How did Florida tax signs manufactured in Florida and furnished with subcontracted installation under lump-sum or fully itemized contracts?

Plain-English summary

Florida treated the sign manufacturer as the consumer under its lump-sum fixture contracts and imposed use tax on the signs' full manufactured cost.

The company manufactured wall-mounted and concrete-anchored pylon signs in Florida, then subcontracted installation. Because the installed signs became real-property fixtures, the real-property contractor rule applied even though a third party performed the physical installation.

For lump-sum, cost-plus, fixed-fee, guaranteed-price, and similar contracts, the manufacturer owed use tax when each sign was manufactured. The measure was full manufactured or fabricated cost, excluding material cost on which it had already paid sales tax. The same rule applied when the job site was outside Florida because the manufacturer used the sign to perform its contract before any claimed export sale.

A different result was possible only under a qualifying Rule 12A-1.051(2)(d) contract that itemized every material and its price before work began. Then the company would be a retailer, collecting tax on the sign charge while excluding a separately stated installation charge. A properly documented out-of-state delivery could qualify as an interstate sale, but the Department doubted the company could meet the advance-itemization rule when installers chose unknown additional materials.

What this means for you

• Subcontracting installation did not prevent the sign manufacturer from being treated as the improving contractor.
• Out-of-state installation did not remove Florida use tax from signs manufactured for non-itemized contracts.
• Retail-sale treatment required complete advance itemization, not merely separate sign and installation totals.

Common questions

Q: What tax applied under the company's lump-sum contracts?
A: Use tax on the full manufactured cost of each sign, subject to the credit for materials already taxed.

Q: Did an out-of-state job site change the result?
A: No, for the non-itemized contracts described.

Q: When could the sign charge be treated as a retail sale?
A: Only under a qualifying contract listing every material and price in advance; separately stated installation could then be excluded.

Citations and references

• Fla. Stat. § 212.02(20), (21) — definitions of use and use tax
• Fla. Stat. § 212.06(1) — tax on tangible property manufactured for the manufacturer's own use
• Fla. Admin. Code r. 12A-1.051(2), (5), (16), (22)-(24) — real-property contracts, fabricated cost, and installed signs
• Fla. Admin. Code r. 12A-1.064(1) — documented interstate export sales
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-045

Original ruling text

Aug 12, 1996

Re: Technical Assistance Advisement 96(A)-045
Sales And Use Tax - Manufacture and Installation of Signs
Both Within and Without Florida
Petitioner: XXXX (herein the "Taxpayer")
Rule 12A-1.051, F.A.C.

Dear :

This response is in reply to your May 1, 1995, and January 22,
1996, petitions 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

The following relevant information regarding the Taxpayer's
method of transacting business is quoted from the Department's
February 24, 1995, Notice of Decision to the Taxpayer:

[The Taxpayer] is a manufacturer and retail dealer of
signs. In the instant situation, [the Taxpayer]
manufactured signs which were later attached to the walls
of buildings and electrical pylon signs which rested on
their own foundations anchored into the ground in concrete.
[The Taxpayer] manufactured the signs in the State of
Florida. Because of certain insurance constraints, [the
Taxpayer] does not install its manufactured signs. In
contracts where the customer desires to have the sign
installed, [the Taxpayer] contracts with a "sign installer"
to have the sign installed. Its sales contracts are lumpsum contracts for both in-state and out-of-state customers.

REQUESTED ADVISEMENT

You endeavor to receive the Department's advice on the proper
application of sales or use tax under the circumstances
described above. You further request advice on the proper
application of sales and use tax should you convert from lumpsum contracts to contracts which conform to Rule 12A1.051(2)(d), F.A.C.

DISCUSSION OF LAW

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

Section 212.06(1), F.S., provides in significant part the
following:

Sales, storage, use tax; collectible from dealers; "dealer"
defined; dealers to collect from purchasers; legislative
intent as to scope of tax.
(1)(a) The aforesaid tax at the rate of 6 percent of the
retail sales price as of the moment of sale, 6 percent of
the cost price as of the moment of purchase, or 6 percent
of the cost price as of the moment of commingling with the
general mass of property in this state, as the case may be,
shall be collectible from all dealers as herein defined on
the sale at retail, the use, the consumption, the
distribution, and the storage for use or consumption in
this state of tangible personal property or services
taxable under this part....
(b) Except as otherwise provided, any person who
manufactures, produces, compounds, processes, or fabricates
in any manner tangible personal property for his or her own
use shall pay a tax upon the cost of the product
manufactured, produced, compounded, processed, or
fabricated without any deduction therefrom on account of
the cost of material used, labor or service costs, or
transportation charges, notwithstanding the provisions of
s. 212.02 defining "cost price...."

Subsections 212.02(20) and (21), F.S., the terms "use" and "use

tax" as follows:

(20) "Use" means and includes the exercise of any right or
power over tangible personal property incident to the
ownership thereof, or interest therein, except that it does
not include the sale at retail of that property in the
regular course of business.
(21) The term "use tax" referred to in this chapter
includes the use, the consumption, the distribution, and
the storage as herein defined.

The above statutory definition of the term "use" was interpreted
in the matter of Klosters Rederi A/S v. State, Etc., 348 So.2d
656 (Fla. 3rd DCA 1977). The court held that a foreign vessel
owner's action of merely removing from storage in Florida and
subsequent placement on board ship of "expendable" items,
constituted "use", within the statutory definition of such term
defining use as the exercise of any right or power over tangible
personal property incident to ownership thereof. The Klosters
court held that... "[T]he definition of 'use,' as set forth
above, is broad enough to cover even the removal of property
from a warehouse and loading of said property upon a vessel."

Further, in United Air Lines v. Mahin, 410 U.S. 623, 93 S.Ct.
1186, 35 L.Ed.2d 545 (1973), the U.S. Supreme Court held that,
pursuant to an Illinois state statute defining the word "use" as
an "exercise... of any right or power over tangible personal
property incident to the ownership of that property," withdrawal
from storage of fuel to be consumed by an interstate carrier
afforded the state the right to impose a use tax on the stored
fuel without offending the commerce clause of the Federal
Constitution.

Rule 12A-1.051, F.A.C., provides the implementing administrative
law for s. 212.06(1)(b), F.S., above, relative contractors who
repair, alter, improve, or construct real property. 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.

Pursuant to the provisions of Rule 12A-1.051(16),(22),(23), and
(24), F.A.C., signs such as those manufactured by the Taxpayer
based on the description contained in your petition are
considered to be improvements to real property upon
installation. As the Taxpayer contracts to furnish and
indirectly install (installation subcontracted) signs which
constitute fixtures to real property, the Taxpayer is, thus,
governed by the provisions of Rule 12A-1.051, F.A.C. Pursuant
to the provisions of Rule 12A-1.051(2)(e), F.A.C., the
contractor is the ultimate consumer of materials and supplies it
uses to perform a lump sum, cost plus, fixed fee, guaranteed
price or any other kind of contract except an itemized contract
as described in subsection (2)(d) of the rule ("class (2)(d)
contract"). As we have already established this would include
sign contractors.

Moreover, under the provisions of Rule 12A-1.051(5), F.A.C., if
the contractor manufactures or fabricates items to use in
performing contracts other than class (2)(d) contracts, the
contractor is subject to use tax measured on the full
manufactured or fabricated cost of such items, not just on the
cost of the direct materials. Further, under the provisions of
subsection (5)(e) of the rule, the contractors liability for use
tax for such manufactured or fabricated items attaches at the
moment such items are manufactured or fabricated.

Also relevant to this issue is the interpretation of Rule 12A1.051(2)(d), F.A.C., in the matter of Sears, Roebuck & Company
v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2nd
Cir. Ct. 1994). The court in Sears interpreted paragraph (2)(d)
of Rule 12A-1.051, F.A.C., relative to contracts wherein Sears
agreed to furnish and install appliances which became fixtures
of real property, such as hot water heaters and built-in ovens,
ranges, and dishwashers. A receipt was issued to the customer

up front which listed the appliance by name and included a cost
for the appliance and a separate cost for the installation.
Sears would than engage an independent contractor to perform the
installation. The independent installer would always supply
some additional items of tangible personal property necessary to
complete the installation. Such items were never listed on the
sales receipt, since Sears had no knowledge of what specific
materials would be used by the installer to complete the
installation, but were simply later billed as a flat sum by the
installer. Sears contended that it was not performing class
(2)(d) contracts since its receipt did not specifically itemize
and describe the unknown materials furnished by the independent
installer. Given these facts, the court agreed with Sears and
ruled that Sears had not performed (2)(d) contracts.

Accordingly, Sears was correct in not charging tax to the
customer on the appliances or the installation and was, further,
correct in having paid tax on its cost price of purchasing the
appliances from the manufacturer.

The tests coming out of the Sears decision to be applied in
determining whether a given contract constitutes a class (2)(d)
contract are: (i) the contract must itemize each and every
separate material and the price per each furnished to perform
the work covered by the contract and (ii) the contract must show
such itemization in advance of the work being performed.

In the case of class (2)(d) contracts, it would be possible to
have a sale in interstate commerce and, thus, nontaxable. This
is true because in the case of a class (2)(d) contract, the
contractor is not the ultimate consumer of the materials, but is
instead a retailer of the materials as provided in subsection
(2)(f) of the rule. In order for a nontaxable sale in
interstate commerce to occur, the provisions of Rule 12A1.064(1), F.A.C., would have to be satisfied. Rule 12A1.064(1), F.A.C., provides in relevant part the following:

(1)(a) Sales tax is imposed on the sales price of each item
or article of tangible personal property, unless otherwise
exempt, when the property is delivered to the purchaser or
his representative in this state. However, the tax does

not apply to tangible personal property irrevocably
committed to the exportation process at the time of sale,
when such process has been continuous or unbroken.
(b) Intent of the seller and the purchaser that the
property will be exported is not sufficient to establish
the exemption; nor does delivery of the property to a point
in Florida for subsequent transportation outside Florida
necessarily constitute placing the property irrevocably in
the exportation process. Tangible personal property shall
be deemed committed to the exportation process if:

1. The dealer is required by the terms of the sale contract
   to deliver the goods outside this state using his own mode
   of transportation. The dealer must retain in his records
   trip tickets, truck log records, or other documentation
   reflecting the specific items and export destination;
2. The dealer is required by the terms of the sale contract
   to deliver the goods to a common carrier for final and
   certain movement of such property to its out of state
   destination. Sales by a Florida dealer are exempt when the
   dealer delivers the merchandise to the transportation
   terminal for shipment outside this state and secures a dock
   or warehouse receipt and a copy of the bill of lading. On
   shipments to points outside the United States, a shipper's
   export declaration shall also be obtained;....

CONCLUSIONS OF LAW

From the information quoted above, the types of signs the
Taxpayer contracts to manufacture are signs which constitute
fixtures to real property upon installation. Consequently,
pursuant to Rule 12A-1.051(2)(e), F.A.C., the Taxpayer is the
ultimate consumer of the materials and supplies it uses to
perform lump sum, cost plus, fixed fee, guaranteed price, or
similar forms of contracts to manufacture, furnish, and install
signs. Moreover, since the Taxpayer is manufacturing the signs,
the provisions of Rule 12A-1.051(5), F.A.C., apply.
Consequently, the Taxpayer is required to accrue and remit to
the Department use tax on the full manufactured cost of each
sign it manufactures for use in performing a contract to furnish
and install the sign notwithstanding that it may subcontract the
installation to a third party sign installer. The third party

installer would be responsible for any materials it furnished to
perform the installation on a lump sum, cost plus, fixed fee,
guaranteed price, or similar basis. As provided in Rule 12A1.051(5)(c), F.A.C., the Taxpayer would exclude the cost of
materials on which it has already paid sales tax to the supplier
in computing the manufactured cost of a sign.

The above tax treatment would apply whether the job site is
within or outside Florida. In those instances where the job
site is outside Florida, the Taxpayer is not considered to be
making a sale in interstate commerce because, as earlier noted,
the Taxpayer is the ultimate consumer of the manufactured sign
it has contracted to furnish and install on a lump sum, cost
plus, fixed fee, guaranteed price, or similar basis. Pursuant
to Rule 12A-1.051(5)(e), F.A.C., the use tax attaches at the
moment a sign(s) is manufactured for use by the Taxpayer to
perform such a contract regardless of the ultimate destination
to an out of state job site. Such treatment is comparable and
consistent with factors giving rise to use tax in the Klosters
and United Airlines cases noted and summarized, above.
Therefore, this application of use tax against the Taxpayer for
the manufactured cost of signs it manufactures for its use in
performing other than class (2)(d) contracts does not violate
the Commerce Clause or Import/Export Clause of the United States
Constitution.

If the Taxpayer's contracts are recast in a form satisfying the
requirements of Rule 12A-1.051(2)(d), F.A.C., then pursuant to
Rule 12A-1.051(2)(f), F.A.C., the Taxpayer would be considered
to be making retail sales of the signs when performing such
contracts. The Taxpayer would, thus, be obligated to collect and
remit sales tax on the charge for the sign(s) excluding the
installation charge if separately stated. However, in the case
of a class (2)(d) contract with an out of state customer, tax
will not apply to the charge to the customer for the sign if the
delivery to the out of state customer occurs in a manner which
complies with the provisions of Rule 12A-1.064(1), F.A.C.,
above. In view of the fact that the Taxpayer subcontracts the
installation of its signs to third party installers, it is,
hence, doubtful that the Taxpayer would be able to structure its
contracts to fully comply with Rule 12A-1.051(2)(d), F.A.C. As

was true with the Sears case, supra, the Taxpayer would have no
way of knowing what materials are being used by the third party
installer with which it has contracted. Therefore, the Taxpayer
would not be able to itemize such materials in its contract with
the customer before the work is performed.

Copies of the Rule provisions cited in this advisement are
enclosed for your convenient reference.

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. 24538