How did Florida tax HVAC repair jobs and maintenance contracts involving equipment permanently attached to real property?

Plain-English summary

The sampled HVAC repair contracts were not retail-sale contracts because the customers did not receive an advance agreement itemizing every material by type, quantity, and price. The contractor was therefore the ultimate consumer of the parts and materials, had to pay tax when buying them, and generally should not charge sales tax to the customer.

That result covered ordinary time-and-material invoices, a flat-rate repair, and a lump-sum cooling-tower replacement. Detailed itemization after the work was completed was too late. An advance contract could qualify for different treatment only if it contained the required material detail and separate pricing before performance.

The monthly maintenance agreement was also not a taxable service warranty because it covered central HVAC equipment permanently affixed to realty. The customer did not owe sales tax on the monthly payments, but the contractor owed tax on parts and materials it consumed while performing the agreement.

What this means for you

For work on improvements to real property, invoice format alone does not control. Florida looked for a binding pre-work contract that specifically described and priced every material. Without it, the contractor buys materials as the consumer rather than reselling them to the customer.

A customer's exemption certificate also does not automatically exempt a contractor's purchases. In the government job reviewed here, the contractor bought the parts, held them until installation, and sought reimbursement; the government did not directly order, take title and risk, receive vendor invoices, and pay the vendors as the cited public-works rule required.

Common questions

Q: Is a detailed invoice issued after the repair enough to create a taxable retail sale of parts? No. The required itemization had to appear in a contract entered before the work.

Q: What detail did the advance contract need? Each material had to be itemized by type, quantity, and price, with the work separately priced as required by the cited class (2)(d) rule.

Q: Who paid tax on the sampled time-and-material and lump-sum jobs? The repairer paid tax on its material purchases; it did not charge sales tax to the customer on those jobs.

Q: Were monthly HVAC maintenance charges taxable as service warranties? No. The agreement covered equipment permanently affixed to realty, which the cited warranty rule excluded.

Q: Did a government customer's exemption certificate make the contractor's parts tax-free? No. The Department found the contractor was the purchaser and ultimate consumer because the government did not satisfy the direct-purchase factors.

Citations and references

• Fla. Admin. Code r. 12A-1.051(2) and (34) — contractor contract classes and central HVAC systems as improvements to realty
• Sears, Roebuck & Co. v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2d Cir. Ct. 1994) — advance material itemization required for a class (2)(d) contract
• Fla. Admin. Code r. 12A-1.105 — service-warranty treatment and the real-property exclusion
• Fla. Admin. Code r. 12A-1.094 — public-works direct-purchase factors
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-065

Original ruling text

SUMMARY

Consistent with TAA 96-045 and 96-062, and the Circuit Court Order in Sears v. Department of Revenue, Case No. 921080 (Fla. 2nd Circuit Court, 1994), the department ruled that the Taxpayer's contracts with its customers did not meet the criteria of a class (2)(d) contract under Rule 12A-1.051, F.A.C. In making the determination that the contracts did not meet the criteria of a type (2)(d), the department relied on the fact that there was no contract, entered into with the Taxpayer's customers in advance of the work performed, which itemized the material by type, quantity, and price.

The department also ruled that monthly payments made by the Taxpayer's customer for the repair and maintenance of equipment permanently affixed to realty were not subject to sales tax imposed on service warranties. The Taxpayer was advised that it is liable for the payment of tax on any materials or parts consumed by it in the performance of the maintenance agreement.

Oct 08, 1997

Re: Technical Assistance Advisement 97A-065 Sales and Use Tax - Repair of Equipment Attached to Realty Rules: 12A-1.051, 12A-1.094, and 12A-1.105, F.A.C. XXX (herein Repairer) FEI: XX

This is a response to your petition dated May 5, 1997, 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.

REQUESTED ADVISEMENT

Your letter requests the Department's advice concerning whether certain transactions of Repairer, who is engaged in the repair or maintenance of central air conditioning or heating systems, which are improvements to real property, should be classed as contracts of the type and form described in Rule 12A1.051(2)(d), Florida Administrative Code. Together with your letter, you have provided samples of seven transactions, including relevant documents, facts, and explanations. The seven transactions, for which you seek guidance, are paraphrased from your letter as follows:

1. Service Materials & Labor Billing. Residential Customer - no
   contract on file. The customer calls Repairer requesting service. Since the customer has an open account with Repairer, she is billed at a later date. The only material used in this job was nitrogen, which was originally purchased by Repairer for truck stock. Repairer paid sales tax to the vendor on the purchase of the nitrogen.

On the invoice to the customer, a separate charge was made for the materials (nitrogen) and the labor, although the invoice does not specifically itemize the materials with respect to the type or quantity used in the job. The invoice states: "Materials -Residential $15.00, and labor - residential service
$48.00." Repairer did not charge the customer sales tax on this transaction.

2. Residential C.O.D. Billing. Non-contract customer. Most of
   these customers are first-time callers who do not have a contract with Repairer and are billed on a C.O.D. basis. In these instances, Repairer's technician responds to a call and upon completion of the job, prices a work order and requests payment from the customer. In this example, the customer is charged $35.00 for 5 pounds of R-22 (unit price - $7.00 per pound), $88.00 for two hours labor, and $22.00 for travel. Sales tax was charged to the customer on the $35.00 charge for the 5 pounds of R-22. Repairer paid sales tax on the purchase of the R-22 used in this job.

3. Service Contract Billing. This customer has an active contract which covers monthly maintenance as well as labor. The customer makes a monthly payment for an amount agreed pursuant to the maintenance contract. The customer is billed separately for any parts which are required to repair the unit. On the attached sample invoice, the customer is billed a lump sum amount of $250.00, which represents the agreed upon monthly maintenance charge.

4. Parts and Labor Billing. Commercial non-contract customer.
   In this transaction, Repairer's technician, upon checking the customer's equipment, purchased specific parts from the supplier needed for the repair. The supplier later billed Repairer for the parts and the sales tax. The technician leaves the customer with a copy of the work order describing the work performed. No prices are listed on the work order. On the final invoice to the customer, the customer is billed $140.77 for parts, and
   $324.00 for labor. Sales tax was charged to the customer for the parts. The parts are not separately itemized by type or quantity.

5. Flat Rate Billing. Commercial contract customer. In this
   transaction, the customer requested an estimate from Repairer for the repair of certain, non-contract covered equipment, namely a walk-in freezer. A "flat rate" quotation is approved via facsimile to and from the customer. The quoted price for the repair is $775.00, with no itemization of materials and parts in the quoted price.

Upon completion of job, Repairer's technician leaves a work order with the customer listing a description of the work completed and the materials used. The customer is later billed a flat rate for the quoted amount of $775.00. No sales tax was charged to the customer in this instance. Repairer paid sales tax on the purchase of the materials used in this job.

6. Job Billing. In this transaction, the customer is given a
   proposal by Repairer, titled "Proposal and Agreement," for the replacement of a cooling tower. All materials to be used in the fulfillment of this contract are listed on the proposal.

However, there is no itemization by price or quantity. The price quoted for the job is a lump sum amount of $6,700.00. Repairer paid sales tax on the purchase of the equipment and materials used in this contract.

7. Governmental Entities Billing. In this transaction, a
   governmental entity contracted with Repairer at a "specific labor rate." Any parts used by Repairer are billed to the governmental entity on a "pass-through" basis, meaning Repairer does not mark-up the price of the parts. The governmental entity requires a copy of the vendor invoice for the parts installed at their premises. The parts and materials do not become property of the governmental entity until they are installed on the property.

Repairer pays sales tax to the vendor on its purchase of the parts. In turn, the governmental entity reimburses Repairer for the cost of the parts, excluding the sales tax paid by Repairer to the vendor. The governmental entity extends to Repairer its tax exemption certificate. Finally, Repairer submits a bill to the governmental entity for the materials and the labor. The materials are not itemized by amount, type, or quantity on the final invoice to the governmental entity.

RELEVANT AUTHORITY

Rule 12A-1.051, F.A.C., governs the taxability of purchases or use of tangible personal property by contractors who purchase or manufacture materials and supplies for use in the performance of non public works contracts. Rule 12A-1.051, F.A.C., provides in relevant part:

(1) ... The method by which contractors or subcontractors arrive at the total contract price charged for repair, alteration, improvement and construction of real property or for a combination of work on both real and personal property must be determined for the purpose of ascertaining whether the receipts from sales made to or by them are taxable.

As provided in Rule 12A-1.051(2), F.A.C., contractors may use

one of the following methods in arriving at the total contract price:

(a) Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services for a lump sum;

(b) Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services on a cost plus or fixed fee basis;

(c) Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services with an upset or guaranteed price which may not be exceeded; and

(d) Contracts in which the contractor or subcontractor repairs, alters, improves or constructs real property and wherein he agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and to complete the work either for an additional agreed price or on the basis of time consumed.

Paragraph (e) of Rule 12A-1.051(2), F.A.C., states that:

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.

As stated in Paragraph (f) of Rule 12A-1.051(2), F.A.C.:

In cases falling in class (d) above, the contractor or subcontractor is deemed to be selling tangible personal property at an agreed retail price and shall collect tax from his purchaser based upon the amount of the receipts

from such sales, excluding installation charges if separately stated. A dealer selling to such contractor or subcontractor must obtain a resale certificate in lieu of tax.

As provided in Rule 12A-1.051(34), F.A.C., central air conditioning systems are improvements to realty. Equipment and materials furnished and used in the installations of such systems are taxable to lump sum, cost plus, fixed fee or guaranteed price contractors.

Also relevant to the issue is the interpretation of Rule 12A1.051(2)(d), F.A.C., in the matter of Sears, Roebuck & Company v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2nd Circuit Court, 1994). The court in Sears, supra, interpreted paragraph (2)(d) of Rule 12A-1.051, F.A.C., relative to contracts wherein Sears agreed to furnish and install appliances which became fixtures of real property, such as hot water heaters and built-in ovens, ranges, and dishwashers. A receipt was issued to the customer up front, which listed the appliance by name, and included a cost for the appliance and a separate cost for the installation. Sears would then engage an independent contractor to perform the installation. The independent installer would always supply some additional items of tangible personal property during the installation. Such items were never listed on the sales receipt, since Sears had no knowledge of what specific materials would be used by the installer to complete the installation. The items were billed later at a flat sum by the installer.

Sears contended that it was not performing class (2)(d) contracts since its receipt did not specifically itemize and describe the unknown materials furnished by the independent installer. Given these facts, the court agreed with Sears and ruled it had not performed (2)(d) contracts. Accordingly, Sears was correct in not charging tax to the customer on the appliances and the installation of same. The court also ruled that Sears was correct in having paid tax on the cost price of the appliance on its purchase from the manufacturer.

The tests coming out of the Sears decision to be applied in

determining whether a given contract constitutes a class (2)(d) contract are: (i) the contract must itemize each and every separate material and the price per each furnished to perform the work covered by the contract; and (ii) the contract must show such itemization in advance of the work being performed.

A detailed invoice issued upon completion of service work on a central air conditioning or heating system does not constitute a class (2)(d) contract. Service jobs on central air conditioning or heating systems which involve a detailed billing after the work is completed, but which do not involve the preparing of a contract, in advance, fully itemizing by type, quantity, and price of material to be used in the job, are considered time and material jobs, not class (2)(d) contracts.

With regard to transaction number three, Rule 12A-1.105, F.A.C., provides guidance concerning the taxability of maintenance agreements. Specifically, Rule 12A-1.105, F.A.C., states that every person who solicits, offers, provides, issues, or delivers any service warranty, or who receives, on behalf of another person, any consideration from a service warranty holder is exercising a taxable privilege. Rule 12A-1.105(1)(b)1., F.A.C., defines the term "service warranty" as:

... any contract or agreement which indemnifies the holder of the contract or agreement for the cost of maintaining, repairing, or replacing tangible personal property, whether or not the contract provides for the furnishing of parts....

However, pursuant to Rule 12A-1.105(1)(b)3., F.A.C., the term "service warranty" does not include contracts or agreements covering tangible personal property which becomes a part of real property. As such, a service contract covering the cost of repairing a central heating and air conditioning system is not a taxable service warranty.

DEPARTMENT RESPONSE

The following is our response to each of the seven sample transactions presented in the request for technical assistance.

1. Since, in this transaction, the customer was not given a contract in advance, fully itemizing by price, type, and quantity of material needed to perform the work, the transaction is not a class (2)(d) contract. Rather, it is considered a "time and material job," and tax on all materials should be paid by Repairer on the purchase of such materials. No sales tax, in this instance, should be charged to the customer.

2. As with transaction number one, since the customer was not
   given a contract in advance, fully itemizing by price, type, and quantity of material needed to perform the work, the transaction does not meet the criteria of a class (2)(d) contract. Rather, it is considered a "time and material job," and tax on all materials should be paid by Repairer on the purchase of such materials. No sales tax, in this instance, should be charged to the customer.

However, unlike the first transaction in which the invoice did not specifically itemize the materials, this invoice does specifically itemize the material (R-22) by quantity sold (5 pounds) and unit price ($7.00 per pound). As such, you are alerted that had Repairer entered a contract with this customer in advance, and such contract itemized the materials to be used in the job, in a manner similar to the itemization shown on the sample invoice, this transaction would in fact qualify as a class (2)(d) contract.

3. Since the maintenance agreement covers the repair of
   equipment permanently affixed to realty, the monthly payments made by the customer pursuant to the agreement are not subject to sales tax. You are advised that any materials or parts consumed by Repairer in the performance of the maintenance agreement are subject to use tax on the purchase of same.

4. This transaction is considered a "time and material job"
   since the customer was not given a contract in advance, fully itemizing by price, type, and quantity of material needed to perform the work, and it is not a class (2)(d) contract. As such, tax on all materials should be paid by Repairer on the purchase of such materials. No sales tax, in this instance,

should be charged to the customer.

5. This transaction cannot be classed as a type (2)(d) contract
   under Rule 12A-1.051, F.A.C., since there is no itemization of materials, either in advance or upon completion of the job, used in the performance of the job. In this instance, the customer is quoted and billed a "lump sum" amount, and since Repairer paid sales tax on the purchase of the materials used in the fulfillment of the contract, no sales tax should be billed to the customer.

6. Since the materials used in this contract are not fully
   itemized, i.e., by price, type, and quantity of material needed to perform the work, the transaction does not meet the criteria, as established in Sears, supra, of a class (2)(d) contract. Since the customer is quoted and billed for a "lump sum" amount, and since Repairer paid sales tax on the purchase of the materials used in the fulfillment of the contract, no sales tax should be billed to the customer.

7. Since this transaction involves a tax exempt governmental
   entity, it is a public works contract and, for sales and use tax purposes, is governed by Rule 12A-1.094, Florida Administrative Code. Specifically, subsections (2) and (3) of Rule 12A-1.094, F.A.C., state that the purchase of materials is taxable to the contractor as the ultimate consumer in instances where the contractor is deemed to be the purchaser.

However, if the purchaser of the materials is the governmental entity, the transaction is exempt. For there to be an exempt transaction, the governmental entity must directly purchase, hold title to, assume the risk of loss of the tangible personal property prior to its incorporation into realty, and satisfy various factors contained in Rule 12A-1.094, Florida Administrative Code. Other factors of Rule 12A-1.094, F.A.C., which must be satisfied to insure the exempt status of the contract, include:

1. The governmental entity must execute the purchase orders for
   the tangible personal property involved in the contract, which must include the governmental entity's consumer's certificate of

exemption number. The contractor may present the governmental entity's purchase orders to the vendors of the tangible personal property;

2. The governmental entity must acquire title to and assume
   liability for the tangible personal property at the point in time when it is delivered to the job site up until the time it is incorporated as real property;

3. Vendors must directly invoice the governmental entity for
   supplies;

4. The governmental entity must directly pay the vendors for the
   tangible personal property; and

5. The governmental entity must assume all risk of loss or
   damage for the tangible personal property involved in the contract. The governmental entity should acquire, or be the insured party under, liability insurance on the building materials.

Under the guidelines of Rule 12A-1.094, F.A.C., outlined above, Repairer is the ultimate consumer of the parts and materials used in the fulfillment of the contract with the governmental entity. Accordingly, Repairer is required to pay use tax on its purchases of parts and materials. The fact that the governmental entity presented to Repairer its consumer's certificate of exemption does not exempt Repairer's purchases from taxation.

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.

Sincerely,

Richard R. Parsons
Tax Law Specialist
Technical Assistance and Dispute Resolution (904) 922-4838