Who owed Florida tax on materials used in three types of air-conditioning repair contracts?

Plain-English summary

The air-conditioning contractor, not its customer, owed tax on the materials used in all three repair arrangements. The contractor was improving real property and none of the contracts fully identified and priced every material before work began.

That result covered time-and-material billing determined after service, a fixed lump-sum compressor replacement, and a time-and-material proposal capped at a maximum amount. The contractor had to pay sales tax when buying materials or accrue use tax on untaxed purchases, and it should not charge the customer sales tax.

What this means for you

An invoice that itemizes materials after the work is done does not necessarily turn a real-property contractor into a retail seller. The cited special contract category required complete advance identification and pricing of every material.

Common questions

Q: Did itemizing parts after repair make them retail sales? No. The ruling required full itemization in the contract before work began.

Q: How were lump-sum jobs treated? The contractor paid tax on its material costs and did not collect tax from the customer.

Q: What about untaxed out-of-state purchases? The contractor had to self-accrue Florida use tax.

Citations and references

• Fla. Stat. § 212.06 — sales and use tax collection
• Fla. Admin. Code r. 12A-1.051(2) — real-property contractors
• Fla. Admin. Code r. 12A-1.091 — use tax
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-048

Original ruling text

SUMMARY

Question: What is the appropriate sales tax treatment of
repairs and servicing of air conditioning systems by a real
property contractor?

Answer - Based on Facts Below: A real property contractor
should pay tax on the cost of materials and charge no sales
tax to the customer for repair and servicing of air
conditioning systems under all of the following
circumstances: (1) a technician is dispatched in response
to a customer call, necessary services are performed, and a
detailed bill is sent that itemizes parts and labor; (2) a
technician is dispatched and diagnoses the problem, a lump
sum quote is presented to the customer, the necessary work
is performed, and the customer is billed for the quoted
lump sum price; or (3) the customer is presented a proposal
itemizing estimated labor and materials with pricing to be
based on actual time and materials not to exceed a
guaranteed maximum price, the work is performed, the
customer is billed based on costs of time and materials
actually incurred up to but not in excess of the guaranteed
maximum. In all three scenarios, the contractor is the
consumer of the materials used and is subject to tax on its
costs. None of the described transactions would qualify as
a contract described in Rule 12A-1.051(2)(d), F.A.C.

Sep 17, 1999

Re: Technical Assistance Advisement 99A-048
Sales and Use Tax - Air Conditioning Contracts
Section 212.06, F.S.
Rule: 12A-1.051, F.A.C.

Dear :

This letter is a response to your submission of information
dated June 15, 1999, seeking the Department's issuance of a

Technical Assistance Advisement ("TAA") concerning the above
company's different air conditioning sales and service
transactions. Your petition has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

DISCUSSION OF FACTS

XXX ("Taxpayer") is a Florida corporation providing commercial
air conditioning services in the XXX area. The company enters
into different types of sales and service transactions,
specifically described below, for which it seeks to obtain
guidance on the Florida sales and use tax consequences. All of
the transactions involve labor and materials applied to
remedying an air conditioning need of a customer. The various
transactions, as paraphrased from your letter, are as follows:

(a) Time and Material Billing:

Customer places a service call for air conditioning service. A
technician is dispatched to perform necessary services. These
include diagnosis, cleaning and replacement of faulty parts.
After the service is performed, the customer is sent a detailed
billing for labor, parts, materials, and sales tax. A sample
invoice is included (see example 1) which sets forth the number
of hours the technician spent on the job and the various parts
and materials utilized. No sales tax was paid by taxpayer on
the initial purchase of the parts and materials used. The
customer is charged sales tax on all parts and materials, but
not on labor.

(b) Lump Sum Billing:

A customer places an air conditioning service call. A
technician is dispatched and determines that the unit has a bad
compressor. The customer is given a written lump sum quote for
the compressor replacement. The compressor is replaced and the
customer is billed at a later date for the quoted fixed price.
Labor and materials are not itemized. The contractor pays sales

tax on all materials used in the job. Two exhibits are
provided. (See examples 2 and 3.)

(c) Time and Material Not to Exceed Proposal:

The customer is given a proposal with terms indicating "time and
material not to exceed contract." The proposal sets forth an
itemization of estimated labor and material to be used in an air
conditioning system repair. The work is completed and billed by
an itemized invoice setting forth actual labor and materials
used. The amount invoiced may not exceed the estimate. The
invoice often is less than the estimate, and the amounts of
labor and materials used may vary from those set forth in the
proposal. No sales tax was paid by the taxpayer on the
acquisition of the parts and materials used. The customer is
charged sales tax on all parts and materials and not on labor.

REQUESTED ADVISEMENT

You seek advice on sales and use tax regarding the taxability of
the transactions for repair and installation services.

DISCUSSION, ANALYSIS, AND CONCLUSION OF LAW

Section 212.06, Florida Statutes, titled "Sales, storage, use
tax; collectible from dealers; 'dealer' defined; dealers to
collect from purchasers; legislative intent as to scope of tax,"
states in part:

(1)(a) The aforesaid tax at the rate of 6 percent of the
retail sales price as of the moment of sale, 6 percent of
the cost price as of the moment of purchase, or 6 percent
of the cost price as of the moment of commingling with the
general mass of property in this state, as the case may be,
shall be collectible from all dealers as herein defined on
the sale at retail, the use, the consumption, the
distribution, and the storage for use or consumption in
this state of tangible personal property or services
taxable under this chapter. The full amount of the tax on a
credit sale, installment sale, or sale made on any kind of
deferred payment plan shall be due at the moment of the

transaction in the same manner as on a cash sale. (Emphasis
Supplied)

Rule 12A-1.051, F.A.C., 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 for the repair, construction,
alteration or improvement of real property. (A copy is attached
hereto for your reference.) Rule 12A-1.051(34), F.A.C.,
specifically provides that central air conditioning systems,
such as those serviced by the Taxpayer, are improvements to real
property. Equipment and materials furnished and used in
servicing air conditioning systems are taxable to the contractor
when servicing is performed pursuant to a lump sum, cost plus,
fixed fee, or guaranteed price contract.

Rule 12A-1.051(2)(e), F.A.C., provides that:

When a contractor or subcontractor uses materials and
supplies in fulfilling either a lump sum, cost plus, fixed
fee, guaranteed price... 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. (Emphasis
Supplied)

In situations in which a contractor agrees to make improvements
to real property and, in addition to the labor, agrees to sell
specifically described and itemized materials at an agreed price
or at the regular retail price, the contractor is deemed to be
selling tangible personal property, and is required to collect
tax from the contractor's customer on the selling price,
excluding separately itemized installation charges. Rule 12A1.051(2)(d),(f), F.A.C. In order to fall under this category,
which is sometimes referred to as a "class (2)(d) contract,"
every material used in the contract, without exception, must be
identified and priced to the customer in the contract before the
commencement of any work. See Sears, Roebuck & Company v.
Department of Revenue, Case No. 92-1080 (Fla. 2nd Cir. Ct.
1994). In the instant situation, none of the transactions under

consideration qualify as class (2)(d) contracts. None of the
transaction provides the customer with a contract in advance
which fully itemizes, by price, type, and quantity, the
materials needed to complete the job.

For "Time and Material Billing", the amount to be invoiced is
determined after the service is rendered. Thus, this billing
does not provide the customer, in advance, with a specifically
itemized listing of all materials and supplies. This transaction
is taxable to the contractor, your company, as the ultimate
consumer of the items of tangible personal property used in the
transaction. No sales tax should be charged to the customer.

For the "Lump Sum" example there is no separate itemization in
advance, of materials used. Thus, the contractor correctly is
the taxpayer accruing and paying tax on all materials costs as
provided under Rule 12A-1.051(2)(e), F.A.C., tax should not be
charged to the customer.

For the "Charges Not to Exceed Contract" transaction, the
customer is merely provided with an estimate of the materials
that may need to be used in performing the repair. Actual
material use may vary from the proposal. Thus, there is no
specific itemization of materials by price quantity, and type,
which is provided to the customer in advance. As such, the
contractor is the ultimate consumer of all materials and
tangible personal property used. No sales tax should be charged
to the customer.

From the facts you presented, all of the transactions involve
contracts for installation, repair or maintenance of permanent
improvements to real property. The actual materials used for
the installations vary by the job, but the contracts do not
provide exact pre-itemization of the materials used in the jobs.
Nor does it appear to be practical to do this. Miscellaneous
materials are used as needed by the installer. The precise usage
of materials depends on conditions at the site that may vary.
This method of contracting conforms with Rule 12A-1.051(2)(a) or
(b), F.A.C., and thus the sales and use tax of this real
property improvement should be imposed on you, the contracting
company, as the ultimate consumer of the items of tangible

personal property to be installed into real estate.

If the business does not make sales of tangible personal
property directly to customers without being involved in the
installation of the tangible personal property into real
property, then sales tax should be paid on all purchases of
materials at the time of purchase. If purchases are being made
from out of state suppliers that are not Florida dealers, then
self accrual of use tax will be required upon the importation of
the items when they reach Florida. Please find enclosed rule
12A-1.091, F.A.C. pertaining to the use tax. If the taxpayer
purchased any materials and supplies used in its installation
transactions exempt with a resale certificate, then the taxpayer
should accrue use tax on the cost price of such materials and
supplies.

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 upon 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 from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents 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 before disclosure. In an effort to protect the
confidentiality of such information, we request you provide the
undersigned with a redacted copy of your request for Technical
Assistance Advisement, backup material and response within
fifteen days of the date of this advisement.

Sincerely,

Jonathan E. Swift

Tax Law Specialist
Technical Assistance & Dispute Resolution
(850)922-4840

Control #38145