Was an airport baggage-handling system a real-property improvement, and who owed Florida tax under the lump-sum construction contract?

Plain-English summary

Florida treated the airport baggage-handling system as an improvement to real property and taxed the contractor's inputs rather than its lump-sum charges to the airline.

The contractor manufactured, constructed, and installed the system for a fixed lump-sum price. The airline owned the project during construction and paid the contractor, while the county airport owner reimbursed the airline and would own the completed system after acceptance.

The Department found the system was annexed to the airport, appropriate to its use, and intended by the county to remain permanently. It therefore qualified as a real-property improvement.

As the improving contractor, the contractor was the ultimate consumer of materials and supplies and owed sales or use tax on them. It also owed use tax on the fabricated cost of components produced on or away from the airport. Its charges to the airline for construction, manufacture, and installation were not taxable sales.

What this means for you

• The system's physical annexation, airport function, and intended permanence supported fixture treatment.
• A lump-sum real-property contractor paid tax on incorporated materials and fabrication rather than collecting tax on the contract price.
• County reimbursement alone did not establish an exemption for the airline's purchases outside the contractor's construction charges.

Common questions

Q: Was the baggage system tangible personal property sold to the airline? A: No. The Department treated the completed system as an improvement to airport realty.

Q: Who owed tax on materials and fabricated components? A: The contractor.

Q: Did the contractor collect tax on its lump-sum charges to the airline? A: No.

Citations and references

• Fla. Stat. § 212.05 — sales and use tax on the contractor's purchases and use
• Fla. Admin. Code r. 12A-1.051(2)(e) — contractor as consumer under a lump-sum real-property contract
• Fla. Admin. Code r. 12A-1.051(5) — fabricated components
• Fla. Admin. Code r. 12A-1.070(1)(a)6.b.I — fixture treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-046

Original ruling text

Aug 13, 1996

Re: TAA 96A-046
Improvement to the Realty of an Airport Section 212.05, F.S. Rules 12A-1.051(2)(e), 12A-1.070(1)(a)6.b.I, and (5), F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated February 26, 1996, wherein you described a contract between XXXX (herein Airline), and XXX (herein Contractor), for the manufacture, construction and installation by Contractor of a baggage handling system (herein either System, or Project), for a fixed, lump-sum price, to be installed at the XXXX (herein Airport), for the use thereafter by Airline. Airport is owned by XXX, and operated through its Aviation Department.

You provided the Department with several contracts and other documents related to the Project, including an agreement styled Contract, executed August 11, 1994, between Airline and Contractor in which the System is described as Concourse "C" Outbound Baggage Project; a document styled Agreement For Selection, Acquisition, Installation And Operation Of A Laser Baggage Sortation System Between XXXX, and [Airline], (herein County and Airline Agreement); an agreement labelled Assignment Agreement, dated June 27, 1994; and a copy of the bid document of the Project, which was made available to prospective bidders on or about May 18, 1994, labelled Notice To Bidders (herein Bid).

Article 1 of the Bid identifies the owner of the Project as the Airline. It appears that the bids were opened on June 27, 1994. The successful bidder was Contractor.

Paragraph 22.2 of the Bid provides that "[a]t the sole option of

the County, the Owner will assign the Contract to the County." Presently, only the Contractor has executed the Assignment.

Paragraph 22.1 of the Bid declares that the County is a thirdparty beneficiary under the Contract.

You state on page 2 of your letter that County "... will actually own..." the System, but that Airline will use the System after it is completed.

Also, on the same page, you declare that County "... will fund the account to be used to pay [Contractor]." Thus, you assert that County is "... paying for the baggage handling system."

You then add that the System "... becomes the property of County as of the moment construction is completed and accepted."

As to the payment of sales or use tax, you provide, on page 1 of your letter, the information that Contractor "... is either paying Florida sales tax to the vendor or self-remitting Florida use tax." You add that, as to "... components fabricated at locations other than Airport, [Contractor] is remitting use tax on the fabricated cost of the component."

You argue that Contractor has no duty to collect sales tax from Airline on the charges which arise under the Contract provisions during the course of the System's construction, manufacture and installation.

In your letter you asked for a response to three questions: 1) Is the System an improvement to realty; 2) Whether Contractor is liable for the sales or use tax on the cost of the materials and components of the System; and 3) Whether Contractor should collect such tax on any of the charges to Airline made by Contractor in the construction, manufacture, or installation of the System?

In providing suggested responses to these questions you cite Rule 12A-1.070(1)(a)6.b.I., F.A.C., as dispositive of the first issue, which is whether the System is realty, by stating that the instant facts reveal that the two prong test of the rule

provision has been satisfied, in that, the System will be owned by County, which also owns the land occupied by the Airport, and that it is the intention of the County to consider the System as a permanent accession to the realty.

Thus, you conclude that the System, upon completion, will be a part of the realty of the Airport.

You then cite Rule 12A-1.051(2)(e), F.A.C., as support for your argument that Contractor need not collect sales tax from the Airline on the charges which arise under the Contract by asserting that this rule makes it clear that in a lump sum agreement, the contractor "... is required to pay tax on the materials and supplies but is not required to collect tax under the contract."

You conclude that the Contractor "... is properly remitting tax on the materials it purchases and manufactures for use in the construction of the baggage handling system."

Department Response

During a telephone conversation on March 5, 1996, and in a written communication received by the Department on March 9, 1996, the Department learned, on the basis of the best knowledge available, that the County has not executed the Assignment Agreement. Thus, the Airline remains the owner of the Project. The other contracting party is the Contractor. Further, the Department learned that construction of the System is underway and the Project is approximately 97 percent complete. As you have indicated, the County is to be the owner of the System after its completion and acceptance in accordance with paragraph 6.03 of the County and Airline Agreement. This provision states in part that "The System, upon completion and acceptance by the Airline and the County, and any construction work done to the Terminal Building in order to accommodate the installation of the System shall immediately become the property of the County, free and clear of any liens or encumbrances whatsoever."

Paragraphs 7.01 and 7.02 of the County and Airline Agreement

require the Airline to bear the cost of cleaning, maintaining and repairing the System. To off-set this cost to the Airline, paragraph 5.02 forgives the Airline certain costs it would normally bear as to charges for the operation and maintenance of other parts of the baggage handling facilities of the airport.

During the period of construction, paragraph 4.02 creates a reimbursement process whereby after the Airline issues a check to a vendor (payee) in payment of reimbursable expenditures, the County through its Accounting Division "... shall then mail or deliver the check to the payee and shall immediately wire transfer sufficient funds to the account [of the Airline] to cover the amount of the check."

Thus, as the above facts reveal, the Airline is the owner of the Project, either until the County exercises its election to have the Contract assigned to itself, or at the time of the completion and acceptance by the County of the Project. During construction, the Airline pays the Contractor, through its own checks, which amount is then returned by the County to the account of the Airline.

The System is an improvement to realty because the determination of whether personalty becomes a fixture is a factual question, Matter of Gray Industries, Inc. v. Freehling, 595 F.2d 1045 (5th Cir. 1979), and that the facts satisfy the three prong test in Commercial Finance Company v. Brooksville Hotel Company, 123 So. 814, 816 (Fla. 1929). That is, the System is being annexed to the realty, the appropriateness of the System to the Airport is established, and the Department is satisfied that it is the intention of the County, which the Department considers as the party making the annexation, that the accession be permanent.

Having established that the System represents an improvement to realty, it seems clear that the payments by the Airline to the Contractor are not taxable. The taxable transactions are those in which the Contractor purchases the materials and supplies which are incorporated into the System, and the use tax obligation which is created when Contractor fabricates components at locations on, or away from, the premises of the Airport. You provided assurance that these taxes were being

paid or remitted.

The tax on the purchases is required by operation of s. 212.05, F.S., and by Rule 12A-1.051(2)(e), F.A.C., wherein, as to the latter, a contractor, contracting to improve realty in accordance with a lump sum contract, is the ultimate consumer of the materials and supplies and is liable for the sales tax. As to fabricated components, the tax is applied as set out in Rule 12A-1.051(5), Florida Administrative Code.

Consequently, in answer to your three questions the Department states that the System is an improvement to realty; that it is proper that the Contractor pay or remit the sales or use tax as previously described on the materials, supplies and fabricated cost of components incorporated into the System; and that Contractor is not required to collect sales or use tax on any of its charges to the Airline in the construction of the System.

Albeit this issue was not broached in your letter, the Department seeks to clarify that under the reimbursable provisions cited above, which appear in paragraph 4.02 of the County and Airline Agreement, the taxability of any purchases made by Airline, other than the payments tendered to the Contractor in accordance with the Contract for the construction, manufacture and installation of the System, is not determined within this Technical Assistance Advisement. Thus, nothing herein should be interpreted to mean that the Airline enjoys an exemption from sales or use tax solely because it receives reimbursement from the County.

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 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 the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Tax Policy and Dispute Resolution

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