Could a structural-steel contractor use Florida's optional sheet-metal method to calculate use tax on fabricated steel installed under lump-sum contracts?

Plain-English summary

Florida required the structural-steel contractor to calculate use tax on fabricated cost rather than use the optional sheet-metal formula.

The contractor fabricated structural-steel products, supplied them under lump-sum real-property contracts, and hired subcontractors to erect them. The Department limited the optional method in Rule 12A-1.051(19)(b) to contractors who fabricate and install sheet metal—defined in the ruling as U.S. Number 10 gauge or lighter.

Because the taxpayer fabricated structural steel, it had to use the general manufactured-cost method. That calculation included direct materials, direct labor, and allocable indirect manufacturing costs under subsection (5). The subcontractor's labor charge for erecting the fabricated products into real property was not subject to sales or use tax.

What this means for you

• The type and gauge of metal determined access to the optional sheet-metal method.
• Structural-steel fabricators had to include production overhead in fabricated cost.
• The optional 6% tax on 50% of contract price was unavailable.
• Separate erection labor that incorporated the steel into real property was not taxable.

Common questions

Q: Could the contractor use the sheet-metal option?
A: No.

Q: What tax base applied?
A: Fabricated cost, including direct materials, direct labor, and indirect manufacturing costs.

Q: Were the erection subcontractor's labor charges taxable?
A: No.

Citations and references

• Fla. Admin. Code r. 12A-1.051(1), (2)(e), (5), (19)(b), (19)(g)2. — contractors and fabricated property
• Fla. Admin. Code r. 12A-1.056 — tax remittance
• Fla. Admin. Code r. 12A-1.093 — records
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-022

Original ruling text

Mar 22, 1996

Re: TAA 96A-022
Use Tax on Fabrication of Steel Products
Rule 12A-1.051, F.A.C.

Dear :

This is in response to your letter of January 10, 1995, in
which you requested a Technical Assistance Advisement (TAA)
regarding XXXX [hereinafter "Taxpayer"] method of computing use
tax on the fabricated cost of items used in the performance of
contracts to construct or improve real property. Additional
documentation requested in our letter dated February 8, 1995,
was received by this office on February 27, 1995.

FACTS

Taxpayer is a fabricator of steel products. Taxpayer
enters into lump sum contracts with general contractors to
fabricate, provide, and erect/install steel products as part of
buildings and other structures. Taxpayer subcontracts with
others for the labor to erect/install the steel products.

Taxpayer calculates and pays use tax each month on the cost
of all products it fabricates. When determining the fabricated
cost of the products, Taxpayer adds the cost of materials,
labor, and an overhead factor which is recomputed each year.
Taxpayer requests assurance of the following:

"1. that [Taxpayer's] present method of paying use tax in
accordance with sections 12A-1.051(19)(b)[, F.A.C.,] of the
Sales and Use Tax Rule is proper.

"2. that [Taxpayer] has the right to change the method of
computing the use tax on all contracts from that enumerated
in [R]ule 12A-1.051(19)(b)1.[, F.A.C.,] to 12A1.051(19)(b)2.[, F.A.C.,] so long as it is used for all

contracts for that fiscal year.

"3. that the sale[s] tax is applicable only to the
materials used in the erection by the subcontractor as
noted in [R]ule 12A-1.051(3)[, F.A.C.]"

REGULATORY AUTHORITY

Rule 12A-1.051, F.A.C., provides in part:

"(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....
"(2)(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 of contract except
one falling in class (d) above, he becomes the ultimate
consumer thereof....
"(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....
"(19) Roofing and/or sheet metal, heating and/or air
conditioning, and septic tank contractors who manufacture
or fabricate items of tangible personal property for their
own use in the performance of real property contracts shall
remit the tax under the following procedure:...
"(b) SHEET METAL CONTRACTORS - Sheet metal contractors may
elect one of the following methods:
"1. Report tax at the rate of 6 percent of the fabricated
cost. Fabricated cost includes the cost of all materials,
as well as the cost of labor, power, transportation, and
other plant expenses as stated in subsection (5) of this
rule. Adequate records, as prescribed under Rule 12A-1.093,
F.A.C., must be maintained to reflect fabricated cost.
Such contractor must register as a dealer and extend a
resale certificate in lieu of tax to suppliers of
materials; or

"2. Report the tax at the rate of 6 percent of 50 percent
of the total contract price less the total of any
subcontract which requires the subcontractor to furnish and
install items of tangible personal property. Such
contractor must register as a dealer and extend a resale
certificate in lieu of tax to suppliers of materials....
"(g) For the purpose of this subsection, the following
definitions are used:...
"2. SHEET METAL CONTRACTOR - One who fabricates and
installs metal or other related items for inclusion in
contracts for the improvement to realty...."

ADVISEMENT

The optional method for calculating and remitting tax
provided by Rule 12A-1.051(19)(b), F.A.C., is available only to
contractors that fabricate and install sheet metal, and not
other types of metal. Sheet metal differs from other types of
metal by its weight. It is the Department's position,
consistent with statutory provisions pertaining to contracting,
that a "sheet metal contractor" is a contractor who fabricates
and installs metal of U.S. Number 10 gauge or lighter for
inclusion in construction contracts. The contract provided by
the Taxpayer, which is supposed to be representative of the
types of contracts entered into by the Taxpayer, clearly shows
that the Taxpayer fabricates and installs structural steel, and
not sheet metal. Taxpayer incorporates these structural steel
products into real property under lump sum contacts with general
contractors. Since the Taxpayer is a structural steel
contractor, and not a sheet metal contractor, it does not
qualify for the optional method provided to roofing and/or sheet
metal, heating and/or air conditioning, and septic tank
contractors for remitting tax. Consequently, Taxpayer would not
be able to report tax at the rate of 6% of 50% of the total
contract price as provided under Rule 12A-1.051(19)(b), F.A.C.
Taxpayer must rely on the provisions of subsection (5) of Rule
12A-1.051, F.A.C., to determine the amount of tax due.

During a telephone conversation with Taxpayer's
employee/bookkeeper on March 10, 1995, it was clarified that the
issue in reference to number 3. ("that the sale[s] tax is

applicable only to the materials used in the erection by the
sub-contractor as noted in Rule 12A-1.051(3)") is that of the
application of sales tax to a subcontractor's labor charges.
The labor charges that a subcontractor makes to Taxpayer for
erecting Taxpayer's fabricated steel products which become a
part of real property are not subject to sales or use tax.

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 will be deleted by the Department
before disclosure in keeping with your request dated January 10,
1995, for deletion of private or confidential information.

Sincerely,

Sharon Gallops
Senior Tax Specialist
Tax Policy and Dispute
Resolution

/sg
Cont. #19879