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.