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