Could one Florida contract separate nontaxable in-wall computer cabling from taxable network equipment and installation?

Subject

Cable Installation

Plain-English summary

A single contract could separate qualifying cabling-plant work from taxable network equipment, but only if all four Department conditions were met. The cabling charge could be excluded from the taxable customer charge as a real-property improvement, while the intelligent hubs, network cards, software, and their installation remained taxable.

The four conditions were:

1. The contract could not retain title to the installed property.
2. The cabling had to be attached to the building as an accession to realty, such as within ceilings, crawl spaces, or walls.
3. Contracts and invoices had to state the cabling labor-and-material charge separately from the network-equipment and installation charge.
4. The contractor had to charge sales tax on the equipment and its installation labor, and pay vendor tax or accrue use tax on the cabling materials and supplies.

If the contract and invoices did not separately identify the cabling charge from the equipment charge, the Department said the entire contract would be subject to sales tax.

What this means for you

The ruling made documentation decisive. Physical installation as in-wall wiring was not enough by itself; the contract, invoices, tax charged on equipment, and tax paid or accrued on cabling materials all had to follow the stated treatment.

Common questions

Q: Were intelligent hubs and other network products treated as real property? No. They could be removed without significant damage and were treated as taxable equipment.

Q: Could cabling and equipment appear in one contract? Yes, if every stated condition was satisfied.

Q: What happened if the charges were not separately stated? The entire contract was taxable under the ruling's caveat.

Citations and references

• Fla. Stat. § 212.05(1)(e)1.b-c and (e)2 — cited telecommunications and television-system provisions
• Fla. Admin. Code r. 12A-1.046 — proposed amendments cited as contemporary Department policy
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-028

Original ruling text

Title:

Cable Installation

May 06, 1993

Re: TAA 93A-028
Application of Sales Tax to Contracts Covering Both the
Sale and Installation of Computer Cabling Plants and
Network Electronic Equipment
Taxpayer: XXX (Herein collectively "Company")
FEI#: XXX

Dear :

This reply is to your December 16, 1992, petition for the
Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S., concerning the captioned
matter and parties. Your petition has been carefully examined
and the Department finds it to be in compliance with the
requisite criteria set forth in Chapter 12-11, F.A.C.
Therefore, the Department is herewith granting your request for
the issuance of a TAA and the ensuing discourse shall embody
said ruling.

DISCUSSION OF FACTS

Your petition sets forth the following portrayal of facts
relating to the issues under advisement:

"The Company sells cables and cable accessories at retail
and at wholesale to customers located throughout the United
States. The Company collects and remits sales tax to the
State of Florida on each sale in Florida, unless the
customer furnishes the Company with a resale certificate or
a consumer certificate of exemption.

"The Company also contracts to install computer cable in
commercial buildings (completed buildings and buildings
under construction) for customers located throughout the
United States. The cable is installed above ceilings, in

crawl spaces, and in walls much the same, as electrical
wiring. Plates, much like electrical outlets, are installed
in the buildings as part of the job. This retrofitting of
buildings enables the Company's customers to network
computers and peripherals. In the past, the Company's
customers have supplied all the computer, electronic
hardware and software for the network. The Company
supplied only the improvements to its customer's buildings.
The installed cabling is commonly referred to in the
industry as a `cabling plant.'

"The principal terms of the Company's contracts for the
installation of computer cable are uniform. Basically, the
contracts outline the scope and cost of the work to be
performed. Significantly, the Company does not separately
itemize the price of the cable and charge a separate labor
charge per hour. Rather, the Company's contracts are lump
sum contracts. The Company charges its customers lump sum
for the entire transaction, including materials and labor.
In nearly every instance, the contracts give no indication
what portion, if any, of the contract price is allocable to
the cost of the cable or the cost of installation. In
those instances where the portion of the contract price
relating to materials is separately shown, the cost of
those materials is not itemized. Instead, it is shown as a
lump sum portion of the total contract price. The Company
does not charge its customers sales tax on these lump sum
contracts for installation of computer cable because the
Company's work constitutes an improvement to real property
that is not subject to sales tax.

"The Company purchases the cable it uses from various
sources. The Company has always paid use tax on the cable
and other materials it purchases for use in the performance
of lump sum contracts for the improvement to real property
(`lump sum contract'). In those instances where the
Company manufactures materials for use in performing a lump
sum contract, the Company accrues use tax in accordance
with the law and the Department's rules.

"The Department completed a sales and use tax audit of the

Company in 1992. The Company's treatment of the
installation of cabling plants as lump sum contracts was
upheld by the Department. The Company's treatment of these
contracts as lump sum was also affirmed by the Department
in a letter of technical advice dated July 1, 1988, a copy
of which is enclosed.

"The Company is diversifying its business beyond the
installation of cabling plants. The Company intends to
sell and install network electronic equipment (network products') including intelligent hubs, network interface cards, and network management software for local area networks (LAN'). The network products are an integral part
of the operating LAN. They link the personal computers
(`PC's') and peripherals, creating an intelligent cabling
plant. Unlike the cabling plant, the network products may
be removed from the building without causing significant
damage to either the network products or the building."

In framing the issues under advisement, your petition goes on to
provide the following chronology of the technological
advancements relative to the computer industry in which Company
engages:

"For many years, the computer communication system
consisted of a wiring closet that operated as the
administrative management center for all the computer
devices and peripherals. Under prior technology, the
wiring closet contained a panel into which peripherals were
plugged. In order to access a peripheral, a person would
have to physically move the plug for a given device or
peripheral to an available port, thereby connecting a
peripheral to the host computer. Thus, if a person needed
access to different peripherals, he would have to manually
change the cables plugged into the panel. With this dated
technology, managing connectivity was difficult and
cumbersome.

"Technology has developed rapidly and the manual plug
system has been replaced by what is commonly referred to as
the `intelligent hub.' The intelligent hub is designed to

allow many devices to be used by each PC without requiring
that the plugs be moved manually. The intelligent hub acts
as a `traffic cop' by allowing a PC to, or prohibiting it
from, accessing a particular device or peripheral. If a
peripheral, such as printer, is being accessed by a PC, the
intelligent hub will deny access to other PC's until the
printer is again available.

"In order to access the network, each PC must have a
network interface card installed in it. The network
interface card allows the PC to access the LAN. The
intelligent hub manages the connectivity and system traffic
among the PC's, the devices and the peripherals.

"The intelligent hub can be removed from the building
without major work and without causing major damage to the
hub or the building. However, it has little functional
value separate and apart from the cabling plant and the
related computers and peripherals.

"Depending on whether the cabling plant is installed during
construction of the building or after the completion of
construction, the ratio of the cost of the cabling plant to
the intelligent hub (and other network products) will vary.
Depending on the size of the cabling plant and network
product contract, the cost of the cabling plant may be
significantly greater than the cost of the network
products.

"PC's can be linked and can operate without an intelligent
hub. The PC's could be cabled together with the
peripherals and then operate as a network. The intelligent
hub merely adds a level of sophistication to the network
allowing it to operate more efficiently and effectively it provides a cost effective system with cabling advantages

• it allows PC's on the network more flexibility with
  peripherals and other PC's."

REQUESTED ADVISEMENT

You endeavor to receive the Department's advice regarding the

following issues:

"As discussed above, the Department has determined that the
Company's installation of cabling plants is an improvement
to real property pursuant to a lump sum contract. The
issue here is whether the Company's sale and installation
of network products are taxable as the sale of tangible
personal property. If the sale of this equipment is so
taxed, does this treatment alter the taxation of the
installation of cabling plants pursuant to a lump sum
contract? If it would alter how the cabling plants are
taxed, can the Company separate the contract for the sale
and installation of cabling plants from the contract for
the sale and installation of the network products and
continue to characterize the cabling plants as an
improvement to real property pursuant to a lump sum
contract?"

DISCUSSION AND ANALYSIS OF LAW AND POLICY

In addressing the issues under advisement, it is useful to
examine the statutory sales tax treatment of the installation of
telecommunication, telegraphic, and television system program
service equipment. In furtherance of this examination, we refer
to the provisions of s. 212.05, F.S., which provide in
significant 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:...
"(e)1. At the rate of 6 percent on charges for:...
"b. Any television system program service.
"c. The installation of telecommunication and telegraphic
equipment....
"2. For purposes of this part, `television system program
service' means the transmitting, by any means of any audio
or video signal to a subscriber for other than

retransmission, or the installing, connecting,
reconnecting, disconnecting, moving, or changing of any
equipment related to such service...." (Emphasis Supplied)

With respect to the above, the Department has adopted the
position that under certain specified conditions, contracts
covering the installation of telecommunications equipment and
wiring or television system program service equipment and wiring
can be bifurcated whereby the wiring portion of the contract can
be treated as a contract to make improvements to realty. The
first of the required conditions is that there be no retained
title provisions or terms within the contract. The second
required condition is that the wiring must be attached to the
realty in such manner as to become an accession to the realty
such as installation within the ceiling, crawl space, and
interior of the walls of a building. The third requirement is
that the contract and invoices must separately state and
identify the charge for wiring (labor and materials) entirely
apart from the charge for furnishing and installing the
equipment. Lastly, the contractor must charge sales tax to the
customer on the charges for the equipment and attendant
installation labor and must pay tax to its vendor/supplier on
the purchase price of the materials and supplies requisite to
performing the wiring portion of the contract or accrue and
remit to this agency use tax on the cost of such materials and
supplies.

Evidence of the Department's position, as described above, is
manifested in the proposed rule amendments ("Amendments") to
Rule 12A-1.046, F.A.C., published in the Florida Administrative
Weekly, Volume 18, No. 49, Page 7485, December 4, 1992.
Although these Amendments exist only in proposed state at this
juncture, they are reflective of the Department's contemporary
policy, as described above, with respect to the particular types
of contracts mentioned in the foregoing discussion. Considering
the substantial similarities between the installation of
telecommunications equipment and wiring or television system
program service equipment and wiring and the installation of the
network products and cabling plants (wiring "above ceilings, in
crawl spaces, and in walls"), the Department finds that a sales
tax treatment paralleling that described above for

telecommunications equipment and wiring or television system
program service equipment and wiring is in order.

CONCLUSIONS

The foregoing presentation evidences and explains the
Department's contemporary policy with respect to the sale and
installation of telecommunications equipment and wiring and
television system program service equipment and wiring and the
merits of extending equivalent treatment to Company's
installation of the network products and cabling plants provided
that all conditions described in the above description of the
Department's policy are fully satisfied.

Therefore, the Department hereby affirms that Company may
contract for the installation of cabling plants and the sale and
installation of network products by means of a single contract
and exclude from the sales taxable charge made to its customers
that portion of the contract amount relating to installation of
the cabling plants provided that all conditions set forth in the
above policy description are complied with in full. For the
purpose of reiteration these conditions are restated as: (i)
that there be no retained title provisions or terms within the
contract; (ii) that the wiring (cabling plant) must be attached
to the realty in such manner as to become an accession to the
realty such as installation within the ceiling, crawl space, or
interior of the walls of a building; (iii) that the contract and
invoices must separately state and identify the charge for
wiring (labor and materials) entirely apart from the charge for
furnishing and installing the equipment (network products); and
(iv) that the contractor must charge sales tax to the customer
on the charges for the equipment (network products) and
attendant installation labor and must pay tax to its
vendor/supplier on the purchase price of the materials and
supplies requisite to performing the wiring (cabling) portion of
the contract or accrue and remit to this agency use tax on the
cost of such materials and supplies.

CAVEAT

You are hereby alerted to the fact that unless the Company's

contract and invoices separately state and identify the charge
for installing (wiring) the cabling plant (labor and materials)
in the walls, crawl space, and ceiling of the building entirely
apart from the charge for furnishing and installing the network
products (equipment), the contract in its entirety will be
deemed subject to sales tax.

This response constitutes a Technical Assistance Advisement
under s. 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 s. 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 and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/