What use tax and discretionary surtax applied when an HVAC contractor donated an installed system to a charity?

Subject

Donation of Heating and Air Conditioning System/Application of Discretionary Sales Surtax Cap to Fabricated Costs

Plain-English summary

The contractor owed use tax on the full fabricated cost of a donated HVAC system, not just its materials. Fabricated cost included shop labor and overhead. Job-site fabrication labor and post-manufacturing installation labor were excluded.

The ruling could not give one final surtax-cap calculation because the plans were not submitted. If the fabricated items formed one working unit, the $5,000 cap applied to that unit or total contract as described. If they were separate items, the cap applied item by item.

What this means for you

Donating fabricated property does not avoid use tax. The donor is the consumer, and the measurement includes manufacturing cost even when the recipient is a charity.

Common questions

Was shop fabrication labor taxable? Yes.

Were job-site fabrication and installation labor taxable? No, under the described rules.

Did the ruling cap surtax at the first $5,000 of the whole contract? Only if the components qualified as one working unit; the record was incomplete.

Citations and references

• Fla. Stat. §§ 212.02(4), 212.06(1)(b), and 213.22
• Fla. Admin. Code rr. 12A-1.043(1), 12A-1.051(5)(f), (7), (19)(d), 12A-1.077(1), and 12A-15.004(2)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-030

Original ruling text

May 10, 1994

Re: Technical Assistance Advisement 94(A)-030
Donation of Heating and Air Conditioning System/Application
of Discretionary Sales Surtax Cap to Fabricated Costs
Rules 12A-1.051(5)(f),(7), and (19)(d); 12A-1.043(1);
12A-1.077(1); and 12A-15.004(2), F.A.C.
ss. 212.02(4) and 212.06(1), F.S.
Petitioner: XXX (herein the "Contractor")
FEI: XXX
Sales Tax: XXX
Other Parties: XXX (herein the "Donee")
FEI: XXX
XXX (herein "Church A")
FEI: XXX
XXX (herein "Church B")
FEI: XXX

Dear:

This response is in reply to your February 11, 1994, petition
for the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to s. 213.22, F.S. Your petition
regards the referenced matter and party. The Department has
carefully examined your petition and finds it to meet the
criteria set forth in Chapter 12-11, F.A.C., requisite to
issuance of a TAA. Therefore, the Department is by this
response issuing the requested TAA.

DISCUSSION OF FACTS

Your petition and supporting documents impart the following
significant information regarding the issues under advisement
herein:

"1) [The Contractor] has made donations of installed HVAC
systems to [the Donee] by way of [Church A]. [The
Contractor] would incur use tax on the tangible property
donated and we are under the following impression and would

like your TAA ruling on the following.

"When the [Contractor] donates to a charity, meaning that
we install air conditioning and heating units at no charge
to the organization, the actual costs of the equipment and
[sheet metal] used to make [duct work], and all material
supplies needed for installation are taxable at the current
Florida rate of 6% and where applicable the individual
county surcharges at the rate of 1%. We are not required
to pay use tax on the labor to fabricate the [duct work] or
the labor to install and start up the new systems. [12A1.077 Free Merchandise and 12A-1.051(7)]

"2) [The Contractor's] initial determination letter TAA
91A-034 dated July 29, 1991[,] indicates that [the
Contractor] pay Use Tax on the Amount of the final
contract, @ 50%

"Since the date of that determination letter, XXX passed an
additional 1% County Surtax.

"We are currently paying the Florida Use Tax on the total
contract amount @ 50% times the rate of 6%. We are using
the same formula for the 1% County Surtax.

"Enclosed is a copy of a contract representative of this
type of transaction. The [Church B] Air Conditioning
Modifications' contract was in the amount of $56,495.00.
The [Contractor] paid use tax at 7% on 50% of the contract
amount or $28,257.50...."

Examination of the contract (the "Contract") submitted with your
request shows it to be executed by and between Church B and the
Contractor. Article 1, 1.1 of the Contract describes the scope
of the work as follows:

"The scope of work shall generally include, but not
necessarily be limited to, modifications to both the 105
ton chiller system in the sanctuary building and to the 45
ton DX system in the XXX Building in accordance with plans
and specifications.... The scope of work shall include all

associated electrical work, piping and insulation work,
crane rental, removal of all debris, and all permits...."

REQUESTED ADVISEMENT

You endeavor to elicit the Department's advice regarding
substantially the following specific questions:

1. When the Contractor donates (including installation)
   without charge a central HVAC system to a nonprofit
   charitable entity, does the Contractor only pay sales
   or use tax on the materials and supplies involved and
   not on fabrication costs and installation labor?
2. Should only the first $5,000 of the Contract be
   subject to Discretionary Sales Surtax?

DISCUSSION OF LAW

The following relevant provisions of statutory, administrative,
and case law are consulted in addressing your points of inquiry:

Rule 12A-1.077, F.A.C.: "Free Merchandise.
"(1) Donations of taxable tangible personal property made
to any person, to a federal or state governmental unit, or
to any religious, educational or charitable institution are
exempt; however, the donor is required to pay tax on the
acquisition cost of the tangible personal property since
the donor is the consumer thereof, unless the donor is an
exempt entity under Chapter 212, F.S...." (Emphasis
Supplied)

In construing the above exemption, the Department must
adhere to and be guided by the long-standing and
fundamental precept of statutory construction, established
by the Florida Supreme Court, which mandates that
exemptions from or exceptions to taxing statutes must be
strictly construed against the taxpayer. See Asphalt
Pavers v. Dept. of Revenue, 584 So.2d 57 (Fla. 1st DCA
1991); Dade Cty. Taxing Auth. v. Cedars of Lebanon, 355
So.2d 1205 (Fla. 1978), reh. den. April 5, 1978; Williams
v. Jones, 326 So.2d 425 (Fla. 1975), reh. den. March 4,

1976; Straughn v. Camp, 293 So.2d 689 (Fla. 1974); United
States Gypsum Company v. Green, 110 So.2d 409 (Fla. 1959).

Section 212.02(4), F.S.: "`Cost price' means the actual
cost of articles of tangible personal property without any
deductions therefrom on account of the cost of materials
used, labor or service costs, transportation charges, or
any expenses whatsoever." (Emphasis Supplied)

Section 212.06(1), F.S.: "(b) Except as otherwise provided,
any person who manufactures, produces, compounds,
processes, or fabricates in any manner tangible personal
property for his own use shall pay a tax upon the cost of
the product manufactured, produced, compounded, processed,
or fabricated without any deduction therefrom on account of
the cost of material used, labor or service costs, or
transportation charges, notwithstanding the provisions of
s. 212.02 defining 'cost price'...." (Emphasis Supplied)

Administrative elucidation of s. 212.06(1)(b), F.S., is
provided in Rule 12A-1.043, F.A.C., which states:

"(1)(a) Any person who manufactures, produces, compounds,
processes, or fabricates in any manner an article of
tangible personal property for his own use shall pay a tax
upon the cost of the property manufactured, produced,
compounded, processed, or fabricated without any deduction
therefrom on account of the cost of material used, labor or
service costs, or transportation charges or other direct or
indirect overhead costs which are a part of the
manufacturing, producing, compounding, processing, or
fabricating cost of the property notwithstanding the
provisions of Section 212.02(5), F. S., defining 'cost
price'; provided, however, that the cost of labor to
manufacture, produce, compound, process, or fabricate
expendable items of tangible personal property which are
directly used by such person in manufacturing, producing,
compounding, processing, or fabricating other tangible
personal property for sale or his own use is exempt.
"(b) Elements of cost price will include those costs that
are directly or indirectly attributable to the

manufacturing, producing, compounding, processing, or
fabricating an article of tangible personal property for
one's own use and which are 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 time the article of tangible
personal property is manufactured, produced, compounded,
processed, or fabricated for use or consumption, and such
tax shall be remitted to the Department of Revenue in
accordance with Rule 12A-1.056, F.A.C.... (Emphasis
Supplied)

We point out that an agency's administrative interpretation

of a statute by rule has been accorded great deference by
the courts, and will not be overturned unless the agency's
interpretation of the statutes is clearly erroneous;
reviewing court will defer to any interpretation within the
range of possible interpretation. See Pershing Industries
v. Department of Banking, 591 So.2d 991, 993 (Fla. 1 DCA
1991); Eager v. Florida Keys Aqueduct Authority, 580 So.2d
771 (Fla. 3 DCA 1991); Natelson v. Department of Ins.; 454
So.2d 31 (Fla. 1 DCA 1984); State ex rel. Szabo Food Serv.,
Inc. of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1973), reh.
den. Jan. 9, 1974.

Rule 12A-1.051(5)(f), F.A.C.: "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."
(Emphasis Supplied)

Rule 12A-1.051(7), F.A.C.: "Tangible personal property
purchased by contractors to be incorporated into jobs for
religious, educational or charitable institutions is
taxable." (Emphasis Supplied)

This provision (Rule 12A-1.051(7), F.A.C.) only addresses
items purchased by contractors to be incorporated into jobs
for religious, educational or charitable institutions, but
does not address items manufactured or fabricated by
contractors for their use in performing free work for such
entities.

Rule 12A-1.051(19), F.A.C.: "Roofing and/or sheet metal,
heating and/or air conditioning, and septic tank
contractors who manufacture or fabricate items of tangible
personal property for their own use in the performance of
real property contracts shall remit the tax under the
following procedure:....
"(d) HEATING AND/OR AIR CONDITIONING AND SHEET METAL

CONTRACTORS - Heating and/or air conditioning and sheet
metal contractors may elect one of the following methods:
"1. Report tax at the rate of 6 percent of the fabricated
cost. Fabricated cost includes the cost of all materials,
as well as the cost of labor, power, transportation, and
other plant expenses as stated in subsection (5) of this
rule. Adequate records, as prescribed under Rule 12A-1.093,
F.A.C., must be maintained to reflect fabricated cost. Such
contractor must register as a dealer and extend a resale
certificate in lieu of tax to suppliers of materials; or
"2. Report tax at the rate of 6 percent of 50 percent of
the total contract price less the total of any subcontract
which requires the subcontractor to furnish and install
items of tangible personal property. Such contractor must
register as a dealer and extend a resale certificate in
lieu of tax to suppliers of materials; or
"3. Keep adequate departmentalized records to separate
heating and/or air conditioning operations from sheet metal
operations and pay tax upon acquisition of materials for
the heating and/or air conditioning operations and choose
method 1. or 2. above for reporting tax on the sheet metal
operations....
"(f) The compliance procedure for the contracts outlined
above may be reviewed at the end of each calendar year by
either the Florida Department of Revenue or the members of
the Associations to determine its applicability to the next
succeeding year.
"(g) For the purpose of this subsection, the following
definitions are used:
"1. ROOFING CONTRACTOR - One who installs roofing materials
and purchases prefabricated items incidental to roofing for
improvement to realty, and who does no shop fabrication.
"2. SHEET METAL CONTRACTOR - One who fabricates and
installs metal or other related items for inclusion in
contracts for the improvement to realty.
"3. ROOFING AND SHEET METAL CONTRACTOR - One who purchases
materials, and fabricates items, and who does shop
fabrication of metal and related items, and who installs
both the materials and fabricated items for improvement to
realty.
"4. HEATING AND/OR AIR CONDITIONING AND SHEET METAL

CONTRACTOR - One who purchases and installs heating and/or
air conditioning and ventilating equipment and who
fabricates metal and other related items used in connection
with the installation of heating and/or air conditioning
and ventilating systems for improvement to realty."
(Emphasis Supplied)

Your petition specifies that the Contractor employs the
method described in Rule 12A-1.051(19)(d)2., F.A.C., to
accrue and remit use tax on its contracts consistent with
the advice received in TAA 91A-034.

Rule 12A-15.004, F.A.C.: "(2)(a)1. The surtax does not
apply to the sales amount above $5,000 on any item of
tangible personal property. However, the surtax does apply
to the first $5,000 of the sales amount on any item of
tangible personal property and to all other transactions
which are subject to the state tax imposed on sales, use,
rentals, and other transactions by Part I, Chapter 212,
F.S., without limitation, except as provided in (3)
below....
"(b)1. For purposes of administering the $5,000 limitation
on any item of tangible personal property, if two or more
taxable items of tangible personal property are sold to the
same purchaser at the same time and, under generally
accepted business practice or industry standards or usage,
are normally sold in bulk or are items which, when
assembled, comprise a working unit or part of a working
unit, such items shall be considered a single item for
purposes of the $5,000 limitation when supported by a
charge ticket, sales slip, invoice, or other tangible
evidence of a single sale or rental....
"2. ... c. Example: When a heating and air conditioning
distributor/dealer, who normally makes bulk sales (that is,
sells several heating and air conditioning units at the
same time) bills for such units on one invoice, the surtax
applies to the first $5,000 on the total invoice.
"d. Example: In the case of heating and air conditioning
dealers who do not normally make bulk sales, the surtax
applies to the first $5,000 on each unit, even though the
dealer may sell and list several units on one invoice.

"e. Example: Piping, duct material, wiring, and other
similar items used to make up the heating and air
conditioning system are normally sold in bulk. Thus, if the
selling dealer sells and invoices that type of material on
one invoice, the surtax applies to the first $5,000 for the
total of these materials....
"(d) Where a purchase order is issued by the purchaser to
the selling dealer, or an agreement is made between the
selling dealer and the purchaser which is reduced to
writing, that provides for the purchase of a specific
quantity of tangible personal property which, according to
the terms and conditions set out in the purchase order or
agreement, is to be delivered to the purchaser within a
definite specified time, such transaction constitutes one
sale for purposes of the $5000 limitation. Delivery of the
tangible personal property so ordered within the time
specified in the purchase order or agreement will
constitute one sale notwithstanding that due to the nature
of the property it must be delivered in installments or
that multiple deliveries may be necessary to consummate
delivery to the purchaser. In the absence of a written
purchase order or written agreement reflecting the above
conditions, each individual delivery of tangible personal
property is to be considered one sale. Each individual
delivery of tangible personal property on purchase orders
for indefinite quantities or open-end purchase orders is
considered to be one sale.
"(e) Where a contractor fabricates an item of tangible
personal property for his own consumption and use in the
performance of contracts for the construction or
improvement of real property the $5000 limitation is
applicable only to those cases where the contract, or
agreement which is reduced to writing, specifies the
particular project on which the item of property is to be
used...." (Emphasis Supplied)

CONCLUSIONS OF LAW

RESPONSE, QUESTION 1: Rule 12A-1.077(1), F.A.C., provides that
the donor owes use tax on the acquisition cost of tangible
personal property given away at no charge. However, the rule

does not specifically address the situation where the items
donated where not acquired by the donor in a finished state, but
were manufactured or fabricated from raw materials purchased by
the donor. Thus, in ascertaining the proper application or Rule
12A-1.077(1), F.A.C., to the situation where a donor gives away
items manufactured or fabricated by it, the provisions of such
rule must be construed in pari materia together with the
provisions of Rule 12A-1.043, F.A.C., and s. 212.06(1)(b), F.S.
The provisions of Rule 12A-1.077, F.A.C., cannot be construed in
such manner as to conflict with s. 212.06(1)(b), F.S., or Rule
12A-1.043, F.A.C. Although an agency may interpret and
administer statutory provisions, it cannot enlarge, modify or
contravene the provisions of a statute. Department of Business
Regulation v. Salvation Ltd., 452 So.2d 65 (Fla. 1 DCA 1984);
Department of Insurance v. Insurance Services Offices, 434 So.2d
908 (Fla. 1 DCA 1983), pet. denied, 444 So.2d 416 (Fla. 1984);
Department of Health and Rehabilitative Services v. McTigue, 387
So.2d 454 (Fla. 1 DCA 1980); 4245 Corp. v. Division of Beverage,
371 So.2d 1032 (Fla. 1 DCA 1978). Administrative agencies
entrusted with authority to carry out statutory provisions are
prohibited from giving the statute an amendatory construction.
Florida Growers Coop. Transport v. Department of Revenue, 273
So.2d 142 (Fla. 1 DCA 1973), cert. denied, 279 So.2d 33 (Fla.
1973).

By way of example, when an automobile manufacturer donates
vehicles (regardless of motive), the manufacturer is susceptible
to use tax measured on the full manufactured cost (including all
factory overhead) of the vehicles given away. The tax is not
limited to the only the cost of the direct materials of which
the cars are comprised.

Accordingly, we are compelled to conclude that when the
Contractor donates an HVAC system to a nonprofit charitable
entity, which you indicate would include the installation, the
Contractor is subject to use tax on the full fabricated cost of
all components of the system in a manner consistent with Rule
12A-1.043(1), F.A.C., above. Such costs would exclude job site
labor pursuant to Rule 12A-1.051(5)(f), F.A.C., and installation
cost which is a post manufacturing cost.

RESPONSE, QUESTION 2: Respective of Rule 12A-15.004(2)(e),
F.A.C., above, the Contract under advisement is reduced to
writing. The plans and specifications referenced in Article 1
of the Contract were not submitted, so we are unable to
determine what if any off-site fabrication is necessary to
complete the work under the Contract. Thus, we are unable to
identify any specific fabricated items to the Contract. If the
plans and specifications referenced in the Contract identify the
fabricated items, if any, necessary to complete the project
covered by the Contract, then the provisions of Rule 12A15.004(2)(e), F.A.C., will apply. Further, consistent with Rule
12A-15.004(2)(b)1., F.A.C., above, if the items under the
Contract when assembled comprise a working unit or part of a
working unit, such items shall be considered a single item for
purposes of the $5000 limitation and the Surtax limitation
applies to the total Contract amount.

However, if the manufactured or fabricated items, when
assembled, do not comprise a working unit or part of a working
unit, such items shall be considered separate items for purposes
of the $5000 limitation. Under such circumstance, the Surtax
applies without limitation (excepting any fabricated item whose
cost exceeds $5,000) to the full 50% of the Contract amount
subject to state use tax under Rule 12A-1.051(19)(d)2., F.A.C.,
which method you specify the Contractor uses. With respect to
the fabricated items, if the provisions of Rule 12A15.004(2)(e), F.S., are satisfied, the $5,000 limitation will
apply to each such item.

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. 13630