Should a custom-closet installer collect tax on its lump-sum customer price or pay contractor use tax on fabricated cost?

Subject

Sale, Fabrication, and Installation of Custom Closets

Plain-English summary

The custom closets were real-property fixtures, and the installer was a lump-sum real-property contractor rather than a retailer of completed closets. The systems were permanently attached to walls with rails, L brackets, and screws.

The installer should not collect sales tax on the lump-sum customer charge. It was the consumer of materials and had to accrue use tax on full fabricated cost, including untaxed direct materials, direct labor, and indirect manufacturing costs. Qualifying fabrication labor incurred at the specific job site was not taxable.

What this means for you

Permanent attachment and the all-inclusive contract changed the tax point from the customer invoice to the contractor's acquisition and fabrication costs.

Common questions

Did the installer charge sales tax on the lump-sum contract? No.

What if sales tax had already been paid on direct materials? The cited rule excluded those taxed materials when computing fabricated-cost tax.

Was all fabrication labor taxable? No. Labor incurred at the temporary job site for the specific job was excluded.

Citations and references

• Fla. Stat. §§ 212.02(10)(h) and 213.22
• Fla. Admin. Code r. 12A-1.051(2), (5)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-078

Original ruling text

Dec 22, 1993

Re: Technical Assistance Advisement 93(A)-078
Sales Tax- Sale, Fabrication, and Installation of Custom
Closets
Rule 12A-1.051, F.A.C.
XXX (herein the "Taxpayer")

Dear :

This response is in reply to your October 29, 1993, 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 and supporting documents impart the following
significant information regarding the issues under advisement
herein:

FROM YOUR PETITION
"[The Taxpayer] was incorporated in May of 1993, and
started doing business under the dba [the Taxpayer] on June
1, 1993. All sales to date have included a 6% tax to the
client, which has duly been paid by the [Taxpayer] in a
timely manner.

"It has, however, come to my attention on numerous
occasions that many of our competitors, doing similar style
work, do not charge sales tax for their products.
Obviously, this is not fair to me or may customers, hence
this request for a ruling on this issue.

"The [Taxpayer] is engaged in the sales, fabrication and
installation of wood-laminate custom closets. The typical
transaction involves a design/sales call to the client's
home, where an estimate is given for work requested. The
price to the client is all-inclusive, except the sales tax.
This means that the sale price includes all labor, all
materials, delivery and installation of a finished closet
system.

"Our closets are a wall-based, stud-mounted system. They
are permanently attached to the wall by means of a rail
system and L brackets. No part of it sits on the floor or
is moveable. Other work we do, including garage and office
storage systems will also always be permanently affixed to
the wall, but may have adjustable legs underneath for
additional support.

"I have been made aware many times by clients that they
have not been required to pay sales tax on mica built-in
work they have had done, which does seem to be a similar
circumstance. In a preliminary conversation with a
Department of Revenue representative, she felt that perhaps
our work may require a use tax to be paid on materials,
instead of a sales tax."

FROM PURCHASE ORDER & CONTRACT

The document entitled "PURCHASE ORDER & CONTRACT" submitted as
an exhibit to your request contains a schedule for specifying
the number and color of closets and the width, size, color, and
quantity of accessories. The Purchase Order & Contract quote a
lump sum figure to the customer in the following manner:

"We will make the installation in your closet or closets,
as designated and described for the price of $XX plus sales
tax."

FROM THE BROCHURE

The brochure submitted as an exhibit to your petition contains
the following statements which attest to the customized nature

of the closets:

"Each closet designed and accessorized to suit individual
needs and budgets....

"Our professional designers evaluate your individual needs,
then custom design storage systems that provide you with
the solution...."

FROM FOLLOW UP TELEPHONE CONVERSATION

In a telephone conversation of December 7, 1993, XXX of your
company provided further clarification regarding the manner in
which the closets are anchored to a wall. It is my
understanding from my discussion with XXX that the top of the
closets hangs on a rail which is screwed to the wall and the
bottom of the closets is then anchored to the wall by means of L
brackets which are screwed to the closet and the wall.

REQUESTED ADVISEMENT

You endeavor to elicit the Department's advice regarding the
issue of whether the sales and use tax law requires that the
Taxpayer collect tax from its customers on the lump sum contract
amount charged to the customers covering the sale, fabrication
and installation of closets or whether the Taxpayer should
instead be accruing and remitting to the Department use tax
based on the full fabricated cost of the closets.

DISCUSSION AND ANALYSIS OF LAW

The ensuing discussion and analysis of law and the corresponding
conclusions drawn therefrom will serve to address your points of
inquiry.

Fundamental to resolution of the matters under advisement is the
definition of "real property" for sales tax purposes as set out
in s. 212.02(10)(h), F.S., which states:

"Real property' means the surface land, improvements thereto, and fixtures, and is synonymous withrealty' and

`real estate.'" (Emphasis Supplied)

Moreover, the Department is guided by the ensuing juristic
precepts established by the Supreme Court of Florida in
construing the foregoing definition.

It is a fundamental principle of statutory construction that
legislative intent and policy concerns must control our
construction of statutes and that the determination as to the
intent of the legislature is based upon the plain and ordinary
meaning of the language in the statute itself. See Holly v.
Auld, 450 So.2d 217 (Fla. 1984).

In the matter of St. Petersburg Bank & Trust Co. v. Hamm, 414
So.2d 1071 (Fla. 1982), the Florida Supreme Court held that
while legislative intent controls construction of statutes, that
intent is determined primarily from language of the statute;
plain meaning of statutory language is first consideration.

In the matter of S.R.G. Corp. v. Department of Revenue, 365
So.2d 687 (Fla. 1978), the Florida Supreme Court held that
legislative intent must be determined primarily from language of
statute, as the legislature must be assumed to know the meaning
of the words and to have expressed its intent by the use of the
words found in the statute.

Applying the principles of construction described above, we look
to the definition of the term "fixture" found in Black's Law
Dictionary, Sixth Edition, in ascertaining the plain and
ordinary meaning of said term. This definition states in
pertinent part:

"Fixture. An article in the nature of personal property
which has been so annexed to the realty that it is regarded
as a part of the real property. Leawood Nat. Bank of
Kansas City v. City Nat. Bank & Trust Co. of Kansas City,
Mo.App., 474 S.W.2d 641, 644. That which is fixed or
attached to something permanently as an appendage, and not
removable.

"A thing is deemed to be affixed to real property when it

is attached to it by roots, imbedded in it, permanently
resting upon it, or permanently attached to what is thus
permanent, as by means of cement, plaster, nails, bolts, or
screws...." (Emphasis Supplied)

The preceding definition is representative of the plain and
ordinary meaning of the term "fixture" and encompasses an
article which is attached to a wall by means of screws. It
therefore follows that the definition of "real property"
contained in s. 212.02(10)(h), F.S., must contemplate and
embrace such articles within the scope of real property.
Accordingly, the fact that the closets are attached to the wall
by means of rails, L brackets, and screws forces recognition
of the closets as "fixtures" within the plain and ordinary
meaning of such term as analyzed above.

REGULATORY AUTHORITY

Inasmuch as the installation of the closets is viewed as
constituting the installation of "fixtures" of real property,
the operative rule governing the appropriate application of
sales and use tax to such transactions is Rule 12A-1.051, F.A.C.
This rule governs and controls the application of sales and use
tax with respect to contractors who repair, alter, improve, or
construct real property. Among the types of contractors subject
to the provisions of this rule are contractors who fabricate and
install cabinetry. The fabrication and installation of closets
under advisement is substantially analogous to the fabrication
and installation of cabinets and accordingly an equivalent
treatment for sales and use tax purposes is warranted.

The following provisions of Rule 12A-1.051, F.A.C., are relevant
to the issues under advisement:

"(1) This rule shall govern the taxability of purchases or
use of tangible personal property by contractors who
purchase or manufacture materials and supplies for use in
the performance of non public works contracts.... The
method by which contractors or subcontractors arrive at the
total contract price charged for repair, alteration,
improvement and construction of real property or for a

combination of work on both real and personal property must
be determined for the purpose of ascertaining whether the
receipts from sales made to or by them are taxable.
"(2) Such contractors may include, among others, building,
electrical, plumbing, heating, painting, decorating,
ventilating, paper hanging, sheet metal, bridge, road,
landscape or roofing contractors and they may use one of
the following methods in arriving at the total contract
price:
"(a) Contracts in which the contractor or subcontractor
agrees to furnish materials and supplies and necessary
services for a lump sum;
"(b) Contracts in which the contractor or subcontractor
agrees to furnish the materials and supplies and necessary
services on a cost plus or fixed fee basis;
"(c) Contracts in which the contractor or subcontractor
agrees to furnish materials and supplies and necessary
services with an upset or guaranteed price which may not be
exceeded; and
"(d) Contracts in which the contractor or subcontractor
repairs, alters, improves or constructs real property and
wherein he agrees to sell specifically described and
itemized materials and supplies at an agreed price or at
the regular retail price and to complete the work either
for an additional agreed price or on the basis of time
consumed.
"(e) When a contractor or subcontractor uses materials and
supplies in fulfilling either a lump sum, cost plus, fixed
fee, guaranteed price or any kind or contract except one
falling in class (d) above, he becomes the ultimate
consumer thereof. The person or dealer who sells such
materials and supplies to such contractor or subcontractor
is making sales at retail and is required to collect the
tax from him based upon the receipts from such sales.
"(f) In cases falling in class (d) above, the contractor or
subcontractor is deemed to be selling tangible personal
property at an agreed retail price and shall collect tax
from his purchaser based upon the amount of the receipts
from such sales, excluding installation charges if
separately stated. A dealer selling to such contractor or
subcontractor must obtain a resale certificate in lieu of

tax....
"(3) If a contractor's or subcontractor's business is only
that of taking contracts in classes (2)(a), (b) or (c), he
should not give a resale certificate and should pay tax on
any of the materials and supplies purchased. If his
business is also that of taking class (2)(d) contracts or
of selling construction materials or other tangible
personal property at retail, he shall furnish his dealers
with a resale certificate on all purchases for resale. If
a buyer gives a resale certificate and thereafter consumes
some of the materials and supplies purchased in the
performance of contracts in classes (2)(a), (b) or (c), he
must include in his return to the Department of Revenue tax
upon the cost price of the materials and supplies so used
in addition to tax on retail sales under class (2)(d)
contracts. If a contractor or subcontractor purchases
materials and supplies without a resale certificate and
subsequently sells some of them at retail or uses them in
fulfilling class (2)(d) contracts, he must collect the tax
thereon and report and pay same to the Department of
Revenue. In such cases the contractor or subcontractor may
take the tax paid by him to his dealers as a credit on his
report to the Department. All contractors and
subcontractors must maintain records in accordance with the
requirements of s. 213.35, F.S., as created by section 6,
Chapter 88-119, Laws of Florida, of all materials used in
the performance of contracts for the improvement of realty,
adequate to show that the appropriate tax has been accrued
and remitted by them or paid to their vendors, as the case
may be....
"(5)(a) Contractors, except asphalt contractors, who
operate fabricating or manufacturing plants which make
items of tangible personal property for their own
consumption and use in the performance of contracts for the
construction or improvement of real property are subject to
tax upon the fabricated or manufactured cost of such items.
"(b) The tax is based upon the cost price of the product
manufactured, produced, compounded, or processed or
fabricated. Elements of cost price will include those costs
that are directly or indirectly attributable to the
manufacturing, producing, compounding, processing, or

fabricating of an article of tangible personal property for
one's own use and which is properly chargeable to a capital
account or to the cost of the product under generally
accepted cost accounting standards. Major elements to be
included in the manufactured cost price of tangible
personal property for one's own use include direct
materials, direct labor, and indirect manufacturing costs.
"1. Direct material costs include all materials and related
freight costs, that are physically observable as being
identified to the finished tangible personal property, that
are consumed in producing the property, or that become a
component or ingredient of the finished property. See
paragraphs (c) and (d), below, for calculating the tax on
the cost of the finished product when sales tax has or has
not been paid on direct materials.
"2. Direct labor includes labor costs that are traceable to
the production of the finished property.
"3. Indirect manufacturing costs refer to all costs other
than direct materials and direct labor that are associated
with the manufacturing process and include both variable
and fixed factory overhead. Other terms describing this
category include factory overhead,'factory burden,' and
`manufacturing overhead.' Such indirect manufacturing costs
include, but are not limited to the following,
notwithstanding the fact that sales tax has been paid:

a. Indirect labor and all direct and indirect labor
overhead including overtime premium, vacation and
holiday pay, sick leave pay, shift differential,
payroll taxes, payments to a supplemental
unemployment benefit plan, and employee fringe
benefits and supervisory personnel;
b. Compensation of officers, to the extent it is
related to production and not administrative
functions;
c. Indirect materials and supplies;
d. Rework labor, scrap, and spoilage;
e. Tools and equipment, to the extent not
capitalized;
f. Depreciation;
g. Amortization;

h. Depletion;
i. Insurance;
j. Rent of equipment, facilities, or land;
k. Interest expense attributable to production
costs;
l. Costs of administrative, service, or support
departments allocable to production;
m. General and administrative expenses incurred in
production activities (for example, security
services, factory accounting, and data
processing);
n. Material handling and warehousing of direct
materials and goods in process;
o. Repairs and maintenance related to production
facilities;
p. Taxes, other than taxes based on or measured by
income;
q. Freight costs of direct materials (freight-in);
r. Expenses incurred in implementing quality
control;
s. Utilities, including electricity, water,
telephone, etc.;
t. Waste disposal; and/or
u. Any other indirect costs allocable to production,
however described or classified.
"(c) Direct materials on which the tax has been paid shall
not be included when computing the tax on the cost price of
items of tangible personal property manufactured, produced,
compounded, processed, or fabricated.
"(d) Persons who manufacture, produce, compound, process,
or fabricate items of tangible personal property for resale
or for their own use or consumption may purchase direct
materials tax exempt but shall include the cost of the
direct materials when computing tax on the cost price of
the items so manufactured, produced, compounded, processed,
or fabricated for such persons' own use or consumption. If
tax has been paid on the direct materials, the method
described in paragraph (c) should be used when computing
the tax on the cost price of the items so manufactured,
produced, compounded, processed, or fabricated.
"(e) The tax is due at the moment the contractor

manufactures an item of tangible personal property for his
own use, and such tax shall be remitted to the Department
of Revenue in accordance with Rule 12A-1.056, F.A.C.
"(f) Fabrication labor incurred at the job site in the
performance of repairing, altering, improving, or
constructing real property is not subject to tax. For the
purpose of this rule, "job site" means a temporary site
where fabrication is performed for a specific job. This
site becomes a permanent manufacturing plant site when
fabrication is performed for any job other than the
specific job for which the site was selected."

CONCLUSIONS OF LAW

First, we reiterate that for the reasons set out in the forgoing
discussion and analysis of law the Taxpayer is considered to be
a contractor making improvements to real property when
fabricating and installing the closets.

Next, we find that the exhibit Purchase Order & Contract
submitted with your petition which quotes a lump sum covering
materials, labor, fabrication, and delivery constitutes a lump
sum contract with respect to Rule 12A-1.051(2)(a) and (e),
F.A.C. Accordingly, under such rule provisions, the Taxpayer is
viewed as the ultimate consumer of the materials and supplies
necessary to fabricate and install the closets and as such is
subject to the payment of sales tax on the acquisition cost of
such materials and supplies.

Further, since the Taxpayer is fabricating the custom closets
for use in performing lump sum contracts, the provisions of Rule
12A-1.051(5), F.A.C., above, apply. Pursuant to such rule
provision, the Taxpayer is obliged to accrue and remit directly
to the Department use tax on the full fabricated cost of the
closets including direct material costs (if Taxpayer did not pay
tax on direct materials to its suppliers), direct labor, and
indirect manufacturing costs (including but not limited to the
cost elements enumerated in Rule 12A-1.051(5)(b)3., a. through
u., F.A.C., above). However, fabrication labor incurred at the
job site is not subject to tax pursuant to Rule 12A-1.051(5)(f),
F.A.C., above. Moreover, Line B (Taxable Purchases) of the sales

and use tax return (Form DR-15) serves as the vehicle for
effecting such remittance of use tax.

Lastly, as the Taxpayer is a contractor making improvements to
real property when fabricating and installing the closets under
the Purchase Order & Contract and is subject to the accrual and
remittance of use tax in the manner described above, the
Taxpayer, thus, should not charge or collect sales tax on the
lump sum contract amount billed to its customers. However, the
taxpayer is of course free to incorporate its cost of use tax
into the lump sum contract amount as it does with all other
overhead costs for purposes of recapturing such cost.

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/

Control No. 11765