Could a metal fabricator use Florida's optional sheet-metal-contractor method and pay tax on 50% of a lump-sum real-property contract?

Subject

Lump Sum Contract/Sheet Metal Contractor

Plain-English summary

The company could not use the optional sheet-metal-contractor method that calculated tax as 6% of 50% of the total contract price. Although it fabricated and installed metal fences, railings, stairways, ductwork, and similar items, the Department found that it was not a sheet metal contractor under the specific definition governing that election.

Under the general rules, a contractor using materials in a lump-sum real-property contract was the ultimate consumer. A contractor fabricating items for its own use in improving real property owed tax on the fabricated cost, including direct materials, direct labor, and indirect manufacturing costs.

What this means for you

Fabricating metal does not by itself establish eligibility for a special sheet-metal-contractor tax method. The business must fit the governing trade definition and keep the required fabrication-cost records.

Common questions

Could the company use a resale certificate for raw materials and then pay on half the contract price? Not under the requested optional method, because it did not qualify as a sheet metal contractor.

What general tax base applied to its self-fabricated items? The fabricated or manufactured cost described in the ruling.

Did using a lump-sum contract eliminate the contractor's tax? No. It made the contractor the ultimate consumer of materials used to improve real property.

Citations and references

• Fla. Stat. §§ 212.05, 212.06(1)(b), 213.22, and 489.105(3)(d)
• Fla. Admin. Code r. 12A-1.051(2), (5), (18), and (19)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-042

Original ruling text

Title:

Lump Sum Contract/Sheet Metal Contractor

Jul 14, 1994

Re: TAA 94A-042
Sheet Metal Contractor
Sections 212.05 and 212.06(1)
Rules 12A-1.051(2); 12A-1.051(5); 12A-1.051(18); 12A1.051(19), F.A.C.
Taxpayer: XXX (Hereinafter referred to as "Contractor")

Dear :

Your letter of March 29, 1994, requested a Technical Assistance
Advisement, concerning the above referenced matter. This
response constitutes a Technical Assistance Advisement under
Chapter 12-11, Florida Administrative Code, and is issued to you
under the authority of s. 213.22, Florida Statutes.

DISCUSSION OF FACTS

Your letter provides the following significant facts:

"We are a metal(s) fabricator, and as such fabricate
specialty items for the construction industry. The items
that we fabricate for example could be light metal fences,
hand railing, stairways, duct work, etc....

"Under our lump sum contracts we not only fabricate these
items, but install them also. We extend our resale
certificate to purchase the raw materials tax exempt. The
use of the real sale [sic] certificate seems to be in order
if we report the tax as provided in Rule 12A1.051(19)(b)2."

You have also provided a copy of a document entitled "PROPOSAL",
in which Contractor submits specifications and estimates for a
"402 LINEAR FEET WROUGHT IRON FENCE", complete and installed for
the sum of XXX. According to the cover page and information

presented in our telephone conversation of April 4, 1994, this
document represents an example of Contractor's "lump-sum
contract."

REQUESTED ADVISEMENT

You seek a binding statement on the following questions:

"Can we elect to enter into a lump sum contract, as a real
property contractor (sheet metal contractor) under Rule
12A-1.051(19)(b)[,F.A.C.,] and collect the tax at the rate
of 6% of 50% of the total contract price?"

You further state:
"In the question stated above our biggest concern is are we considered a sheet metal contractor?' After a careful review of F.S. 212 and the Florida Administrative Code there seems to be no clear cut definition of aSheet Metal
Contractor'."

RELEVANT AUTHORITY

The following passages quoted from the Florida Statutes and the
Florida Administrative Code are pertinent to your request:

Section 212.05, F.S., provides in part:

"Sales, storage, use tax. - 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,
including the business of making mail order sales, or who
rents or furnishes any of the things or services taxable
under this chapter, or who stores for use or consumption in
this state any item or article of tangible personal
property as defined herein and who leases or rents such
property within the 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:...."
"(b) At the rate of 6 percent of the cost price of each

item or article of tangible personal property when the same
is not sold but is used, consumed, distributed, or stored
for use or consumption in this state."

Section 212.06(1), F.S., provides in part:

"(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.'..."

Rule 12A-1.051(2), F.A.C., provides that contractors who perform
non public works contracts 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."

Rule 12A-1.051(2)(e), F.A.C., further provides:

"(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 of 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."

Rule 12A-1.051(5), F.A.C., provides in part:

"(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...."

Rule 12A-1.051(18)(a), F.A.C., provides in part:

"1. The U.S. Supreme Court has held that where a state
imposes a tax on the full fabricated cost of property being
imported into the state, such state must require all
instate dealers to pay tax on the completed fabricated cost
on all similar property.
"2. Inasmuch as those items now being manufactured or
produced by sheet metal workers are being taxed on the full
manufactured or fabricated cost when imported into the
State of Florida, sheet metal workers in Florida are

required to pay tax on the total fabricated or manufactured
cost of the finished product used by them in the
performance of contracts for the improvement of realty...."

Rule 12A-1.051(19), F.A.C., provides in part:

"(19) 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 tax under the following procedure:...."
"(b) SHEET METAL CONTRACTORS - 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 12A1.093, 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 the 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.
...
"(g) For the purpose of this subsection, the following
definitions are used:...
"2. SHEET METAL CONTRACTOR - One who fabricates and
installs metal or other related items for inclusion in
contracts for the improvement to realty."

DISCUSSION/RESPONSE

Pursuant to Rule 12A-1.051(2)(a), (b), and (c), F.A.C., when a
contractor uses materials and supplies in fulfilling a lump sum,
cost plus, fixed fee or guaranteed price contract to improve
real property, the contractor becomes the ultimate consumer

thereof and is liable for the sales tax on the materials and
supplies purchased for use in the contract.

Rule 12A-1.051(5)(a), F.A.C., provides that 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. Pursuant to Rule 12A1.051(5)(b), F.A.C., tax on the full manufactured cost of those
components includes direct materials, direct labor costs, and
indirect manufacturing costs.

It is the Department's position, promulgated in Rule 12A1.051(19), F.A.C., that roofing and/or sheet metal, heating
and/or air conditioning, and septic tank contractors who
manufacture or fabricate items of tangible personal property may
elect an alternative compliance procedure relating to the
fabricated cost of materials used in real property contracts.
In all instances, such contractors must maintain adequate
records of fabrication costs.

Although Chapter 212, Florida Statutes, does not define "sheet
metal contractor", for purposes of Rule 12A-1.051(19), F.A.C.,
the Department is guided by the definition for "Sheet Metal
Contractor" provided in Rule 12A-1.051(19)(g)2., F.A.C., which
is intended to be consistent with the definition spelled out in
Section 489.105(3)(d), F.S., that states:

"(d) `Sheet metal contractor' means a contractor whose
services are unlimited in the sheet metal trade and who has
the experience, knowledge, and skill necessary for the
manufacture, fabrication, assembling, handling, erection,
installation, dismantling, conditioning, insulation,
alteration, repair, servicing, or design, when not
prohibited by law, of ferrous or non-ferrous metal work of
U.S. No. 10 gauge or its equivalent or lighter gauge and of
other materials, including, but not limited to, fiberglass,
used in lieu thereof and of air-handling systems, including
the setting of air-handling equipment and reinforcement of
same and including the balancing of air-handling systems."

Accordingly, your company would not be considered a "Sheet Metal
Contractor" for purposes of Rule 12A-1.051(19), F.A.C., and
would not qualify for the optional method provided to roofing
and/or sheet metal, heating and/or air conditioning, and septic
tank contractors for remitting tax. Consequently, your company
would not be able to enter into lump sum contracts as a real
property contractor under Rule 12A-1.051(19)(b), F.A.C., and
report tax at the rate of 6% of 50% of the total contract price.

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,

Delores Overcash
Technical Assistant
/DO
Ctrl #14640