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

Ctrl. No. 24820