How did Florida tax a municipal utility's emissions monitoring system, installation labor, and liquidated damages?

Plain-English summary

Florida taxed the municipal utility's entire emissions-monitoring-system price, including separately stated installation labor.

Municipalities were generally exempt, but the statute excluded machinery and equipment used by municipally owned electric systems. A separate generating-equipment exemption did not apply because this plant produced electricity by burning residual oil.

The Department treated the system as tangible personal property and included assembly or installation labor in its sales price. It also refused to subtract contractual liquidated damages because they compensated the utility for added supervision expenses rather than operating as a discount or rebate. The Department calculated $23,098.14 of tax and, after $16,678.86 already remitted, a $6,419.28 deficiency.

For future purchases, the utility had to pay tax to the vendor or contractor unless it had self-accrual authority. If an unregistered vendor did not collect Florida tax, the utility had to remit use tax with its return.

What this means for you

• Municipal ownership did not exempt this electric-generation equipment.
• Separately stated installation labor remained part of the taxable sales price.
• Liquidated damages did not reduce tax when they compensated added supervision costs.
• Direct self-accrual required Department authority.

Common questions

Q: Was the emissions monitoring system exempt?
A: No.

Q: Was installation labor taxable?
A: Yes, as part of the system's sales price.

Q: Did liquidated damages reduce the taxable price?
A: No.

Q: How much additional tax did the ruling calculate?
A: $6,419.28.

Citations and references

• Fla. Stat. § 212.02(4), (17) — cost price and sales price
• Fla. Stat. § 212.05(1)(a)1.a. — tax on retail selling price
• Fla. Stat. § 212.08(5)(c), (6) — energy equipment and municipal exemptions
• Fla. Admin. Code r. 12A-1.0911 — self-accrual authority
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-017

Original ruling text

Feb 12, 1996

Re: Technical Assistance Advisement 96A-017
Sales and Use Tax; Purchases by a Municipal Utility
Section 212.08(6), F.S.

Dear :

This is in response to your request for a Technical
Assistance Advisement regarding the application of sales tax to
contracts for the purchase of machinery and equipment used in
the production of electrical energy by the XXXX (hereinafter
"System") of the XXXX (hereinafter "City"). Your letter
presents the following:

[System] operates, maintains and manages an electric
generation, transmission and distribution system for
[City]. [System] regularly contracts with outside
contractors for the purchase and installation of tangible
personal property. [System] contracted with an out of state
contractor ... for the purchase of labor and materials
needed for the installation of a [steam plant emissions
monitoring system].

The agreement, including change orders and less liquidating
damages, was for the amount of $345,747.62 and consisted of
$68,600 in nontaxable labor charges and $277,147.62 in
taxable material purchases. We have applied sales tax on
our actual material cost to complete the installation since
we believe that:

1) `cost' as described in section 212.02[, F.S.,] is
intended to reflect amounts actually paid in order to
acquire an asset and the benefits received
2) liquidated damages should not be treated as a source
of income
3) liquidated damages should not be ignored since they
represent a reduction of the benefits received

4) this equipment does not qualify as tax exempt per
Section 212.08(5)(c)[, F.S.,] since it is not used in
an exempt generating plant; this plant produces
electricity with steam energy derived from the burning
of residual oil
5) all appropriate sales tax has been remitted to the
contractor for payment to the Florida Department of
Revenue. If your determination requires payment of
sales tax of the `gross' amount we will self accrue it
and make prompt payment of the additional $2,303.29
($38,388.10 x 6%)[.]

Questions:
Please respond to the following two questions and recommend
any changes or additional items for review that may legally
reduce our sales tax due on future contracts.

1) Should we compute sales tax on the Net' amount and recognize liquidated damages as a reduction in our cost of the materials purchased? 2) Should weself accrue' and remit sales tax directly
to the Florida Department of Revenue on future
contracts?

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) are
pertinent to your request.

Section 212.02, F.S., provides in part:

(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. ... (17)Sales price' means the total amount paid for tangible
personal property, including any services that are a part
of the sale....

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

... [E]very person is exercising a taxable privilege who
engages in the business of selling tangible personal
property at retail in this 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:
(a)1.a. At the rate of 6 percent of the sales price of each
item or article of tangible personal property when sold at
retail in this state, computed on each taxable sale for the
purpose of remitting the amount of tax due the state, and
including each and every retail sale.

Section 212.08, F.S., provides in part:

(5) EXEMPTIONS; ACCOUNT OF USE. --- ...
(c) Machinery and equipment used in production of
electrical or steam energy. - The purchase of machinery and
equipment for use at a fixed location which equipment and
machinery are necessary in the production of electrical or
steam energy resulting from the burning of boiler fuels
other than residual oil is exempt from the tax imposed by
this chapter. Such electrical or steam energy must be
primarily for use in manufacturing, processing,
compounding, or producing for sale items of tangible
personal property in this state....
(6) EXEMPTIONS; POLITICAL SUBDIVISIONS. --- There are also
exempt from the tax imposed by this chapter sales made to
the United States Government, a state, or any county,
municipality, or political subdivision of a state when
payment is made directly to the dealer by the governmental
entity ... This exemption does not include sales ... for
use in any political subdivision or municipality in this
state of machines and equipment and parts and accessories
therefor used in the generation, transmission, or
distribution of electrical energy by systems owned and
operated by a political subdivision in this state....

DETERMINATION

Generally, municipalities are exempt from sales and use

taxes except for purchases of machinery and equipment used in
the generation, transmission, or distribution of electrical
energy. However, under the provisions of s. 212.08(5)(c), F.S.,
a municipality may purchase machinery and equipment used to
generate electricity tax exempt, if the fuel source which
produces that electrical energy comes from a fuel other than
residual oil. (The Department accepts the production of
electrical and steam energy for sale by the producer as
satisfying the requirement in s. 212.08(5)(c), F.S., regarding
the production of tangible personal property for sale.) Since
the electrical energy produced by System for City is the result
of burning 2.2% sulfur No. 6 oil, no exemption is available on
System's machinery and equipment purchases.

Machinery and equipment necessary to generate steam or
electrical energy is considered to be tangible personal property
for sales and use tax purposes. Pursuant to s.
212.05(1)(a)1.a., F.S., tax is due on the selling price of
tangible personal property. Pursuant to s. 212.02(17), F.S.,
the selling price of tangible personal property includes any
services (assembly or installation labor) that are a part of the
sale. Accordingly, the entire purchase price of the emissions
monitoring system, including any separately stated labor
charges, will be subject to tax.

Your letter states that liquidated damages were claimed
with respect to the purchase of the emissions monitoring system.
Such liquidated damages were allowed pursuant to provision
1.30.6 of the project bid package which states in pertinent
part:

In case of failure on the part of the Supplier to complete
Material delivery within the time fixed in the contract,
the following sums per calendar day shall be deducted from
monies due to the Supplier, not as a penalty, but as
liquidated damages and added expense for supervision.
[T]he liquidated damage amount per calendar date will be
$2500.00/day....

A penalty is generally a form of punishment. It is evident from
the above language that it is not the intent of System to punish

the contractor for missing the prescribed equipment delivery
date. Instead, the liquidated damages expressly serve as
compensation for supervision expenses incurred by System as a
result of the delay. The liquidated damages in this contract are
specifically not a discount or rebate and do not serve to reduce
the contracted selling price of the emissions monitoring system.
Accordingly, the taxable selling price of the emissions
monitoring system may not be reduced by the liquidated damages.

Based on the financial information provided in your letter,
System's sales tax liability on the subject contract is computed
as follows.

Initial Contract

$382,881.00

Change Orders:
Change Order #1

$5,500.00

Change Order #2

(4,245.28)

Net Change in Contract

1,254.72

Adjusted Contract After Change Orders

384,135.72

Sales Taxes Due
State ($384,135.72 X 6%) $23,048.14
Local Option ($5,000 X 1%)
Total Taxes

Total Amount Due

50.00
23,098.14

$407,233.86

Based on the worksheet which accompanied your letter,
System remitted $16,678.86 in sales tax to the contractor.
Since the correct amount of sales tax due on the purchase of
machinery and equipment is $23,098.14, there is a sales tax
deficiency of $6,419.28 which should be remitted directly to the
Department of Revenue.

With respect to future purchases, unless System has been
granted self-accrual authority pursuant to Rule 12A-1.0911,
F.A.C., sales taxes should be paid to the machinery and
equipment vendor or contractor. In the event that the machinery
and equipment vendor or contractor is not registered to collect
Florida sales tax, then System should remit use tax on the
purchases along with the monthly sales and use tax return, Form
DR-15.

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
Tax Policy and Dispute
Resolution

encl.
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