Did the original TAA treat a utility's monthly charge for utility-owned voltage-reduction equipment as a taxable equipment lease?

Subject

Taxability of Certain Equipment Furnished by Utilities

Plain-English summary

In the original ruling, the Department treated the utility's monthly facilities charge as payment for a service, not as rent for tangible personal property. The utility used transformers and related equipment to provide customers with electricity at multiple voltage levels.

Although the written agreement called the arrangement a facilities lease, the utility retained ownership and all practical control. It selected the equipment, installed it on customer premises, operated and maintained it, handled repairs and replacement, and alone could disconnect, remove, or relocate it. The customer did not direct the equipment's physical operation.

Under the cited rule, furnishing equipment without giving the customer possession or operational control was a service transaction rather than a rental. The Department therefore concluded that the customer payments were not subject to sales tax or gross receipts tax. It also recorded that the utility paid sales tax when purchasing the equipment and parts.

The official source begins with an update directing readers to revised TAA 97A-032R and to TAA 04A-059. This page explains the original 1997 ruling only.

What this means for you

The original analysis looked past the agreement's lease label and focused on actual possession and operational control. Utility ownership alone was not the only fact; the utility also made every engineering, installation, maintenance, repair, replacement, and removal decision.

Because the Department later directed readers to revised and additional guidance on the same facilities charges, the original result should not be used as the final statement of Florida's position.

Common questions

Q: Why was the facilities agreement not treated as an equipment lease? The utility retained possession and operational control throughout the arrangement, while the customer received voltage-transformation service.

Q: What equipment was involved? The submitted table included transformers, streetlights, oil switches, and other parts used to provide the required electric service.

Q: How was the monthly charge calculated in the example? The agreement multiplied installed cost of $73,913.01 by 1.5% to produce a monthly charge of $1,108.70 in addition to energy and demand charges.

Q: Can the original ruling be read without the later guidance? No. The official document expressly says to consult revised TAA 97A-032R and TAA 04A-059.

Citations and references

• Fla. Stat. § 212.05(1)(c) — sales tax on gross proceeds from leases or rentals of tangible personal property
• Fla. Admin. Code R. 12A-1.071(10)(d) — service transaction when furnished equipment remains outside the customer's possession and operational control
• Warning Lights of Georgia, Inc. v. State of Florida, Department of Revenue, 678 So. 2d 1377 (Fla. 4th DCA 1996) — cited by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-032

Original ruling text

Update: Please refer to TAA 97A-032R dated Jan. 31, 2005
Also see TAA 04A-059 dated Oct. 26, 2004

May 05, 1997

Re: Technical Assistance Advisement 97(A)-032
XXX (herein Utility)
Section 212.05(1)(c), F.S.
Rule 12A-1.071(10)(d), F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated December 11, 1996, but received on February
10, 1997, wherein you asked the Department to make a
determination as to whether sales tax or gross receipts tax may
be validly imposed on payments made by customers of Utility for
certain equipment furnished by Utility to such customers who,
because of their high electric consumption, require electric
service at various voltage levels.

On the first page of your letter you quote from an explanation
provided by XXX, Utility's Managing Utility Analyst, as to the
nature of this equipment:

To accommodate multiple voltage level service requirements,
the customer has the option to either purchase, install and
operate its own voltage reduction facilities
(transformers); or, the customer may receive voltage
transformation service by paying a monthly fee, presently
referred to as a "lease" of facilities and service from
(Utility through its) "Facilities Leasing Adjustment
(FLA)."

The assumption is made that the word "Adjustment" should be read
as "Agreement" in the above text.

As to the taxability of the equipment pursuant to this

agreement, you state that "... we feel strongly that the type of
service in question does not qualify as being taxable."

In a continuation of the explanation provided by XXX you quote
him as stating that:

... In the situation referred to herein as a "lease",
(Utility) provides, installs, operates and maintains the
requisite facilities in return for a fee from the customer.
Consequently, what is referred to as a facilities lease is
not a true lease but rather a provision of service separate
from and removed from providing electric energy at a single
voltage level. The facilities remain under the ownership,
operation and control of (Utility) at all times.

You attached to your letter a one-page document bearing the
title, Facilities Lease Agreement, executed by Utility and a
customer wherein it is provided in Section 1 that the customer
agrees "... to lease electric facilities behind a primary
meter..."

In Section 2 of the agreement, the cost to the customer for the
equipment is expressed as:

The installed cost of $73,913.01 will be multiplied by 11/2% to yield a monthly charge of $1108.70. It is
understood that the charges shown above are in addition to
base rate energy and demand charges and shall be paid as
part of the total utilities service charge. Said
facilities are defined and installed costs are tabulated on
attached Table #1.

You also provided a one page document styled Table I which is
further identified by the legend, Summary of PAR Facilities.
This document enumerates equipment and parts, such as a
transformers, streetlights, oil switches, which are subject to
the Facilities Lease Agreement in a total amount of $73,913.01.

You contend that the enumerated equipment and parts for which
the customer pays a monthly charge of $1,108.70 is not taxable
because no lease exists between Utility and customer. Rather,

you argue that Utility is providing a service to the customer,
in that by the provision of the equipment and parts the customer
obtains the multiple levels of voltage the customer requires.

You state, in your letter of December 11, 1996, that an audit
was conducted of Utility, and the charges for the equipment and
parts provided under numerous agreements, identical or similar
to the Facilities Lease Agreement discussed above, were assessed
sales tax and gross receipts tax.

Department Response

Section 212.05(1)(c), F.S., imposes sales tax on the "... gross
proceeds derived from the lease or rental of tangible personal
property...." Rule 12A-1.071. F.A.C., interprets the statute.

During a telephone conversation on February 11, 1997, the
Department learned that the equipment and parts enumerated on
Table 1, referred to above, are placed on the customers premises
by employees or agents of Utility. The selection of the
equipment to provide the desired electric service of the
customer is determined by Utility. The installation of the
equipment, its maintenance, replacement, repair, and its removal
from the property of the customer is administrated solely by
Utility. At its request, the Department received a copy of
relevant provisions of the Rules and Regulations for Electric
Service Handbook, issued by Utility wherein the following text
appears:

2.6.5. Service wires, service connections, meters, and
metering equipment shall be disconnected, removed, or
relocated only by authorized employees of (Utility).

Considering that the equipment and parts are administered in all
respects by Utility, commencing with engineering considerations,
which determine the selection of the appropriate equipment, to
all aspects of its installation, operation, maintenance, repair,
replacement, and concluding with its removal, the payments made
to Utility by the customer are not given pursuant to a lease but
are payments for a service transaction.

Consequently, the payments made to Utility by customers pursuant
to a Facilities Lease Agreement, of a kind discussed herein, are
not subject to sales tax, nor to gross receipts tax. See, for
example Rule 12A-1.071(10)(d), F.A.C., which describes an
agreement whereby equipment, when furnished to a customer "...
and the customer does not take possession of or have any
direction or control over the physical operation, the contract
constitutes a service transactions and not the rental of
tangible personal property, and no tax is due on the
transaction." Further, see, Warning Lights of Georgia, Inc. v.
State of Florida, Department of Revenue, 678 So.2d 1377
(Fla.4DCA 1996).

In a telephone conversation on April 30, 1997, the Department
learned that there is no issue that sales tax is paid by Utility
on its purchases of the equipment and parts which are used in
connection with the Facilities Lease Agreement.

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 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

Control Number 27845