Did Florida treat a permanently installed marina security system as tangible personal property or a real-property fixture?

Plain-English summary

Florida treated a permanently affixed marina security system as an improvement to real property, not as tangible personal property sold to the customer.

The components were bolted or screwed to a stump, piling, or concrete wall and the installation contracts did not retain title. The Department compared the system to permanently affixed burglar and fire alarms and found the same contractor-tax treatment applied.

Under lump-sum, cost-plus, fixed-fee, or guaranteed-price contracts, the installer paid tax to suppliers on materials used to install, repair, or maintain the system and did not charge sales tax to the customer. If the installer manufactured or fabricated the system from raw materials, tax was measured by the full fabricated or manufactured cost, not merely raw-material cost.

What this means for you

• Permanent affixation and contract language controlled the fixture analysis.
• Retained-title or personal-property-until-paid terms could change the result.
• A real-property contractor was the consumer of installation and maintenance materials.
• In-house manufacturing brought the full fabricated-cost rule into play.

Common questions

Q: Was the installed marina system tangible personal property? A: No. It was treated as a real-property fixture on the stated facts.

Q: Did the installer charge the customer sales tax? A: No, under the listed lump-sum, cost-plus, fixed-fee, or guaranteed-price contracts.

Q: What tax did the installer pay? A: Tax on purchased materials, or on full fabricated cost when it manufactured the system.

Citations and references

• Fla. Admin. Code r. 12A-1.051(5) — fabricated property used by contractors
• Fla. Admin. Code r. 12A-1.051(16) — real-property improvement contracts
• Fla. Admin. Code r. 12A-1.056 — remittance provision referenced by the rule
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-018

Original ruling text

Feb 16, 1996

Re: Technical Assistance Advisement 96(A)-018 Sales And Use Tax - Installation and Maintenance of Marina Security System Petitioner: XXX (herein the "Taxpayer") Rule 12A-1.051, F.A.C.

Dear :

This response is in reply to your September 21, 1995, petition for the Department's issuance of a Technical Assistance Advisement ("TAA") pursuant to s. 213.22, F.S., and Rule 12-11, F.A.C. Your petition regards the referenced matter and Taxpayer. The Department has carefully examined your petition and finds it to meet the criteria set forth in Chapter 12-11, F.A.C., requisite to issuance of a TAA. Therefore, the Department is hereby issuing the requested TAA.

DISCUSSION OF FACTS

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

The following quotations are taken from the fact sheet you furnished from the Taxpayer describing the marina security system (the "System"):

"The [System] starts with the Marina Blockaide mounted at the head of an entrance channel facing the open water. An alarm set of photo-eyes span the channel entrance to monitor any boat movement into the protected area. An alarm receiver, either a pocket pager or an alarm panel at security head[q]uarters, completes the basic [System]. With additional equipment, the progress and direction of the intruder can be monitored by your security personnel.

"The instrument is a self-contained cube, approximately 2'x 2'x 2', of weatherproof fiberglass with a ¬" colored Plexiglass window. The weight is approximately 60 pounds.

"The power to operate the [System] is unique and versatile. Since the Marina Blockaide is often of the most value in remote locations, both the photo-eyes and the unit [itself is] designed to be powered by a self-contained solar system requiring no external power source and eliminating both the cost and the inherent hazards of 120 VAC power. The alternate option is the normal plug-in household 120 VAC power...."

The following statement is quoted from your August 23, 1995, letter to the Department:

"The [System] is permanently affixed at a channel entrance and may be programmed to send radio signals to a security station elsewhere on the property...."

The photographs of the System furnished with your petition depict the manner of affixation of the solar powered eye(s) and marina blockade components making up the System. These photographs show the different components bolted or screwed to a tree stump, a piling, and directly to a concrete retaining wall.

Additionally, you advised in our telephone conversation of December 29, 1995, that the Systems are not installed under retain title provisions.

REQUESTED ADVISEMENT

You endeavor to receive the Department's advice on whether the System constitutes a fixture to real property when installed or retains the identity of tangible personal property and, consequently, how to properly collect and/or pay sales tax on the System.

DISCUSSION OF LAW

The following administrative and case law is relevant to addressing the issue under advisement herein:

Rule 12A-1.051(16), F.A.C., states:

"(16) Materials purchased for use in the performance of lump sum, cost plus, fixed fee or guaranteed price contracts for the improvement of real property are taxable to all: Block and brick masons Burglar and fire alarm system Carpets (See subsection (40) of this rule) Cement workers Door Electrical Elevator and escalator Fencing Flooring Glazers Heating, ventilating and air conditioning Insulating Iron workers Jalousies Landscaping Lathing Lawn and fire prevention sprinkler system Lot clearing and grading Mirrors (See subsection (41) of this rule) Painting Paper hanging Paving Pier and dock building Plastering Plumbing Roofing Septic tank; taxable on fabricated cost of 60 percent of installed price acceptable Sheet metal workers Sign; when signs become a part of real property Solar systems

Steel erecting
Steel sash
Stucco
Swimming pool
Tile
Waterproofing
Well drilling"
(Emphasis Supplied)

An agency's administrative interpretation of a statute by rule has been accorded great deference by the courts, and will not be overturned unless the agency's interpretation of the statutes is clearly erroneous; reviewing court will defer to any interpretation within the range of possible interpretation. See Pershing Industries v. Department of Banking, 591 So.2d 991, 993 (Fla. 1 DCA 1991); Eager v. Florida Keys Aqueduct Authority, 580 So.2d 771 (Fla. 3 DCA 1991); Natelson v. Department of Ins., 454 So.2d 31 (Fla. 1 DCA 1984); State ex rel. Szabo Food Serv., Inc. of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1973), reh. den. Jan. 9, 1974.

Also relevant to your point of inquiry are the provisions of Rule 12A-1.051(5), F.A.C., which relate to contractors involved in the fabrication or manufacture of items to fulfill contracts they perform to improve real property. This subsection provides:

"(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."

CONCLUSIONS OF LAW

By way of the above rule quotation, we already have in existence established administrative law on the sales and use tax treatment of permanently affixed burglar and fire alarm systems. Such systems are treated as improvements to real property. Inasmuch as such systems are strongly analogous to the instant System, we, therefore, find no rational basis for applying a different sales and use tax treatment to the System than that already given to burglar and fire alarm systems. In short, the Systems should be treated as fixtures to real property for sales and use tax purposes so long as the contracts to install the Systems do not contain retained title provisions and, further, do not contain any other terms or conditions by which the Taxpayer and the customers agree that the Systems shall remain tangible personal property until paid for in full.

Accordingly, the Taxpayer should comply with the provisions of Rule 12A-1.051(16), F.A.C., above, by paying tax to its suppliers on the materials the Taxpayer purchases for use to furnish and install a System as well as materials it uses to repair or maintain a System pursuant to a lump sum, cost plus, fixed fee, or guaranteed price contract. Sales tax would not be charged to the customer by the Taxpayer under such contract methods since the installed System constitutes a fixture to real property.

Moreover, if the Taxpayer is fabricating or manufacturing the System from raw materials, the Taxpayer's liability is not limited merely to tax on the cost of the raw materials, but would be measured on the full fabricated or manufactured cost to the Taxpayer for a System (not yet installed) as provided in Rule 12A-1.051(5), F.A.C., above.

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. 23461