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

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