How did Florida tax materials and off-site fabrication under a lump-sum real-property improvement contract?

Subject

Materials and Fabrication for Lump-Sum Real-Property Improvements

Plain-English summary

For the presumed lump-sum real-property improvement contract, the contractor was the ultimate consumer of the materials and owed tax on them rather than charging sales tax to the customer. The sample contract covered a $96,914 restaurant remodel and bundled materials, tools, labor, and services into one price.

Materials bought in Florida for the real-property work were retail purchases taxable to the contractor. If the contractor used a Florida manufacturing plant to fabricate items for its own use in the project, it also had to accrue use tax on manufactured cost, including direct labor and indirect manufacturing costs under the rule. Direct materials on which tax had already been paid were excluded from the manufactured-cost tax base as the quoted rule prescribed.

The Department did not conclusively classify every listed item. Roller chairs and picture-frame signs appeared to remain tangible personal property, while booths, benches, boards, planters, and signs could be fixtures or movable property depending on how they were attached. The taxpayer bore the burden of showing whether the contract was predominantly a real-property improvement.

What this means for you

Contract form and the installed property's character both mattered. Under a lump-sum real-property contract, the contractor generally consumed the construction materials. A separately itemized sale of tangible personal property with installation could instead require tax collection from the customer.

Off-site plant fabrication was treated differently from fabrication labor at a temporary job site. The quoted rule taxed plant-manufactured cost for the contractor's own use but excluded qualifying job-site fabrication labor.

Common questions

Q: Who paid tax on materials under the sample contract? The contractor, as the ultimate consumer, paid sales tax to its vendors or otherwise accrued the appropriate tax.

Q: Did the contractor charge sales tax on the real-property improvement price? No, assuming the lump-sum contract was predominantly for improving real property.

Q: What was taxed when the contractor fabricated items at its Florida plant? The manufactured cost, including applicable direct materials, direct labor, and indirect manufacturing costs under Rule 12A-1.051(5).

Q: Was tax paid twice on direct materials? The quoted rule excluded direct materials on which tax had already been paid when computing tax on manufactured cost.

Q: Did every item listed become real property? No definitive ruling was given for every item. Classification depended on attachment and whether the item became part of the realty.

Q: Did the Department approve the taxpayer's general flow chart? No. It declined because the chart covered many situations rather than one specific transaction or event.

Citations and references

• Fla. Stat. § 212.05(1)(b) — sales and use tax
• Fla. Admin. Code rr. 12A-1.006, 12A-1.016, 12A-1.024 — installation or repair of tangible personal property
• Fla. Admin. Code r. 12A-1.051(2), (3) — real-property contract classes and contractor purchases
• Fla. Admin. Code r. 12A-1.051(5) — manufactured-cost use tax and job-site fabrication
• Fla. Admin. Code r. 12A-1.051(16), (26), (34) — listed contractor, sign, and HVAC rules
• Fla. Admin. Code r. 12-11.001(1) — specific transaction or event requirement
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-016

Original ruling text

SUMMARY

A taxpayer submitted a copy of a contract for construction for a determination as to whether the purchase and use of certain items of tangible personal property are subject to tax. The contract was found to be a lump sum contract for the improvement of real property which created two tax consequences. First, the taxpayer was found to be the ultimate consumer of the tangible personal property with respect to the materials used in the contract, therefore liable for payment of sales tax when the materials are purchased. Second, if the taxpayer operates a manufacturing plant for the production of tangible personal property used in fulfilling its contracts for the improvement of real property, the taxpayer must accrue and remit use tax on the manufactured cost of such items. No tax would be charged by the taxpayer to its customers for the real property improvements.

Mar 30, 1998

Re: Technical Assistance Advisement 98A-016 XXX ("Taxpayer") Sales and Use Tax -- Tangible Personal Property to be Incorporated into Real Property Fla. Admin. Code rules 12A-1.006, 12A-1.016, 12A-1.024, & 12A-1.051 Fla. Stat. s. 212.05 (1997)

Dear :

This is in response to your letter to the Florida Department of Revenue dated July 31, 1997, in which you seek a technical assistance advisement addressing whether the purchase and use of certain tangible personal property are subject to tax as a result of being incorporated into real property.

Facts

Your letter recounted the following:

3. Taxpayer is engaged in the business of (i) fabrication,
   installation and sales of real estate improvements, (ii) construction, installation and sales of cabinets and millwork and (iii) installation, sales and repairs of heating, ventilation and air conditioning systems to commercial customers located within and outside the state of Florida.

4. Taxpayer pays sales tax on all materials purchased,
   regardless of use or dedication to an out of state contract.

5. Taxpayer constructs and installs the real estate
   improvements in accordance with the style and dimensions specified by a customer in the contract (a copy of a sample is attached) and bills the customer based on a lump sum price for materials and supplies and services agreed to at the time the contract is executed.

6. Taxpayer installs or constructs improvements permanently
   on the premises of the customer using its employees. When complete, the work is subject to a warranty for parts and workmanship for a period of 1 year.

7. Under Florida Use Law, the first use of tangible
   personal property used in the manufacture of items occurs in the Taxpayer's Florida fabrication facility, and use tax is paid on all materials incorporated in the customfabricated products subsequently installed at the customer's premises pursuant to the contract.

8. The sample contract attached illustrates the
   construction and installation of items to the interior and exterior of an existing real estate improvement. The items incorporated into the improvement are as follows:

Basic Materials

Lumber
Plywood
Insulation
T-111 siding
Rags
Visqueen
Steel wool
Paint
Stain
Masking tape
Senco pin nails
Nails assorted
Sandpaper
Duct tape
Ceiling tile
Glue
Construction adhesive
Caulk
Washers
Nuts
Assorted hardware

The "sample" contract, dated January 14, 1997, involving the remodeling of a restaurant, provides that the taxpayer will provide and pay for all materials, tools, equipment, labor, and professional and non-professional services. The contract lists a lump sum price of $96,914.00.

The contract describes the "Interior scope of work" as involving: (1) Installing greyboard on white walls; (2) removing and installing decor; (3) installing new booths; (4) installing new grating and endcaps on existing booths; (5) installing interior neon signs; (6) capping all existing planters; (7) installing "Fresh Catch" boards; (8) relamping all fixtures with appropriate bulbs; (9) building square box greyboard posts; (10) installing new decorative fixtures; (11) refinishing all trim and bead board; (12) reupholstering lobby bench; (13) replacing all roller chairs; (14) painting existing soffit bottoms; (15) covering existing glass block with greyboard; (16) adding wall washers at each "Fresh Catch" board; (17) installing tin over transom at emergency doors; (18) filling in grills between

dining rooms; (19) installing tin and greyboard in recessed ceiling in lounge; (20) greyboarding entire back bar wall; (21) painting eyeball and downlight trim rings; (22) installing interior decorative windows; and (23) installing bulkhead. The contract describes the "Exterior scope of work" as involving: (1) Painting complete exterior; (2) removing all awnings at entry leave frame; (3) installing tin/greyboard on existing frame over entry; (4) painting or staining exposed trusses; (5) constructing picture frame signs; (6) removing "critter" from tower and patch wall; (7) installing fishboards; (8) installing lights on fishboards; (9) painting existing hoop lights; and (10) installing tin on front mansards and tower.

Requested Advisement

You request a determination as to whether the purchase and use of the above items of tangible personal property are subject to tax. Letter at 2. You also ask the Department to review a flow chart "used by employees of the Taxpayer to determine Florida Sales and Use tax consequences" and to rule that the chart "accurately depicts the Florida Sales and Use Tax consequences." Letter at 6.(FN 1)

Law & Rules

Rule 12A-1.006(1), Fla. Admin. Code, provides that, when a contractor furnishes parts, the entire charge for adjusting, applying, installing, maintaining, remodeling, or repairing tangible personal property is taxable. See also Rule 12A1.016(3)(a), Fla. Admin. Code (the total consideration received for labor or services used in installing tangible personal property which is sold and does not become part of realty is taxable even though such charge may be separately stated); Rule 12A-1.024(4), Fla. Admin. Code (charges for labor, replacement parts, materials and supplies used by dealers to adjust, apply, alter, install, maintain, remodel or repair tangible personal property belonging to others are taxable).

Repairs, alterations, and improvements to real property are addressed in Rule 12A-1.051, Fla. Admin. Code. This rule 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, and provides:

(2) Such contractors may include, among others, building, electrical, plumbing, heating, painting, decorating, ventilating, paper hanging, sheet metal, bridge, road, landscape or roofing contractors and they 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 the 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.

(e) 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.

(f) 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.
....
(3) If a contractor's or subcontractor's business is only that of taking contracts in classes (2)(a), (b) or (c), he should not give a resale certificate and should pay tax on any of the materials and supplies purchased. If his business is also that of taking class (2)(d) contracts or of selling construction materials or other tangible personal property at retail, he shall furnish his dealers with a resale certificate on all purchases for resale. If a buyer gives a resale certificate and thereafter consumes some of the materials and supplies purchased in the performance of contracts in classes (2)(a), (b) or (c), he must include in his return to the Department of Revenue tax upon the cost price of the materials and supplies so used in addition to tax on retail sales under class (2)(d) contracts. If a contractor or subcontractor purchases materials and supplies without a resale certificate and subsequently sells some of them at retail or uses them in fulfilling class (2)(d) contracts, he must collect the tax thereon and report and pay same to the Department of Revenue. In such cases the contractor or subcontractor may take the tax paid by him to his dealers as a credit on his report to the Department. All contractors and subcontractors must maintain records in accordance with the requirements of s. 213.35, F.S., as created by section 6, Chapter 88-119, Laws of Florida, of all materials used in the performance of contracts for the improvement of realty, adequate to show that the appropriate tax has been accrued and remitted by them or paid to their vendors, as the case may be.
....
(5)(a) Contractors, except asphalt contractors, who operate fabricating or manufacturing plants which make items of

tangible personal property for their own consumption and use in the performance of contracts for the construction or improvement of real property are subject to tax upon the fabricated or manufactured cost of such items.

(b) The tax is based upon the cost price of the product manufactured, produced, compounded, or processed or fabricated. Elements of cost price will include those costs that are directly or indirectly attributable to the manufacturing, producing, compounding, processing, or fabricating of an article of tangible personal property for one's own use and which is properly chargeable to a capital account or to the cost of the product under generally accepted cost accounting standards. Major elements to be included in the manufactured cost price of tangible personal property for one's own use include direct materials, direct labor, and indirect manufacturing costs.

1. Direct material costs include all materials and related
   freight costs, that are physically observable as being identified to the finished tangible personal property, that are consumed in producing the property, or that become a component or ingredient of the finished property....

2. Direct labor includes labor costs that are traceable to
   the production of the finished product.

3. Indirect manufacturing costs refer to all costs other
   than direct materials and direct labor that are associated with the manufacturing process and include both variable and fixed factory overhead....
   ....
   (c) Direct materials on which the tax has been paid shall not be included when computing the tax on the cost price of items of tangible personal property manufactured, produced, compounded, processed, or fabricated.

(d) Persons who manufacture, produce, compound, process, or fabricate items of tangible personal property for resale or for their own use or consumption may purchase direct materials tax exempt but shall include the cost of the

direct materials when computing tax on the cost price of the items so manufactured, produced, compounded, processed, or fabricated for such persons' own use or consumption. If tax has been paid on the direct materials, the method described in paragraph (c) should be used when computing the tax on the cost price of the items so manufactured, produced, compounded, processed, or fabricated.

(e) The tax is due at the moment the contractor manufactures an item of tangible personal property for his own use, and such tax shall be remitted to the Department of Revenue in accordance with Rule 12A-1.056, F.A.C.

(f) Fabrication labor incurred at the job site in the performance of repairing, altering, improving, or constructing real property is not subject to tax. For the purpose of this rule, "job site" means a temporary site where fabrication is performed for a specific job. This site becomes a permanent manufacturing plant site when fabrication is performed for any job other than the specific job for which the site was selected.
....
(16) Materials purchased for use in the performance of lump sum, cost plus, fixed fee or guaranteed price contracts for the improvement of real property are taxable to all contractors, including but not limited to the following contractors - (Caution: See Rule 12A-1.043, F.A.C.):
....
Heating, ventilating and air conditioning
....
Painting
....
(26) Signs fabricated prior to reaching the job site, which do not become part of realty, are tangible personal property and are fully taxable. The sale or rental of such signs, and the installation charges therefor, are fully taxable as a sale or rental of tangible personal property.
....
(34) 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. (Emphasis supplied). See also Fla. Stat. s. 212.05(1)(b) (1997).

Discussion, Analysis and Conclusion

To determine which tax rules apply -- the ones relating to tangible personal property or to real property -- it is essential to ascertain whether the installation of the property at issue becomes part of real property or retains the characteristics of tangible personal property. Although some of the items appear to constitute materials which become part of real property, other items appear to be tangible personal property, such as roller chairs and picture frame signs, while other items could be either, depending on whether they are freestanding and movable or affixed to the floor or walls, for example, booths, lobby bench, "fish" and "Fresh Catch" boards, planters, and signs manufactured prior to being delivered to the job site. See Black's Law Dictionary Fixture at 327 (5th ed. 1983) ("An article in the nature of personal property which has been so annexed to the realty that it is regarded as a part of the land.... e.g., a furnace affixed to a house or other building; counters permanently affixed to the floor of a store; a sprinkler system installed in a building."). Under Kings Bay Yacht & Country Club v. Green, 173 So.2d 509 (Fla. 1st DCA 1965), it is the taxpayer's burden to show by contract whether a given transaction is primarily and predominantly one involving improvements to real property or installation of tangible personal property.

Presuming the "sample" lump sum contract is predominately and primarily for the improvement of real property, it creates two tax consequences for the taxpayer under Rule 12A-1.051, Fla. Admin. Code. First, the taxpayer is the ultimate consumer of all materials, and must pay sales tax when purchasing these materials in Florida. Second, if the taxpayer operates a Florida manufacturing plant to make items of tangible personal property for its own consumption or for use in fulfilling contracts for the improvement of real property, the taxpayer must accrue and remit use tax on the manufactured cost of such items. No tax would be charged by the taxpayer to its customer for the real property improvements.

Pursuant to Rule 12A-1.051(5)(b), use tax will be based upon the cost price of the manufactured product. "Cost price" includes costs that are directly and indirectly attributable to the manufacturing of the tangible personal property and which are chargeable to the cost of the product under generally accepted accounting principles. The 21 "Basic Materials" listed on page two of your request for a TAA qualify as costs within the meaning of "cost price" enunciated in Rule 12A-1.051(5)(b), Fla. Admin. Code, and should be included in your use tax calculations.

This response constitutes a Technical Assistance Advisement under Fla. Stat. s. 213.22 (1997), which is binding on the Department only under the facts and circumstances described in the request for this advice, as specified in section 213.22. 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 treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, Fla. Stat. (1997), which are subject to disclosure to the public under the conditions of Fla. Stat. s. 213.22 (1997). 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 confidential 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,

Gypsy Bailey
Senior Attorney
Technical Assistance & Dispute Resolution (850) 922-9411

Control #: 30713

NOTICE UNDER THE AMERICANS WITH DISABILITIES ACT

Persons needing an accommodation to participate in any proceeding before the Technical Assistance and Dispute Resolution Office should contact the office at 904-488-0717 (voice), or 1-800-DOR-8331 (TDD), at least five working days before such proceeding. You may also call via the Florida Relay System at 1-800-955-8770 (voice), or 1-800955-8771 (TDD).

FOOTNOTE 1 While the Department addresses your first request, it will not issue a ruling on the flow chart because it addresses tax consequences in a number of situations, not "a specific transaction or event" as required under Rule 12-11.001(1), Fla. Admin. Code.