Who owed Florida tax on repairs to a grocery warehouse's real-property refrigeration system?

Subject

Refrigeration System Repairs and Maintenance

Plain-English summary

The warehouse refrigeration systems were part of the real property, so labor to repair them was not taxable. The systems consisted of 33 rooftop industrial units serving multiple temperature-controlled warehouse zones.

For a lump-sum, cost-plus, fixed-fee, guaranteed-price, or ordinary time-and-materials repair, the contractor was the ultimate consumer of the parts and supplies. The contractor paid sales or use tax on those inputs and did not add sales tax as a separate charge to the customer.

The only different result was a qualifying Rule 12A-1.051(2)(d) contract. Every material and its price had to be specifically identified before work began. Merely listing parts and labor afterward on a time-and-materials invoice did not qualify. Under a valid advance-itemized contract, tax applied to the separately sold materials, while labor remained nontaxable.

What this means for you

The invoice format alone did not control. Florida looked at the agreement made before the job began. A contractor could not turn a completed real-property repair into a retail materials sale simply by showing parts and hourly labor separately on the final bill.

Common questions

Q: Was repair labor taxable? No, because the described refrigeration systems were real property.

Q: Did a time-and-materials invoice make the parts taxable to the customer? No. The materials had to be identified and priced in advance to qualify as a separate retail sale.

Q: Who paid tax under an ordinary repair contract? The contractor paid tax as the consumer of the materials and treated that cost as overhead.

Q: Would labor on tangible-personal-property repairs also be exempt? No. The ruling cautioned that the entire charge, including labor, was taxable for repairs to tangible personal property.

Citations and references

• Fla. Admin. Code r. 12A-1.051(2)(d)-(e) — itemized and other real-property improvement contracts
• Sears, Roebuck & Company v. Florida Department of Revenue, Case No. 92-1080 (Fla. 2d Cir. Ct. 1994) — advance material identification and pricing
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-073

Original ruling text

SUMMARY
Repairs and improvements to refrigeration systems which are
considered a part of real property would be governed by
Rule 12A-1.051, F.A.C. The contractor/repairman is the
ultimate consumer of materials and supplies it uses to
perform a lump sum, cost plus, fixed fee, guaranteed price
or any other kind of contract except an itemized contract
as described in paragraph (2)(d) of the rule ("class (2)(d)
contract"). Repairs which are billed by way of the "time
and material method" under which the contractor sets forth
on the customer's invoice the cost of all materials plus a
separate labor charge (usually based on an hourly rate), do
not qualify as class (2)(d) contracts.

Sep 23, 1998

Re: Technical Assistance Advisement 98A-073
XXX ("Taxpayer")
Sales and Use Tax
Refrigeration System Repairs and Maintenance
Rule 12A-1.051, F.A.C.

Dear :

This Technical Assistance Advisement is in response to your
letter of July 30, 1998, in which you seek advice as to the
sales tax implications of the refrigeration repair and
maintenance charges which your company incurs at its location in
Florida. Your letter provides in part:

[Taxpayer] currently operates a grocery warehouse facility
in..., Florida. We have an extensive refrigeration system
in one of the facilities that must be maintained. It is our
understanding based on discussions with your offices that
repairs and maintenance performed on real property can be
exempt from sales tax depending on the invoicing method
used. However, it is our understanding that the greatest

possible sales tax liability would be on materials only
regardless of the invoice method. All labor is not subject
to sales tax. We are currently paying sales tax on all
labor and materials.

The description of the warehouse, which you have provided,
states in part:

The distribution center provides temperature controlled
warehouse space for all perishable product delivered by
[Taxpayer]. There are actually five different temperature
zones, from 44 degrees F. to -10 degrees F.

There are thirty-three industrial refrigeration units
mounted on the roof of the facility. These commercial
units, manufactured by [various companies] are electrically
driven units that use R-22 and R-502 which provide cooling
to massive internal air handlers in the coolers.

Discussion

Based on the description provided, your refrigeration systems
would be considered a part of real property. Any repairs or
improvements to such systems at the facility would be governed
by Rule 12A-1.051, F.A.C., dealing with real property
improvements. Pursuant to the provisions of Rule
12A-1.051(2)(e), F.A.C., the contractor/repairman is the
ultimate consumer of materials and supplies it uses to perform a
lump sum, cost plus, fixed fee, guaranteed price or any other
kind of contract except an itemized contract as described in
paragraph (2)(d) of the rule ("class (2)(d) contract"). Class
2(d) contracts are defined as:

(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.

The issue as to what criteria a contract must meet in order to
constitute a class (2)(d) contract was considered in the case of
Sears, Roebuck & Company v. Florida Department of Revenue, Case
No. 92-1080 (Fla. 2nd Cir. Ct. 1994). These criteria are:

(i) the contract must itemize each and every separate
material and the price per each furnished to perform the
work covered by the contract; and,

(ii) the contract must show such itemization in advance of
the work being performed.

Repairs which are billed by way of the "time and material
method" under which the contractor sets forth on the customer's
invoice the cost of all materials plus a separate labor charge
(usually based on an hourly rate), do not qualify as class 2(d)
contracts. Under this method, there is no advance
identification, itemization or pricing of the materials to be
used in fulfilling the contract, as it is unknown at the
commencement of the job exactly what materials and parts will be
needed. Additionally, the customer under the time and materials
method is contracting for a completed job, rather than the
purchase of materials.

Conclusion

Only when repair contracts are class (2)(d) contracts, as
described in the Sears case, would tax be due on any separately
itemized materials. Regardless of the contract type, labor would
not be taxable. (Labor is taxable only when related to repairs
of tangible personal property. For such repairs, the entire
repair charge, including labor is taxable, whether or not the
labor is separately itemized.) On all real property contracts
other than a class (2)(d) contract, the repairman/contractor is
considered the consumer of all materials used in the repair, and
would owe use tax on all purchases. The repairman would not
collect sales tax as a separate line item from the customer. The
use tax paid by the repairman would be an element of overhead
and would be built into the charges to the customer, in the same
way as other overhead expenses.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S. which is binding on the department only
under 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 our 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,

Jonathan E. Swift
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 922-4840

Control #34947

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