Under Florida's 1994 ruling, what use tax applied when finished goods inventory was moved into research and development?

Subject

Finished Goods Inventory Used in Research and Development

Plain-English summary

For products removed from finished-goods inventory on or after November 8, 1994, the ruling required use tax on the product's full manufactured cost: materials, direct labor, and manufacturing overhead. It did not use the wholesale or retail selling price. Labor incurred later during the research-and-development activity was not taxed under the ruling.

The Department reversed its earlier TAA 90A-071, which had treated inventory items becoming components of R&D products as exempt. TAA 94A-058 applied the new position prospectively, so the company did not owe tax under this ruling for products removed before its issue date.

This is not a current-law guide. The Department placed an official caution on the document stating that it was not amended to reflect the 2005 Lockheed Martin decision or Chapter 2006-57, Laws of Florida.

What this means for you

Use this page only to understand the Department's stated position beginning in November 1994. For later periods, the official caution itself directs attention to intervening case law and legislation.

Common questions

What tax base did the 1994 ruling use? Full manufactured cost, including materials, direct labor, and manufacturing overhead.

Did it tax R&D labor performed after the inventory transfer? No. The ruling said labor incurred during R&D and attributable to the product was not subject to tax.

Did the new position apply before November 8, 1994? No. The Department made the rescission and new treatment prospective.

Can this ruling be relied on for current Florida law? No. The official caution identifies later developments that the advisement does not reflect.

Citations and references

• Fla. Stat. §§ 212.02(4), 212.052, 212.06(1)(b), and 213.22, as applied in 1994
• Chapter 82-219, Laws of Florida
• Department of Revenue v. Lockheed Martin Corp., 905 So.2d 1017 (Fla. 1st DCA 2005), and Chapter 2006-57, Laws of Florida, as identified by the official caution
• State v. Webb, 398 So.2d 820 (Fla. 1981)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-058

Original ruling text

Caution: This advisement has not been amended to reflect changes made by Chapter 2006-57, Laws of
Florida or the opinion of the First District Court of Appeal in Department of Revenue vs. Lockheed Martin
Corporation, 905 So.2d 1017 (Fla. 1st DCA 2005).
Status: Rescinds Technical Assistance Advisement 90A-071
issued November 7, 1990; Effective November 8, 1994.

Nov 08, 1994

Re: Technical Assistance Advisement 94A-058
Sales and Use Tax
Finished Goods Inventory Used in Research and Development
Section 212.052, F.S.

Dear :

On November 7, 1990, the Department of Revenue issued
Technical Assistance Advisement 90A-071 to your company. This
advisement concerned the tax status of items removed from
finished goods inventory and utilized in your company's research
and development activities. Your letter of August 16, 1990,
provided in part:

"[Company],... designs, develops, manufactures and markets
computers and software used in communication applications.
Because the technology associated with its products changes
rapidly, the Company spends large amounts of money,
approximately 20-25% of its revenues, in research and
development in order to remain competitive. Part of the
funds used for research and development relate to items
transferred from finished goods inventory.

...

"Please advise us on the taxability of items transferred
out of finished goods inventory used strictly for research
or development purposes as defined in Florida Statutes

Section 212.052. It is our belief, based upon this
Section, that the fully burdened cost of any item
transferred out of inventory into our research and
development department for use in a strictly research and
development purpose as defined in this Section is not
subject to use tax."

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) are
pertinent to the subject of this advisement.

Section 212.02(4), F.S., provides:

"(4) `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."

Section 212.052, F.S., provides in part:

"(1) For the purposes of the exemption provided in this
section:
"(a) The term `research or development' means research
which has one of the following as its ultimate goal:
"1. Basic research in a scientific field of endeavor.
"2. Advancing knowledge or technology in a scientific or
technical field of endeavor.
"3. The development of a new product, whether or not the
new product is offered for sale.
"4. The improvement of an existing product, whether or not
the improved product is offered for sale.
"5. The development of new uses of an existing product,
whether or not a new use is offered as a rationale to
purchase the product.
"6. The design and development of prototypes, whether or
not a resulting product is offered for sale.

"The term `research or development' does not include
ordinary testing or inspection of materials or products
used for quality control, market research, efficiency

surveys, consumer surveys, advertising and promotions,
management studies, or research in connection with
literary, historical, social science, psychological, or
other similar nontechnical activities.
"(b) The term costs' means cost price as defined in s. 212.02[(4)]. "(c) The termproduct' means any item, device, technique,
prototype, invention, or process which is, was, or may be
commercially exploitable.
"(2) Notwithstanding any provision of this chapter to the
contrary, any person, including an affiliated group as
defined in s. 1504 of the Internal Revenue Code of 1954, as
amended, who manufactures, produces, compounds, processes,
or fabricates in any manner tangible personal property for
such taxpayer's own use directly and solely in research or
development shall not be subject to the tax imposed by this
chapter upon the cost of the product so manufactured,
produced, compounded, processed, or fabricated. However,
the tax imposed by this chapter shall be due on the
purchase, rental, or repair of real property or tangible
personal property employed in research or development which
is subject to the tax imposed by this chapter at the time
of purchase or rental...."

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

"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...."
DETERMINATION

Section 212.06(1)(b), F.S., generally provides that any
person who manufactures, produces, compounds, processes, or
fabricates tangible personal property for their own use shall
pay tax on the full cost (materials, labor, and overhead) of
making that item. In 1982, the Legislature passed Senate Bill
14-D which was enacted as Chapter 82-219, Laws of Florida, and
codified as Section 212.052, Florida Statutes. In part, that
law provides that the products, items, or prototypes which are
manufactured, produced, compounded, processed, or fabricated for

a taxpayer's own use directly and solely in research and
development are not subject to the tax imposed by Section
212.06(1)(b), F.S. However, tax "shall be due on the purchase,
rental, or repair of real property or tangible personal property
employed in research or development."

Section 212.052(2), F.S., expressly provides that tax is
due on real and tangible personal property "employed" in
research and development activities. Clearly, tax is due on the
commercial rental of a building where research and development
activities are carried out. It is also clear that tax is due on
the purchase, rental, or repair of tangible personal property
such as laboratory instruments or testing equipment utilized
("employed") in research and development. However, it is not
stated clearly whether tax applies to tangible personal property
(materials) that becomes a part of the products or items made in
the research and development activities.

It was the Department's position in TAA 90A-071 that items
transferred out of finished goods inventory which became
components of the products made in research and development
operations were exempt pursuant to Section 212.052, F.S., while
tangible personal property that did not become components of the
products made in research and development would be subject to
tax. Current research by the Department has revealed that it
was not the legislative intent to exempt materials which become
components of the products made in research and development
operations. Florida courts have found that legislative intent
is very important when interpreting the provisions of a statute:
"It is a fundamental rule of statutory construction that
legislative intent is the polestar by which the court must be
guided, and this intent must be given effect even though it may
contradict the strict letter of the statute." State v. Webb,
398 So.2d 820 (Fla. 1981).

An impact statement prepared by the House Committee on
Tourism and Economic Development on April 12, 1982, states that
the effect of Section 1 of Senate Bill 14-D (which establishes
Section 212.052, F.S.) "is to exempt from the sales and use tax
engineering labor costs, design labor costs, fabricating labor
costs and depreciation used in research and development

undertaken by a person on his own behalf."

A Fiscal Note prepared by the House Committee on Finance
and Taxation on April 7, 1982, states that the effect of Section
1 of House Bill 27-D (identical to Section 1, Senate Bill 14-D)
is to provide "that the purchase of materials for incorporation
into a `prototype', and the purchase of laboratory equipment and
instruments necessary to conduct research or development, are
still taxable."

Your letter of August 16, 1990, states that part of the
funds used for research and development by your company
represent items transferred from finished goods inventory.
Based on the above analyses, and conversations with legislative
committee personnel, it is the legislative intent that tax will
be due on the cost of materials which are purchased or withdrawn
from finished goods inventory and become a part of the "product"
created in research and development activities.

Finished goods inventory is an asset held for sale in the
ordinary course of business. At the time the products in
finished goods inventory are held for sale, they have a value.
That value includes raw materials, direct labor, and a ratable
share of manufacturing overhead. Accordingly, use tax should be
accrued and remitted on the full manufactured cost (material,
direct labor, and manufacturing overhead) of the product removed
from finished goods inventory; not on the wholesale or retail
selling price of the product. Labor costs incurred during
research and development activities and attributable to the
"product" will not be subject to tax.

Effective with the date of this technical assistance
advisement, the Department's previous technical assistance
advisement 90A-071, dated November 7, 1990, is rescinded and
your company must begin to remit use tax on the cost of products
removed from finished goods inventory for use in research and
development activities. Tax will not have to be remitted by
your company on any products removed from finished goods
inventory for research and development purposes prior to the
date of this advisement.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advise as specified in Section 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 advise 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 Section 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 the
confidentiality of such information, we request you notify the
undersigned in writing within 15 days of any deletions you wish
made to the request or response.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Statutory Compliance

ctrl #16952