Was the full lump-sum price for turnkey school communication and sound systems taxable in Florida?

Subject

Integrated Communication Systems

Plain-English summary

The installer had to collect sales tax on the full lump-sum price of the turnkey school communication and sound systems. The systems integrated telephones, paging, alarms, bells, video conferencing, audiovisual content, cable or satellite reception, intercoms, classroom monitors, and other functions controlled through school telephones.

Florida specifically taxed installation of telecommunications and wired-television equipment. Although structural cabling and wiring could be a real-property improvement, the submitted contract promised one completed turnkey system for one lump sum. With no separate consideration for the wiring and telecommunications as the system's essential nature, the Department would not split the contract into taxable and nontaxable portions.

The public-school setting did not create an exemption. The installer contracted with and was paid by a general contractor, not directly by the school board. A different contract separately pricing structural wiring could treat that work as a real-property improvement, with the installer paying tax on materials rather than charging tax on the wiring contract price.

What this means for you

Allocations in bid materials did not overcome the final contract's single lump sum. Businesses combining taxable equipment installation with real-property work should establish genuinely separate contract consideration before work begins if they expect separate tax treatment.

Common questions

Q: Why was the entire contract taxable? Telecommunications and wired television were central to the integrated system, their installation was taxable, and the contract supplied the whole system for one inseparable price.

Q: Was structural wiring itself always taxable? No. The ruling said separately contracted structural wiring could be a real-property improvement.

Q: Did the school board's government status exempt the subcontract? No. The general contractor, rather than the school board, made the payment.

Citations and references

• Fla. Stat. § 212.02(15)-(16) — sale and total sales price
• Fla. Stat. § 212.05(1)(e) — telecommunications and television-system equipment installation
• Fla. Admin. Code rr. 12A-1.016(3), 12A-1.046 — installed property and telecommunications equipment
• Fla. Admin. Code r. 12A-1.051 — real-property contractors and structural wiring
• Sears, Roebuck & Co. v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2d Cir. Ct. 1994)
• Fla. Stat. § 212.08(6) — direct government purchases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-071

Original ruling text

SUMMARY

Total price for turnkey contracts to provide and install integrated communications and sound system in schools is subject to sales tax because of specific statutory provision taxing installation of telecommunications equipment. The portion of the contract involving structural cabling and wiring could not be separately taxed as a real property improvement because the contract called for completion of the entire job for a single lump sum. Although the systems were often installed in public schools, the contract payments were not exempt because they were made by a general contractor rather than made directly by the school board.

Sep 14, 1998

Re: Technical Assistance Advisement (98A-071) XXX ("Company") Sales and Use Tax -- Integrated Communication Systems Sections 203.012, 212.05, 212.06, 212.08, F.S. Rules 12A-1.016, 12A-1.046, 12A-1.051, F.A.C.

Dear :

This is in response to your letter to the Florida Department of Revenue dated March 23, 1998, as supplemented on April 29, 1998, in which you asked for a technical assistance advisement on behalf of Company concerning the sales tax consequences of contracts to install integrated communications systems. The facts stated below are based upon your letters and the brochures, form Purchase Agreement, and representative contract you have provided.

FACTS

Company designs and installs integrated communications systems and sound systems. An integrated communications system includes

the equipment and wiring required to integrate telephones, paging, alarm systems, bells, video-conferencing, audiovisual materials, sound systems, and all the other communications functions at a school facility into a single system marketed under the name YYYY ("System"). The brochure states, "In new school buildings, [System] offers the flexibility to create an integrated system that utilizes any mix of standard telephones, televisions, media and computer equipment." The System provides media retrieval via telephone or computer, cable television or satellite reception for special programming, video conferencing and messaging, a public address system, an intercom system, computer-based bells and clocks, digital telephone services to the classroom, alarms, video distribution, LAN media scheduling and access, an electronic bulletin board, and other standard features. Options include voice mail, teleconferencing, and distance learning. Each classroom is equipped with a video monitor and telephone. Using the telephone, teachers can make calls inside or outside the school, dial up instructional materials in video or disk format from a centralized audio visual center, or tap into cable or satellite television programming.

A transaction usually includes providing and installing System equipment, as well as wiring the structure. Some contracts may involve a sound system, which involves providing and installing sound equipment as well as wiring for that equipment. On some occasions, Company may provide and install the entire telephone system for the school as well.

The installations under consideration generally occur as part of the construction of a school. Company makes a bid to the general contractor. The bid contains a purchase agreement that breaks out the total price into System equipment, System equipment installation, wiring materials, wiring installation, telephone system, telephone system installation, sound system equipment, sound system wiring, and sound system installation. In the representative contract you supplied, Company agrees to provide all "labor, materials, equipment, services and other items required to complete" the following:

1. A "turnkey" Premise Distribution Wiring System -

Information Management Outlet (IMO) System in accordance with Specification Section XX, included in the Prime Contract.

2. A "turnkey" Integrated Telecommunications System in
   accordance with Specification Section XX, included in the Prime Contract.
3. A "turnkey" Instructional Television System in
   accordance with Specification Section XX, included in the Prime Contract.

Some equipment that will become part of the System is to be furnished by the school board. Among the tasks to be completed is the provision of cable to carry television signals from the local cable television provider.

Although the bid materials contained an allocation of the proposed price to various components of the job, the contract does not provide for any breakdown in price. Instead, it states that Company will receive a single lump sum for fulfilling all of its obligations under the contract. It specifically provides that there are no alternative pricing arrangements and no unit pricing.

School boards do not contract with Company themselves because they prefer to deal with a single general contractor or construction manager on each project. They request a turnkey system rather than contracting for various elements separately to simplify bidding and insure that a single subcontractor is responsible for all aspects of the system.

Company has been charging sales tax on the entire contract price. Contractors have informed Company that some competitors are charging tax only on equipment prices and the installation of telephone systems. Unlike Company, those competitors do not charge sales tax on structural wiring, sound systems, or installation of equipment.

TAXPAYER POSITION

Company has collected tax on the full contract price based on Rule 12A-1.016(3)(b)14., 17., F.A.C., which provides that

persons who furnish and install telephonic equipment and wired television are installing tangible personal property and should collect and remit tax on the total price.

REQUESTED ADVISEMENT

Company requests the Department's advice concerning the proper treatment of Company's contracts under Florida's sales and use tax laws.

RELEVANT AUTHORITIES AND ANALYSIS

Section 212.05(1), F.S., imposes tax on the sales price for retail sales of tangible personal property. "Sale" is defined in section 212.02(15), F.S., to include any "transfer of title or possession, or both, exchange, barter, license, lease, or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration." Section 212.02(16), F.S., defines "sales price" as "the total amount paid for tangible personal property, including any services that are a part of the sale,...." Rule 12A-1.016 (3)(a), F.A.C., states, "The total consideration received for labor or services used in installing tangible personal property which is sold and does not become a part of realty, is taxable even though such charge may be separately stated." Rule 12A1.016(3)(b), F.A.C., provides that those who furnish and install telephonic equipment or wired television are "considered to be retail dealers and are required to charge sales tax on the full price, including installation...."

Section 212.05(1)(e)1.c., F.S., specifically provides that charges for the installation of telecommunication and telegraphic equipment are taxable. In addition, section 212.05(1)(e)1.b., F.S., provides that any television system program service is taxable. "Television system program service" is defined in section 212.05(1)(e)2., F.S., to include "installing, connecting, reconnecting, disconnecting, or changing" any equipment related to transmitting audio or visual signals to subscribers for purposes other than retransmission. Rule 12A-1.046, F.A.C., provides guidance on the application of

section 212.05(1)(e), F.S. It provides, in relevant part, as follows:

12A-1.046 Telephone, Telegraph and Other Telecommunication Services.
...
(1)(b) The term telecommunication service as used in s. 203.012, F.S., includes, but is not limited to, services described or defined therein as local telephone service, toll telephone service, telegram or telegraph service, teletypewriter or computer exchange service, private communication service, cellular mobile telephone, specialized mobile radio, and paging services....

(5) Charges for cable or wired television service and its installation are taxable.

(6)(a) The sale or rental of machines, equipment, parts and accessories therefor used directly in furnishing communication services are taxable.

(b)1. Charges to customers or subscribers of telecommunication service, including charges to residential households, for the sale or rental of equipment used in providing such services are taxable.

2. Charges for the installation of equipment used in
   providing telecommunication services are taxable....

Under its contracts, Company provides and installs some equipment that would be classified as telecommunications or wired/cable television equipment. The remaining equipment to be furnished by Company would be classified as tangible personal property. In any case, the charges for all such equipment and its installation would be taxable under the statutes and rules cited above.

It appears that some of Company's competitors have taken the position that installation charges for equipment other than telecommunications equipment and charges related to structural wiring are not taxable, on the basis that those are charges

related to real property improvements, rather than for installation of tangible personal property or equipment related to telecommunications or wired/cable television. Section 212.05(1), F.S., provides that sales of tangible personal property, not real property, are taxable. Rule 12A-1.051, F.A.C., discusses real property contractors. Unless they enter contracts in advance of beginning work that specifically list and price each and every item of tangible personal property that will be used, such contractors are deemed to be the consumers of that property and must pay tax on their purchase price or cost. The property owners owe no tax on the charges for either materials or installation labor. See Rule 12A-1.051(2), (3), F.A.C.; Sears Roebuck & Co. v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2nd Cir. Ct. 1994). The Department's long-standing position is that equipment is generally considered to be tangible personal property.(FN 1) Structural wiring, on the other hand, is considered to be a real property improvement rather than tangible personal property or telecommunications equipment. Electrical contractors are listed among those to whom the rule applies in Rule 12A-1.051(2), (16), F.A.C. Structural wiring would include cabling that carries telecommuncations signals as well as wiring that carries electrical current.

Although it appears that the portion of the contract involving structural wiring involves real property improvements, there is no separate consideration for that portion of the work. The contract is for turnkey systems with a lump sum payment. A major portion of the System involves telecommunications equipment and wired/cable television equipment. A major purpose of the System is to integrate numerous functions (bells, alarms, audio visual capabilities, classroom television monitors, public announcements, paging, video conferencing, teleconferencing) so that they are all accessible and controlled by a school's telephones. The result is a sophisticated telephone and wired/cable television system that also controls numerous peripheral functions that would otherwise be separately wired and operated. Because the essential nature of the System involves telecommunications and wired/cable television, the charges for its installation are completely taxable under these circumstances.

This response addresses only turnkey contracts similar to the one submitted with your request for technical advice. Company may enter other forms of contracts that would have different tax results. For example, if Company contracted to provide structural wiring for a specified consideration rather than as part of a turnkey system for a lump sum covering all components of the system, the strucutral wiring would be a separable real property improvement. Company would pay tax on the materials it used in installing the structural wiring but charge no tax on its contract price for that wiring.

As a final note, Company has not argued that the taxability of its contracts is affected by the possible status of local school boards as exempt entities under section 212.08(6), F.S., which exempts governmental entities on purchases they make directly. Company's contracts are made with general contractors, and that exemption is not applicable to any payments made by a general contractor as opposed to payments made directly by a school board. The decision of a school board to acquire turnkey systems under lump sum contracts that do not separate real property transactions, tangible personal property purchases, and telecommunications/cable or wired television system equipment purchases precludes Company from applying different sales and use tax treatment to various portions of its activities. The decision of a school board to contract only with a single general contractor and not to make any direct purchases from suppliers precludes consideration of its status as a governmental entity in resolving the issue presented in this case. Unless a school board is willing to structure its contracts differently from those under review, Company is correct in collecting tax on the full contract price.

ADVISEMENT

Based upon the facts presented and the legal authorities and analysis set forth above, Company should collect tax on the full contract price it charges for furnishing and installing integrated communication systems and sound systems.

CLOSING STATEMENT

This response constitutes a technical assistance advisement under section 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 section 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 section 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 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,

Linda W. Bridges
Tax Law Specialist
850-922-9412

Control #: 33586

FOOTNOTE 1 Effective July 1, 1998, the Legislature added a definition of "fixture" to section 212.06, F.S. This definition recognizes the existing case law pertaining to fixtures. The addition of this definition in the statute may serve as a means of clarifying legislative intent and of adopting existing construction of the terms. The definition provides that a fixture is an accessory to land or a structure, which retains its character as an accessory when installed and which is permanently attached to realty. Machinery and equipment are specifically excluded from the definition of fixture. See

chapter 98-141, Section 5, Laws of Florida.