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.