Who owed Florida sales or use tax when a broker sold a lump-sum custom-cabinet job and another contractor fabricated and installed the cabinets?

Subject

Sale, Fabrication, and Installation of Custom Cabinets

Plain-English summary

The contractor that fabricated and permanently installed the custom cabinets was treated as a real-property contractor and the ultimate consumer of the materials. The cabinets were fixtures because they were attached permanently and could not be removed without damaging the premises.

Under the lump-sum contract, the contractor owed sales tax on materials it purchased and use tax on the cabinets' full fabricated cost under the rule applied in the ruling. That cost included direct materials when tax had not already been paid, direct labor, and indirect manufacturing costs. Fabrication labor performed at the job site was excluded.

The separate intermediary found the customer, measured the site, signed the customer contract, collected the funds, paid the contractor, and retained a commission. Because it did not buy or sell the cabinets or supply fabrication or installation inputs, the Department said it did not owe sales or use tax on the retained commission.

What this means for you

For permanently installed cabinetry sold under a lump-sum real-property contract, Florida looked past the customer-facing contract to identify who actually fabricated and installed the fixtures. The fabricating contractor's cost accounting and the intermediary's real role determined their separate tax obligations.

Common questions

Were the installed cabinets tangible personal property or real-property fixtures? Fixtures, on the stated permanent-attachment facts.

Who owed tax on fabrication? The contractor that made and installed the cabinets, based on the cost rules described in the advisement.

Was job-site fabrication labor included? No, the cited rule excluded fabrication labor incurred at the job site.

Was the intermediary's commission taxable? No. The Department found that the intermediary was not buying or selling tangible personal property under this arrangement.

Citations and references

• Fla. Stat. §§ 212.02(10)(h), 213.35, and 213.22
• Fla. Admin. Code r. 12A-1.051(1)-(3), (5)
• Holly v. Auld, 450 So.2d 217 (Fla. 1984)
• St. Petersburg Bank & Trust Co. v. Hamm, 414 So.2d 1071 (Fla. 1982)
• S.R.G. Corp. v. Department of Revenue, 365 So.2d 687 (Fla. 1978)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-056

Original ruling text

Nov 01, 1994

Re: Technical Assistance Advisement 94(A)-056
Sales Tax -Sale, Fabrication, and Installation of Custom
Cabinets
Rule 12A-1.051, F.A.C.
XXX (herein the "Taxpayer")
SSN #: XXX
SALES TAX #: XXX
XXX (herein the "Contractor")
FEI#: XXX
SALES TAX #: XXX

Dear :

This response is in reply to your August 20, 1994, 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 hereby granting the requested TAA.

DISCUSSION OF FACTS

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

"1. The transaction is between [the Taxpayer] and a
customer, for the sale of cabinets.
"2. [The Taxpayer] has the duties of finding the customer,
measuring the job site specifications, and closing the
Lump Sum Real Property Contract. For this
involvement, [the Taxpayer] receives a percentage of
the contract sale.
"3. [The Taxpayer] does not use any company materials,
labor or overhead directly or indirectly attributable
to the fixtures installed pursuant to the contract.

"4. The cabinets are manufactured from raw materials and
subsequently installed by a third party, [the
Contractor].
"5. The cabinets become a permanent component of Real
Property, [in] so much as removal would physically
damage the subject premises.
"6. All materials, labor, overhead, and installation labor
are furnished by [the Contractor].
"7. [The Taxpayer] collects all funds from the sale and
channels the monies through business operations,
forward to [the Contractor]....

"[The Taxpayer] collects funds from the contract sale,
keeps the allocated percentage, and channels the remaining
portion to [the Contractor]....

"Again, [the Contractor] uses all raw materials, labor, and
overhead required to fabricate and install the cabinets in
the customer's home or business. The cabinets are
manufactured for a contract [the Taxpayer] executed with a
customer.

"Attached in the tabulated green section you will find
copies of the Lump Sum Real Property Contract, executed by
[the Taxpayer] with a customer, where cabinets have been
built by [the Contractor] for installation by [the
Contractor]. The importance of these contracts is nothing
more than to establish the Lump Sum Real Property
Improvement status.

"For explanation, the contract's terms state that one set' of kitchen and bath cabinets, plus adjustments for specialized hardware and hinges, are to be sold for $XX. Theone set' contains all materials, labor, and overhead
used by [the Contractor] to produce the items.

"Found in the tabulated red section, are two [of the
Contractor's] Contracts, where said [Contractor] is billing
[the Taxpayer] for same `one set' of kitchen and bath
cabinets being sold to the customer. Amount of the two
contracts is $XX ($XX + $XX).

"[The Taxpayer] does not pay for the contracts until the
customer compensates for their contract with [the
Taxpayer], in the amount of $XX. Whereby at that time,
[the Taxpayer] collects all funds from the sale and
channels the monies through business operations, to [the
Contractor].

"On this transaction, [the Taxpayer] pays $XX to [the
Contractor] and incomes the remaining $XX as commission.
At time of this transaction, [the Taxpayer] was remitting
sales tax on their profit amount. In this case[,] profit
was $XX and tax accrued was $XX (7% XXX). Essentially,
[the Taxpayer] is paying Florida Use Tax on profit. There
are no expenses. This can be seen by reviewing the income
sheet found in the tabulated blue section.

"Since that period, we have directed [the Taxpayer] to
neither collect, nor accrue any taxes on these
transactions. Our directions rely on the existing factors,
whereby [the Taxpayer] is not buying the cabinets from [the
Contractor] nor providing personnel to install the
cabinets, nor providing any material, labor, or overhead to
fabricate the cabinets. The participation by [The
Taxpayer], in this transaction, is nothing more than an
intermediary' acting as abroker' between [the
Contractor] and the customer.

"We have not been able to locate any legislation, ruling,
or regulations that gives indication for liability on [the
Taxpayer].

"Several transaction of this nature have been included in
the Sales & Use Tax Returns of [the Taxpayer], since
February 1994.

REQUESTED ADVISEMENT

You endeavor to elicit the Department's advice regarding the
following specific points of inquiry:

1. "Does [the Taxpayer] have a liability on the Lump Sum
Contract sale, when said company does nothing more
than acts as a `broker' receiving a commission of the
contract price?"

2. "Does [the Contractor] have a liability on the
   manufactured cost price of items fabricated for use
   and/or installation, because of the `ultimate
   consumer' clause, pursuant to the Lump Sum Real
   Property Contract? Worth noting, [the Contractor] is
   paying Florida Use Tax on the subject transactions at
   hand."

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). 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. See St. Petersburg
Bank & Trust Co. v. Hamm, 414 So.2d 1071 (Fla. 1982).
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. See S.R.G. Corp. v. Department of
Revenue, 365 So.2d 687 (Fla. 1978).

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 nails and/or
screws. It therefore follows that the definition of "real
property" contained in s. 212.02(10)(h), F.S., must contemplate
and embrace cabinetry which is attached by means of nails or
screws as coming within the scope of "fixtures" of "real
property."

REGULATORY AUTHORITY

Inasmuch as the installation of the cabinets 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 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." (Emphasis
Supplied)

CONCLUSIONS OF LAW

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

Next, we find that the exhibit invoice (which you refer to as a
contract) (the "Invoice/Contract") contained at the green
tabulation of your supporting documents is "lump sum" in format
with respect to Rule 12A-1.051(2)(a) and (e), F.A.C.
Accordingly, under such rule provisions, the Contractor is
viewed as the ultimate consumer of the materials and supplies
necessary to fabricate and install the cabinets 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 cabinets for use
in performing lump sum contracts, the provisions of Rule 12A1.051(5), F.A.C., above, apply. Pursuant to such rule

provision, the Contractor is obliged to accrue and remit
directly to the Department use tax on the full fabricated cost
of the cabinets 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 12A1.051(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.

Moreover, as the contractor is making improvements to real
property when fabricating and installing the cabinets under the
Invoice/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 the Taxpayer. However, the Contractor 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.

Lastly, as the Taxpayer is not purchasing or selling tangible
personal property under the contractual arrangement under
advisement, the Taxpayer is not obligated to collect or accrue
sales or use tax on the portion of the Invoice/Contract amount
it retains as a commission.

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. 17284