Was the full lump-sum price for installing or repairing permanent commercial refrigeration systems subject to Florida sales tax?

Subject

Real Property v. Tangible Personal Property

Plain-English summary

The Department concluded that permanent commercial refrigeration systems were improvements to real property, not sales of tangible personal property. Under a lump-sum contract, the contractor therefore did not collect sales tax on the full installation, repair, or maintenance price.

The projects involved permanent walk-in cold-storage units integrated into a building through piping, electrical wiring, drainage, roof or exterior condensers, and copper lines in walls and ceilings. The units worked with the building's heating and air-conditioning systems, became the purchaser's property, and were intended to remain permanent fixtures.

That did not make the project tax-free. For lump-sum real-property contracts, the contractor was the ultimate consumer of the materials and supplies and owed sales or use tax on their cost. Because this contractor manufactured sliding and walk-in doors for its own projects, it also owed use tax on the fabricated or manufactured cost of those items, including direct materials, direct labor, and indirect manufacturing overhead.

Contract format mattered. The ruling contrasted lump-sum, cost-plus, and guaranteed-price real-property contracts with itemized agreements that separately sold specifically described materials. Under the itemized class, the contractor made a taxable retail sale of the materials but excluded installation labor from the taxable receipts.

What this means for you

For permanent building systems, tax treatment depended on both the physical integration of the equipment and the contract type. A lump-sum contractor generally paid tax as the consumer of inputs instead of collecting tax from the customer on the entire contract price.

Contractors that fabricate their own components had an additional use-tax base. Tax was not limited to purchased raw materials; the rule included the manufactured item's labor and overhead costs.

Common questions

Q: Were permanent refrigeration installations taxable on the full lump-sum price? No. The Department treated them as real-property improvements.

Q: Did the contractor owe no tax at all? It owed tax on materials and supplies and use tax on the manufactured cost of self-fabricated project components.

Q: Did the same treatment apply to repairs and maintenance? Yes, when the work involved the permanent refrigeration systems and was performed under a lump-sum contract.

Q: What changed under a separately itemized materials-and-labor contract? The materials were treated as a taxable retail sale, while the separately stated installation labor was excluded.

Citations and references

• Fla. Stat. § 212.02(10)(h), (20), and (21) — real property, use, and use-tax definitions
• Fla. Stat. §§ 212.05 and 212.06(1)(a) — sales and use tax provisions cited in the advisement
• Fla. Admin. Code R. 12A-1.051(2) — four contract classifications for real-property contractors
• Fla. Admin. Code R. 12A-1.051(5)(a) — manufactured-cost tax for contractor-fabricated items used in real-property improvements
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-030

Original ruling text

SUMMARY

The Department finds that the sale and installation of large or small permanent refrigeration systems, and subsequent repair or maintenance related to these permanent refrigeration systems, when installed or repaired on a lump sum, class 2(a), contract are not subject to sales tax on the contract amount, because such systems constitute an improvement to real property. The contractor installing or repairing such refrigeration systems is deemed the ultimate consumer of all the materials and supplies used in the performance of such lump sum contracts, and shall pay the tax on the cost of the materials and supplies so used, including use tax on the manufactured cost on all items produced or fabricated and used in the completion of its lump sum contracts.

Apr 30, 1997

Re: TAA 97A-030
XXX ("Company")
Real Property v. Tangible Personal Property Sections 212.02(10)(h),(20),(21), 212.05, 212.06(1)(a), F.S. Rule 12A-1.051, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated January 10, 1997, in which you solicited guidance on the sales tax implications of certain contract and installation activities undertaken by Company.

You have requested that the Department rule that: "... (T)he sale and installation of large or small permanent refrigeration systems, and subsequent repairs and maintenance related to the refrigeration systems, should be exempt from sales tax on the contract amount as an improvement to real property, assuming a

lump-sum contract." And, "(Company's) sales and use tax responsibilities are limited to a tax on the cost of all materials and supplies consumed in the performance of the contract," given the following fact pattern:

(Company) operates primarily as a commercial refrigeration contractor. In addition to the construction and installation of commercial refrigeration, the Company manufactures a majority of the sliding and walk-in cold storage doors used in their projects. The refrigeration projects at issue involve the construction and installation of large permanent walk-in cold storage units, including related piping, electrical wiring, and drainage. The resulting cold storage unit and related components are essentially integrated with the existing real property.

... As a result of a sales and use tax audit conducted by the local office of the Florida Department of Revenue (DOR), (Company) has treated such projects as the sale and installation of tangible personal property.... However, several recent sales tax audits of certain competitors and customers of (Company) have resulted in a different characterization of these projects. Specifically, we are aware of two such situations where DOR ultimately viewed similar projects as improvements to real property.

Further, you state that: "With the exception of contracts that specifically itemize the charges for materials and supplies separately from labor charges, contracts for the sale, improvement, and installation of real property are exempt from sales tax. The contractor is generally deemed the ultimate consumer of all tangible personal property used in the performance of the contract. As such, the contractor is required to pay a sales or use tax on the cost of all materials used in the contract.... (Company) currently collects and remits sales tax on the full selling price of their refrigeration contracts. These contracts are typically formatted as lump-sum contracts with a fixed price." Thus, you conclude, "Collecting sales tax on the full contract amount creates a significant competitive disadvantage to our client."

Citing Rule 12A-1.051, F.A.C., Section 212.02(10), F.S., and a definition for "improvement" from Black's Law Dictionary, you state:

The DOR has repeatedly cited the following definitions in prior advisements and notices of decision in determining what constitutes a real property improvement. "()Where an object is annexed to realty in such a manner as to induce a reasonable person to believe that it is part of the realty, there is a prima facia presumption that it is a fixture.' 27 Fla Jur 2d, Fixtures Sec. 17.Generally, the burden of proof is on the party who claims the articles annexed to realty are not fixtures to show that they retain their original character as personality.' 35 Am Jur 2d, Fixtures Sec. 5."

Additionally, proposed amendments to Rule 12A-1.051 of the FAC are detailed in the report of the Florida Institute of CPAs' annual meeting with the DOR. Included in these proposed amendments is the definition of "Improvements" which, in part, "means everything artificially built up or composed of parts joined together in some definite manner and permanently attached to real property... Examples are... walk-in cold storage units which become a component part of the building..."

Based on this, you conclude, "(T)he construction and installation of walk-in refrigeration systems should be considered improvements to real property. The installation of such units requires major structural work on the existing real property. This work includes piping and wiring that is integrated into the infrastructure of the building. The refrigeration unit itself is permanently attached to the building. The condenser unit related to the unit is installed outside or on the roof of the building. Copper lines are installed in the walls and ceiling to connect the condenser and refrigeration unit. The refrigeration unit works in unison with the existing air conditioning and heating systems to provide optimal temperatures within the unit and building. Each of the refrigeration units installed by (Company) is owned by the purchaser upon payment of the contract amount. No retained

title provisions exist. The installed unit is intended to be a permanent fixture of the property...."

Additionally, you state, "(S)ubsequent repairs and maintenance of the subject refrigeration units would also be exempt from sales tax, provided the services are provided under a lump-sum contract with a fixed price.... However, if repair and maintenance services are performed under an itemized contract where materials are itemized separately, including individual prices, from the labor component, then only the charges for the labor component are exempt, as provided in Rule 12A-1.051 of the FAC."

DEPARTMENT RESPONSE

Definitions contained within Section 212.02, F.S., define "real property" as the surface land, improvements thereto, and fixtures, synonymous with "realty" and "real estate." "Use" is 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 tangible personal property in the regular course of business. The term "use tax" includes the use, the consumption, the distribution, and the storage as herein defined.

Rule 12A-1.051, F.A.C., gives guidance to contractors who repair, alter, improve and construct real property. Specifically, Rule 12A-1.051(2), F.A.C., codifies four classifications of contracts as follows: Class (2)(a), lump sum; Class (2)(b), cost plus or fixed fee; Class (2)(c), a guaranteed price which may not be exceeded; and Class (2)(d), an agreement to sell specifically described and itemized materials and supplies at an agreed or retail price and to complete the work at an additional agreed price or on the basis of time consumed. Contractors performing contracts in classes (2)(a), (b) or (c) become the ultimate consumer of the materials and supplies and are required to pay the tax on the retail sales price of such materials and supplies at the time of purchase. For contracts falling in class (2)(d), the contractor is deemed to be selling tangible personal property at retail and shall collect the tax from the purchaser, based upon the receipts from such sales,

excluding the charge for installation labor.

Therefore, based on the facts as described by you and the copy of contract (Price Quotation) for labor and material to install refrigeration equipment and insulted cooler panels, the Department finds that the sale and installation of large or small permanent refrigeration systems, and subsequent repair or maintenance related to these permanent refrigeration systems, when installed or repaired on a lump sum, class 2(a), contract are not subject to sales tax on the contract amount, because such systems constitute an improvement to real property. Rather, the contractor installing or repairing such refrigeration systems is deemed the ultimate consumer of all the materials and supplies used in the performance of such lump sum contracts, and shall pay the tax on the cost of the materials and supplies so used.

However, Company's sales and use tax responsibilities are not limited only to "a tax on the cost of all materials and supplies consumed in the performance of the contract." Specifically, in this case where (Company) manufactures or fabricates the sliding and walk-in doors used in its projects, Rule 12A-1.051(5)(a), F.A.C., provides that: "Contractors... who operate fabricating or manufacturing plants which make items of tangible personal property for their own consumption and use in the performance of contracts for the construction or improvement of real property are subject to tax upon the fabricated or manufactured cost of such items." The rule goes on to describe the major elements, direct materials, direct labor, and indirect (overhead) manufacturing cost, as they relate to the computation of the contractor's tax on the cost of the manufactured product.

Therefore, Company's sales and use tax responsibility includes both the tax on the cost of all direct materials and supplies, on which the sales tax was not paid at the time of purchase, and the use tax on the fabricated or manufactured cost, including indirect cost, of the items produced or fabricated in the completion of its lump sum contracts for the installation, repair, or alteration of permanent refrigeration systems which are intended to be a part of real property.

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,

Horace Royals
Tax Law Specialist

Ctrl# 27583