Should a contractor charge a water association sales tax on repair invoices for equipment affixed to real property?

Plain-English summary

The Florida Department of Revenue concluded that the contractor should not charge the nonprofit water association sales tax on any portion of the submitted repair invoices. The Department assumed the transactions were improvements to real property.

The contractor repaired water-system equipment such as adapters, membranes, clamps, anchors, and cord grips affixed to real property. The invoices separately listed some labor, services, parts, travel, and materials, but the parties had no written agreement before the work began that specifically described and priced every material.

That absence prevented the jobs from qualifying as class 2(d) contracts, where a contractor makes retail sales of itemized materials and may exclude separately stated installation charges. Instead, the contractor was the ultimate consumer under Rule 12A-1.051(2)(e), owed tax on materials purchased from suppliers, and made no retail sale of those materials to the association.

What this means for you

Property owners buying repairs

A detailed invoice issued after work was completed did not convert the job into an advance itemized-materials contract under this ruling.

Real-property contractors

For a class 2(d) contract, every material and its price had to be set out in a written agreement before the work. Without that structure, the contractor paid tax as the material consumer.

Accountants and tax professionals

Determine the contract method before deciding which party bears sales tax. Separate invoice lines alone were not enough here.

Common questions

Q: Did separately stated labor and parts make the job a class 2(d) contract? A: No. The Department required a prior written agreement itemizing every material and price.

Q: Who owed tax on the repair materials? A: The contractor owed tax when purchasing the materials from suppliers.

Q: Could the contractor charge the association tax on travel, labor, materials, or other invoice amounts? A: No. The ruling said the contractor should not charge sales tax on any portion of these invoice amounts.

Q: What factual assumption limited the ruling? A: The Department assumed that the transactions were improvements to real property.

Citations and references

• Fla. Admin. Code r. 12A-1.051(1) and (2)(a)-(f) — contract methods and tax treatment for non-public-works real-property contractors
• Sears, Roebuck & Company v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2d Cir. Ct. 1994) — cited for requiring advance itemization of every material and price for a class 2(d) contract
• Pershing Industries v. Department of Banking, 591 So. 2d 991 (Fla. 1st DCA 1991); Eager v. Florida Keys Aqueduct Authority, 580 So. 2d 771 (Fla. 3d DCA 1991); Natelson v. Department of Insurance, 454 So. 2d 31 (Fla. 1st DCA 1984); and State ex rel. Szabo Food Service, Inc. of N.C. v. Dickinson, 286 So. 2d 529 (Fla. 1973) — authorities cited on deference to agency interpretations
• Fla. Stat. § 213.22 and Fla. Admin. Code ch. 12-11 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-062

Original ruling text

Dec 20, 1996

Re: Technical Assistance Advisement 96A-062 Sales And Use Tax - Equipment Repair Affixed on Real Property Petitioner: XXXX (herein the "Taxpayer") Rule 12A-1.051, F.A.C.

Dear :

This response is in reply to your June 18, 1996, 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 relevant facts are taken from the request for technical assistance and our telephone conversation:

You operate as a non-profit water association. XXX performs repairs for your association on equipment such as adapters, membranes, clamps, anchors, cord grips, etc. This equipment, which enables the water to filter through systematically, is affixed to real property.

The following is quoted from your June 18, 1996, letter to the Department:

Our association is being charged sales tax by XXX (herein

"Contractor") Some of the invoices separately state labor and other service items as well as parts. We feel that our contract is defined under Rule 12A-1.051 (2)(d), and thus would be exempt from tax on installation charges as stated in Rule 12A-1.051(2)(f), [F.A.C.]

The invoices furnished with your petition include notations indicating that installed parts are affixed to real property. These invoices indicate charges for installation, service, labor, travel and materials utilized in the repair of the water system's equipment.

You have advised the Department that there were no written agreements between the Taxpayer and the contractor prior to the invoice issuance. This response is predicated upon the assumption that the transactions in question are for improvements to real property.

REQUESTED ADVISEMENT

You endeavor to receive the Department's advice on whether the installation charges and charges for travel time, mileage, meals and lodging are exempt from tax ("class 2(d) contract"), since you feel your contract is defined under Rule 12A-1.051 (2)(d), F.A.C.

DISCUSSION OF LAW

As you are aware, the following provisions of Rule 12A1.051, F.A.C., are relevant to the issue under advisement herein:

(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. This rule shall not apply to contractors who perform public works contracts in view of the fact that those contracts are governed by the provisions of Rule 12A-1.094, F.A.C.... The method by which contractors or subcontractors arrive at the total contract price charged for repair, alteration,

improvement and construction of real property or for a combination of work on both real and personal property must be determined for the purpose of ascertaining whether the receipts from sales made to or by them are taxable.

(2) Such contractors may include, among others, building, electrical, plumbing, heating, painting, decorating, ventilating, paper hanging, sheet metal, bridge, road, landscape or roofing contractors and they may use one of the following methods in arriving at the total contract price:

(a) Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services for a lump sum;

(b) Contracts in which the contractor or subcontractor agrees to furnish the materials and supplies and necessary services on a cost plus or fixed fee basis;

(c) Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services with an upset or guaranteed price which may not be exceeded; and

(d) Contracts in which the contractor or subcontractor repairs, alters, improves or constructs real property and wherein he agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and to complete the work either for an additional agreed price or on the basis of time consumed.

(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. The person or dealer who sells such materials and supplies to such contractor or subcontractor is making sales at retail and is required to collect the tax from him based upon the receipts from such sales.

(f) In cases falling in class (d) above, the contractor or subcontractor is deemed to be selling tangible personal property at an agreed retail price and shall collect tax from his purchaser based upon the amount of the receipts from such sales, excluding installation charges if separately stated. A dealer selling to such contractor or subcontractor must obtain a resale certificate in lieu of tax.... (Emphasis Supplied)

Also relevant to this issue is the interpretation of Rule 12A-1.051(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, 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 then engage an independent contractor to perform the installation. The independent installer would always supply some additional items of tangible personal property during 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. After the installation, Sears was billed a flat sum by the installer. Sears contended that it was not performing class (2)(d) contracts since its customer 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 sales price of the appliances or the customer charge for installation. Sears was also correct in having paid tax on its cost price of purchasing the appliances from the manufacturer.

Pursuant to the Sears decision, the following criteria must be satisfied in order for a given contract to constitute a class (2)(d) contract: (i) the contract must itemize each and every

separate item of TPP used in fulfilling their contract and the price for each such item; and (ii) the contract must be issued in advance of the work performed which sets forth the necessary itemization. A detailed invoice issued upon completion of service work on real property does not constitute a class (2)(d) contract. For example, service jobs on central HV/AC systems which involve a detailed billing after the work is complete, but which do not involve the preparing of a contract, setting forth the materials to be used and the price thereof, in advance of the work are considered time and material jobs, not class (2)(d) contracts.

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.

CONCLUSIONS OF LAW

The issuance of itemized or detailed invoices does not alone constitute a class (2)(d) contract. As established by the Sears decision, all materials used in performing the contract must be specifically itemized by type and price by a written agreement entered into prior to work being performed. Such contract method is usually impossible for repair or maintenance work, because the contractor cannot tell what materials will be needed until he commences the work.

The instant transactions do not result from an agreement which specifically describes and itemizes all materials prior to the work being performed. Instead the instant transactions simply involve detailed invoicing after the work is performed. Consequently, the instant transactions do not constitute class (2)(d) contracts under the Sears decision. Since the Contractor

is not performing class (2)(d) contracts, it is the ultimate consumer of the materials used in performing the contract under Rule 12A-1.051(2)(e), F.A.C., and is subject to tax on its purchase of the materials from its suppliers. Since the instant transactions are not class (2)(d) contracts and, thus, not retail sales of the materials to the taxpayer, the Contractor should not be charging sales tax to the Taxpayer on any portion of the invoice amounts.

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,

Leola B. Carter
Senior Tax Specialist

LBC/
Control No. 25860

In the instant case, the items are commonly referred to as

overhead items consumed by the purchaser in their performance of some endeavor. The taxation of these items withstands the charge of double taxation, for at the moment of sale there is no intent on the part of the purchaser to sell by transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.

To arrive at a selling price of tangible personal property vendors handle the billing in many different ways. The price may be a lump sum, the final price may be a total of many itemized items, or the total may be by the addition of materials and labor. Tax will be added to the grand total however billed to the customer. In the case of Ruralist Press vs. Florida Department of Banking, 429 So.2d 1271 (Fla. App. 1 Dist. 1983) the firm itemized each item that went into the computation of the total selling price of the telephone directories. The plates used in the printing of the telephone directories had been taxed in Georgia, which was proper. The taxpayer argued that by Florida taxing the total selling price of the directories there was double taxation since the plates had borne a tax in Georgia. The Florida courts rejected the double taxation theory.