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