Were lump-sum hospital housekeeping contracts taxable when one included cleaning workers and the other supplied only management?

Subject

Nonresidential Cleaning Services; Management Services

Plain-English summary

The contract that bundled management with actual cleaning was taxable on its full lump-sum price, while the management-only contract was not. Under the Type A contract, the contractor employed the cleaning personnel, furnished management and support staff, and supplied materials for one contract amount. Florida treated that entire amount as the sales price of taxable nonresidential cleaning services.

Under the Type B contract, the hospital employed the workers who performed the cleaning. The contractor trained, managed, and directed those hospital employees but did not itself supply the cleaning labor. Florida treated the net contract amount as payment for management rather than cleaning.

The Type B contractor also supplied some materials without a separate charge. The Department regarded those transfers as inconsequential elements of the management service and therefore applied the personal-service exemption. The ruling assumed the contractor paid applicable tax on its purchases or leases of supplies, materials, and equipment.

What this means for you

Contract labels do not control the Florida result. A housekeeping agreement is more likely to be treated as taxable cleaning when the service provider employs the cleaning workers and charges one amount for the whole function. A management agreement can receive different treatment when the customer employs the workers and any property transfer is incidental and unitemized.

Common questions

Q: Could the Type A contractor separate management value after billing one lump sum? No. The ruling treated the entire contract amount as the taxable sales price of nonresidential cleaning.

Q: Why was the Type B payment exempt? The hospital's own employees performed the cleaning, while the contractor supplied management direction; incidental supplies carried no separate charge.

Q: Did the ruling exempt the contractor's own supply and equipment purchases? No. It assumed the contractor accrued or paid applicable tax on those purchases or leases.

Citations and references

• Fla. Stat. § 212.05(1)(j)1.b. — tax on nonresidential cleaning services
• Fla. Stat. § 212.08(7)(v)1. — personal services involving inconsequential property sales with no separate charge
• Fla. Admin. Code rr. 12A-1.0091, 12A-1.0161 — nonresidential cleaning and service transactions
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-069

Original ruling text

SUMMARY

In accordance with the terms of two contracts, a firm
engaged in providing nonresidential cleaning and the
rendering of management services owes the tax on one
contract which does not distinguish between cleaning and
management services, but has no liability with respect to
the management contract when the sales of tangible personal
property are inconsequential and not separately stated.

Aug 31, 1998

Re: Sales and Use Tax - TAA-98A-069
Nonresidential Cleaning Services; Management Services
Sections 212.05(1)(j)1.b., F.S. 212.08(7)(v)1., F.S.
Rules 12A-1.0091, 12A-1.0161, F.A.C.
XXX (herein Contractor)

Dear :

This is a response, styled a Technical Assistance Advisement, to
your letter dated XXX, in which you asked whether payments
received by Contractor pursuant to two types of contracts which
involve rendering management services or the provision of
nonresidential cleaning services, principally to for-profit
hospitals (herein Facility), are subject to sales or use tax.
The agreements are identified herein as Type A Contract, and
Type B Contract. You provided the Department with a copy of
each of the contracts.

On page 2 of your letter, you describe Type A Contract as one
pursuant to which Contractor:

... performs both management of the [Facility's]
housekeeping function and actual cleaning services. In
these engagements [Contractor] provides both management and
cleaning employees. The revenues received by [Contractor]
in these engagements are billed as a lump-sum, i.e., the

revenues received for management services are not
separately stated from the revenues for cleaning services.

On the same page of your letter you described Type B Contract as
one pursuant to which Contractor:

... performs only the management of the [Facility's]
housekeeping function, not actual cleaning services, and
provides only management employees. In these...
engagements, the actual cleaning activities are performed
by persons who are employees of the [Facility].

You state, on page 2, that Contractor has, since September 1,
1992, collected sales tax from the Facility on Type A
engagements and remitted such tax on the lump sum payments
received by Contractor because this type of an agreement
involves "... management services and nonresidential cleaning
services which are billed as a lump sum." You indicate that
under Type A Contract, Contractor will be furnishing for a lump
sum, management and supervisory personnel, as well as, support
service personnel who actually render the cleaning services.

You concede that the lump sum payments received by Contractor in
accordance with Type A Contracts are subject to tax because
Contractor does not separately distinguish in its billing, the
elements of general management of the housekeeping function from
those of nonresidential cleaning. You cite s. 212.05(1)(k) [now
(j)], F.S., and Rule 12A-1.0091, F.A.C., and Rule 12A-1.0161,
F.A.C., as support for the taxability of the Type A Contract.

However, you claim, also on page 2, as to Type B Contracts, that
Contractor does not collect sales tax from the Facility because
"... these engagements involved only exempt professional
(management) services." You categorize Type B Contracts as only
the rendering of nontaxable professional services because, as
you state on page 7 of your letter, "... the actual cleaning
activities are performed by persons who are employees of the
[Facility], not by employees of [Contractor]." You indicate the
Contractor only furnishes the management and supervisory
personnel. You cite s. 212.08(7)(v), F.S., and Rule 12A-1.0161,
F.A.C., as support for the nontaxability of Type B Contracts.

With respect to both contracts you ask for rulings which respond
only to the taxability of the cleaning or management services,
rather than any other element of the transactions such as
purchase of supplies and materials, and the lease or purchase of
equipment. It is the understanding of the Department that, as to
the cost or purchase price, or the lease price of the supplies,
materials, or equipment, that Contractor accrues or otherwise
pays the applicable tax.

Department Response

Section 212.05(1)(j)1.b., F.S., imposes sales or use tax on
nonresidential cleaning services. Rule 12A-1.0091, F.A.C., and
Rule 12A-1.0161, F.A.C., interpret the statute. The lump sum
required to be paid Contractor by the Facility pursuant to Type
A Contract is the sales price of the nonresidential service.
Rule 12A-1.0091(1)(a), F.A.C., states in part that "[t]he tax is
imposed at the rate of 6 percent of the total sales price or
cost price of such service."

Type A Contract provides for the furnishing to Facility by
Contractor of what is described as "support services."
Contractor, as described in paragraph 1.a. of the Type A
Contract, "... will furnish all coordinating management,
supervisory, training and technical personnel, support service
production and special projects personnel required to
efficiently accomplish said support services." Paragraph 1.b.
states that all "support service production personnel"( cleaning
personnel) who had been employees of the [Facility], prior to
the effective date of the Type A Contract, would become
employees of the Contractor as of the date the services
commenced under the contract. Paragraph 1.c. states that
Contractor will provide "... the necessary supplies and
materials for the proper performance of the housekeeping
services...." The paragraph also states that the costs of such
supplies and materials are reflected in the lump sum payment
received by Contractor.

The Facility will provide "... at its own cost, certain

expendable supplies..." which are enumerated in the paragraph.
Paragraph 2. a of the Type A Contract requires a lump sum
payment by the Facility described as "... the biweekly Contract
Amount for the services rendered hereunder...."

Other provisions of the agreement allow the use by Contractor,
as specified in section 7., of certain spaces within the
Facility for its use in the performance of the provision of
"support services." In section 8, the equipment provided by
Contractor in the furtherance of the cleaning is to remain the
property of the Contractor and any equipment used by Contractor
titled in the Facility is to remain titled in the Facility.
Section 12 stipulates that Contractor is an independent
contractor and is not an agent of the Facility.

As to Type A Contract, a finding is made that it is an agreement
for the provision of nonresidential cleaning services because
the intent of the parties and the language of the agreement
provide for what is described as "support services" which means
the nonresidential cleaning of the Facility. The lump sum
amount imposed by the contract is the sales price of this
service. This lump sum amount is the amount upon which the
sales tax is imposed as required by s. 212.05(1)(j)1.b., F.S.,
and interpreted by Rules 12A-1.0091 and 12A-1.0161, Florida
Administrative Code.

It is the understanding of the Department that Contractor is
accruing or otherwise paying sales tax on the purchase or lease
of supplies and materials and equipment used or consumed in the
performance of its contractual obligations. Thus, the
conclusion of the Department, limited by the ruling you request,
does not consider any aspect of the taxability of the purchase,
lease, consumption or resale of such supplies, materials or
equipment.

As to Type B Contract, on page 1, the provision of what is
termed "support management services" appears as the subject
matter of this class of agreements. In section 1, Contractor is
to provide the sole support service function which is
denominated as "housekeeping."

However, as to the personnel which will accomplish this
function, paragraph 1.b. states, in part, that:

... all presently employed employees of the [Facility]...
who will be trained, managed, and directed by
[Contractor]... shall remain employees of the [Facility],
and shall not at any time during the term of this Agreement
be deemed to be employees of [Contractor]. All newlyemployed support service employees described in this
paragraph shall be the employees of the [Facility].

Subparagraph 1.b.(2) specifies that Facility:

... shall hire, discharge or discipline all such employees
in accordance with the [Facility's] policy and procedures.
The [Facility] shall pay all wages and salaries of its
support service employees, and shall pay all payroll and
other taxes, fees, worker's compensation insurance and
other charges or insurance levied or required by any
federal, state, or local statutes relating to the
employment of its employees....

Paragraph 1.c. states that Contractor:

... shall train, manage and direct all support service
employees of the [Facility] in the performance of their
respective duties, subject always to the control retained
by the [Facility] as employer of said employees.

The Type B Contract also requires a biweekly amount, denominated
as Contract Amount, to be paid to Contractor for the
housekeeping function as described in section 2.a. of the
agreement. The Facility will reduce this amount, as provided in
paragraph 2.b. by "... the gross payroll for all wages and
salaries of its [Facility's] support service personnel
applicable to the period."

However, as specified in subparagraphs 2.b.(1), 2.b.(2), and
2.b.(3), such reduction shall not include FICA taxes and other
enumerated fees and taxes paid by Facility with respect to its
employees, nor, for example, the vacation or sick benefits of

Facility's employees. Thus, the payment to Contractor for the
provision of its services to the Facility is a stated amount
reduced by the gross payroll for wages and salaries of
Facility's employees, as described above.

The limited number of employees of the Contractor who are
stationed on the premises of the Facility is described in
paragraph 1.a. of the agreement. Not included in the
itemization are the "support services employees" who actually
perform the nonresidential cleaning services. The Facility, in
section 8, will provide certain offices and storage space to
Contractor. In subparagraph 1.a.(1) Contractor is required to
"... pay all salaries, payroll and other taxes... related to the
employment of its employees." Further, the contract, in
paragraph 1.e., provides that Contractor will pay "all direct
operating costs and expenses... other than wages and other
expenses of the Facility's employees."

In section 9, both the equipment of the Contractor and that of
the Facility may be used in the housekeeping activities with the
title to the equipment remaining in the respective parties.

Importantly, paragraph 2.d. states that Contractor:

... will sell to [Facility] the necessary supplies and
materials for the [Facility's] support service employees
performing housekeeping duties to use for the proper
performance of the housekeeping services.... It is
understood and agreed that the cost of such items is
included in the Contract Amount stated in Paragraph 2a
above.

The Facility, in the same paragraph, is to provide enumerated
"... expendable supplies..." used or consumed in the
housekeeping function.

The provisions of paragraph 2.d., project the appearance that
Contractor is engaged in the sales to Facility of what is
described as "necessary supplies and materials for the
[Facility's] support service employees." Note is made that the
Contract Amount appears predetermined and unaffected by any

changing amount, cost or price of the supplies and materials
provided by Contractor.

Rather, the cost or price of the supplies and materials is a
mere item of overhead, as is the Contractor's employment costs
of its own on-site employees, or the reimbursement of the onsite manager's automobile expense. The cost or purchase price
borne by Contractor of such supplies and materials is an agreed
cost which simply works a reduction of the compensation paid to
Contractor. There is no separate charge for any items of
supplies or materials.

Thus, considering solely the question whether the Contract
Amount paid to Contractor pursuant to the provisions of
paragraph 2.a. represents a payment for management direction of
the housekeeping duties, rather than the nonresidential cleaning
functions, the conclusion is reached that such net amount is
exchanged for the management function of these duties, and is
not an amount which can be appropriately termed the "sales
price" of nonresidential cleaning services as taxed by s.
212.05(1)(j)1.b., F.S., as interpreted by Rule 12A-1.0161,
Florida Administrative Code.

Section 212.08(7)(v)1., F.S., exempts "... personal service
transactions that involve sales as inconsequential elements for
which no separate charges are made." The net amount paid to
Contractor under the provisions of the Type B Contract, as
described above, represents compensation for the management
direction of the housekeeping duties which are then discharged,
by the employees of the Facility. Such compensation is not
subject to sales or use tax.

It is the understanding of the Department that, as discussed
with regard to the Type A Contracts, Contractor has accrued or
paid the applicable sales tax on the purchase price or cost of
supplies and materials and on the purchase or lease of equipment
used in the performance of duties under the Type B Contract.

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 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, 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 which 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 the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and Dispute
Resolution

Ctrl. No. 33882