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