technical Assistance Advisement, the backup material and this response,
deleting names, addresses and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department within 10 days of the date of this
letter.
Respectfully,

Charles Wallace
Technical Assistance & Dispute Resolution
850-717-7541
Record ID: 210691