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