Was a financed lighting retrofit with a mandatory $1 purchase option taxed as leased equipment or as a real-property improvement?

Subject

Real Property Improvement or Sale of Tangible Property

Plain-English summary

Florida treated the lighting retrofit as a permanent real-property improvement financed through an agreement that functioned like a purchase. The building owner had to buy the installed equipment for $1 after three years, intended the rewiring and lighting to remain permanently, and explained that removal would cost about 20% of the original retrofit price, leave the building uninhabitable, and yield items with no meaningful value.

The agreement called the installed equipment personal property and let the lessor repossess or disable it after default. The Department nevertheless focused on the actual annexation, use, and intended permanence of the installation. It viewed the lessor's retained interest like security for the financed improvement.

The contractor therefore had to pay sales tax when buying the tangible materials incorporated into the real-property improvement. The lessor was not to charge sales tax to the building owner.

What this means for you

Labeling installed property as leased equipment does not control Florida sales-tax treatment when the transaction's facts show a permanent building improvement and an effectively mandatory bargain purchase. The physical installation, intended use, economic reality, and purchase obligation all matter.

Common questions

Q: Did the $1 purchase option matter? Yes. The owner irrevocably agreed to buy the equipment for $1 at the end of the term, supporting the Department's conclusion that the arrangement had the characteristics of a purchase.

Q: Did the contract's personal-property label decide the issue? No. The Department applied the fixture analysis to the actual installation and the parties' intent.

Q: Who paid sales tax? The contractor paid tax on tangible property purchased for incorporation into the real-property improvement.

Q: Did the lessor charge sales tax on the owner's payments? No, under the facts addressed by the ruling.

Citations and references

• Fla. Stat. § 212.06(1)(a) — tax on retail sales and deferred-payment transactions
• Fla. Admin. Code r. 12A-1.051(2)(e) — contractor as the ultimate consumer of materials under qualifying contracts
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-042

Original ruling text

Jun 26, 1997

Re: Technical Assistance Advisement 97A-042
Sales & Use Tax - Real Property Improvement or Sale of
Tangible Property
Sections: 212.06, 212.05, F.S.
Rules: 12A-1.051, 12A-1.071, F.A.C.
Petitioner: XXX Hereinafter (Lessor)
FEI: XX

Dear :

This is a response to your petition received December 27, 1996,
for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

DISCUSSION OF FACTS

XXX (Owner) owns a building located in Florida. Owner desires
to have all of the lighting in their building retrofitted. The
job consists of re-wiring and installation of new lighting.
Owner will request that the job be financed, rather than pay the
entire amount at once. The contractor will then contact Lessor
to create a lease agreement which includes a $1 bargain purchase
option at the end of the lease term. Lessor pays the contractor
the entire lump sum contract price and retains title to all
installed property. Owner will pay monthly lease payments for a
three year term. When the $1 is paid at the end of the lease,
title is transferred to Owner. The lease agreement indicates the
following pertinent facts:

1. In the event of default lessor can take possession of,
   or render unusable, any equipment installed under any such
   lease (lessor can also declare all lease payments under the

entire term of lease due and payable);

2. Lessee "irrevocably" agrees to purchase the equipment
   upon the expiration of the lease term for $1.

You state, in your letter of January 30, 1997, "[w]e have never
had to remove the lighting, ballast, wiring, etc. for breach of
contract. Although technically we could do so it would cost
about 20% of the original cost of retrofitting just to remove
everything. The building would be uninhabitable. Also, the
items that we would remove would not be worth anything."

In Section 11., of the subject agreement, both parties agree to
the following provision:

The Equipment is and will remain personal property no
matter what its use or attachment to realty, but Lessee
will not let it be attached to realty in any way that may
cause it to become part of such realty.

REQUESTED ADVISEMENT

You request the sales and use tax ramifications of such a
transaction.

DISCUSSION AND ANALYSIS OF LAW

Section 212.06(1)(a), F.S., provides:

The aforesaid tax at the rate of 6 percent of the retail
sales price as of the moment of sale, 6 percent of the cost
price as of the moment of purchase, or 6 percent of the
cost price as of the moment of commingling with the general
mass of property in this state, as the case may be, shall
be collectible from all dealers as herein defined on the
sale at retail, the use, the consumption, the distribution,
and the storage for use or consumption in this state of
tangible personal property or services taxable under this
part. The full amount of the tax on a credit sale,
installment sale, or sale made on any kind of deferred
payment plan shall be due at the moment of the transaction

in the same manner as on a cash sale.

Rule 12A-1.051(2)(e), F.A.C., provides:

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.

In Commercial Finance Co. v. Brooksville Hotel Co., 123 So. 814,
816 (Fla. 1929), the Court cited and quoted Seedhouse v.
Broward, 16 So. 425, 429 (Fla. 1894), "'In establishing the fact
whether a given thing is or is not a fixture upon land, the
intention of the owner in placing it there, to be gathered from
his declarations, and from the character, relations, and
purposes of the property, is an important element, sometimes of
controlling importance.'" 27 Fla Jur 2d, Fixtures Sec. 4.

In Strickland's Mayport, Inc. and B.J. Strickland, Jr. v.
Kingsley Bank, 449 So.2d 928 (Fla. DCA 1984) the First District
Court of Appeal cited Commercial Finance Co. v. Brooksville
Hotel Co., supra, stating:

... the Florida Supreme Court set out a three-part test for
determining whether an object is a fixture or personalty:

1. Is there actual annexation to the realty or something
   appurtenant thereto?

2. Is the item in question appropriately applied to the use
   or purpose of that part of the realty to which it is
   connected?

3. Did the party making the annexation intend the item to
   be a permanent accession to the freehold?

If the answer to these three questions is yes, the object

is a fixture.

As contained in 27 Fla Jur 2d, Fixtures Sec. 4, citing
Commercial Finance Co., supra; Greenwald v. Graham, 130 So. 608
(Fla. 1930): "Of the three tests previously mentioned, the
third--the intention of the party making the annexation--is
generally considered to be the chief test."

CONCLUSIONS OF LAW

It is clear the intent of Owner was to purchase an improvement
to real property. Owner was obligated pursuant to the lease to
purchase such rewiring and intended that such installations be
permanent. Lessor's retained security interest in the
improvements is not unlike any other mortgage on real property.
Accordingly, contractor should pay tax on any tangible property
purchased to be included in the real property improvement. No
tax would be charged to Owner by Lessor. As stated above, Owner
was obligated to purchase the improvements at a bargain purchase
price at the expiration of the lease term. This is a contract
for the lease of real property which possesses the
characteristics of a purchase.

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 upon 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 from that
which is 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 that 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 this response.

Should you have any further questions concerning this matter,
please do not hesitate to contact me.

Sincerely,

R. Clay Brower
Tax Law Specialist
Tax Policy & Dispute Resolution
850-922-4837

RCB
Control #: 27409