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

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