SUMMARY

QUESTION:Is Taxpayer making improvements to real property or sales of tangible personal property when it is installing several different types of systems?

ANSWER – Based on Facts Below:Taxpayer jobs are mixed contracts and the taxation is in accordance with the predominant nature of the system unless Taxpayer’s contract allocates the price upon the various elements.

QUESTION: How does the $5,000 discretionary sales surtax limitation apply?

ANSWER – Based on Facts Below: The $5,000 discretionary sales surtax applies to each system sold on a single qualifying purchase order when the predominant nature of the system is that of tangible personal property, or to the tangible personal property allocated price elements. However, two or more systems on a single purchase order for a single residence cannot be combined into a working unit. For example, if the contract or purchase order calls for a security system and a home entertainment system, the two systems cannot be combined to comprise a working unit.

QUESTION: How does tax apply to Taxpayer’s purchases of materials in Florida for use in fulfilling real property improvement contracts in Georgia?

ANSWER – Based on Facts Below: Taxpayer is the ultimate consumer of the materials used, and it owes Florida tax on the purchase of materials upon which delivery is made to Taxpayer in Florida, regardless whether Taxpayer ultimately installs the materials in an improvement to real property outside this state.

August 23, 2007

Re:Technical Assistance Advisement 07A-XXX
Sales and Use Tax – XXX
Sections: 212.05, 212.054, 212.06, F.S.
Rules: 12A-1.051, 12A-1.016, 12A-15.004, F.A.C.

Petitioner: XXX. (herein “Taxpayer”)

FEI: XX

Dear Ms. XXX:

This letter is a response to your petition dated March 26, 2007, for the Department’s issuance of a Technical Assistance Advisement (“TAA”) concerning the above referenced party and matter. 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, Florida Administrative Code. This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22, Florida Statutes.

PRESENTED FACTS

The petition sets forth the following information:

Sales:

The Taxpayer [] is a Florida corporation doing business in both Florida and Georgia. The taxpayer is involved in several business functions, mostly centered on the XXX of wiring and XX within the XXX and XXX of buildings. [Taxpayer] is seeking clarification on the taxability of [its] product and service offerings . . . .

[Taxpayer] has been classified as a “dual operator” as defined in Rule 12A-1.051(9)[, Florida Administrative Code,] under audit.

[Taxpayer’s] contracts are classified as lump sum contracts because not all materials are specifically identified as a retail sale plus installation contract, in Rule 12A-1.051[(3)(d), Florida Administrative Code.]

***

In addition, most contracts are mixed contracts, subject to Rule 12A-1.051(8)(d)[, Florida Administrative Code,] because the contract “clearly allocates the contract price among the various elements of the contract, and such allocation is bona fide and reasonable in terms of the costs of materials and nature of the work to be performed.” Any contract for one particular element would be solely classified as a [] lump sum contract.

The various elements included in the lump sum or lump sum, mixed contracts are 1.) security systems and installations, 2.) access systems and installations, 3.) closed caption television systems and installations, 4.) entertainment systems and installations, 5.) vacuum systems and installations, 6.) telephone networking systems and installations, 7.) computer networking systems and installation, 8.) controlled lighting systems and partials installations, and 9.) security monitoring services. All installation services are subject to state licensing requirements and the fire protection services included in the Security Systems and Installation must be permitted for commercial contracts.

Security Systems and Installations:

Security Systems and Installations include all activities necessary to install wiring and cabling within the walls of the house, a central control panel, motion detectors, fixed communications systems permanently attached to the structure with no use outside of the security system, fire control panels/boxes, fire alarms, and smoke detectors that are attached to the walls and/or ceilings with screws and brackets and wired into the system to monitor sprinkler systems that have already been installed. . . .

Taxpayer is currently taxing the entire contract for security systems and installations as if all components of the system become improvements to real property.

Access Systems and Installations:

Access Systems and Installations include all activities necessary to install wiring and cabling within the walls of the house or to a gate, magnetic gate and door locks, and access monitors with key cards or keypads that allow entry access.

Access Systems and Installation are being taxed to the contractor or property owner as allocated mixed contracts for tangible personal property. However, [Taxpayer] believes that the Access Systems should not be taxed to the contractor or property owner as allocated mixed contracts for real property improvements . . . .

Taxpayer believes the keycards are the only items that remain tangible personal property once the contract is complete.

Closed Circuit Television Systems and Installations:

Closed Circuit Television Systems and Installations include all activities necessary to install wires and cables within the walls of the house, a central control panel, video cameras, communication systems, and closed circuit televisions.

Closed Circuit Television Systems and Installations are being taxed to the contractor or property owner as allocated mixed contracts for tangible personal property . . . .

Entertainment Systems and Installations:

Entertainment Systems and Installation include all activities necessary to install wiring and cabling within the walls of the house, speakers that are permanently implanted within the walls or ceilings of the house, televisions that are mounted with brackets to the walls of the house, and receivers that may be housed by built-ins (cabinets, specifically created for these receivers that are imbedded into the walls of the house) or may be stand-alones.

Entertainment Systems and Installations are being taxed to the contractor or property owner as allocated mixed contracts for tangible personal property . . . .

Vacuum Systems and Installations:

Vacuum Systems and Installations include all activities necessary to install a suction hose imbedded within the walls, a removable suction tank that is hung on the walls of the building with brackets, and a detachable hose that is moved from room to room and attached to outlets for the suction hose in order to perform the vacuuming function.

Vacuum Systems and Installations are being taxed to the contractor or property owner as allocated mixed contracts for tangible personal property . . . .

Telephone Networking Systems and Installations:

Telephone Networking Systems and Installations include all activities necessary to install wire and cable, an attached control box, and telephones specifically designed to work with the control box.

Telephone Networking Systems and Installations are being taxed as allocated mixed contracts for tangible personal property . . . .

Computer Networking Systems and Installations:

Computer Networking Systems and Installations include activities necessary to install wiring systems that aid in computer networking. This may include installing a router on the computers.

Computer Networking Systems and Installations are being taxed to the contractor or property owner as allocated mixed contracts for tangible personal property . . . .

Controlled Lighting Systems and Partial Installations:

For Controlled Lighting Systems and Partial Installations[, Taxpayer] installs a low voltage wire and a control panel. The low voltage wire connects the lighting to the control panel. An electrician installs high voltage wiring connecting the lights, the control panel, and test switches. Once the test switches have been installed and tested, [Taxpayer] supplies the electrician with the controlled lighting switches, which are then installed by the electrician. Once the controlled lighting switches are installed, [Taxpayer] programs the control panel and possibly a remote control. [Taxpayer] bills the client or contractor for the installation of the low voltage wiring, the control panel, the remote control, if included, and the programming.

The sale of controlled lighting switches, furnished but not installed, does not qualify as a real property contract . . . . The predominant nature of the contract is for the controlled lighting switches. . . . Controlled Lighting Systems and Partial Installations are being taxed to the contractor or property owner as allocated mixed contracts for tangible personal property . . . .

Security Monitoring Services:

[Taxpayer] purchases Security Monitoring Services from a vendor to resell to a customer.

[Taxpayer] charges tax on the Security Monitoring Services. . . .

Subsequent Services:

[Taxpayer] is fairly regularly called back to provide repairs, additions, improvements and/or upgrades to the systems that it installs. In addition, [Taxpayer] may provide a service contract to inspect, maintain and repair one or more of the installed systems.

These Subsequent Services are taxed in the same manner as the original service . . . .

Purchases:

[Taxpayer] is seeking clarification on the use taxability of [its] purchases related to [its] product and service offerings, because the prior audit did not clearly identify the tax treatment for [Taxpayer’s] purchases in terms easily understood by [Taxpayer].

Current Practices:

[Taxpayer] makes all purchases in Florida, including material used in Georgia.

[Taxpayer] is currently paying sales tax to all of [its] suppliers with the exception of the suppliers of materials used in lighting and entertainment systems. Until January 1, 2007, [Taxpayer] was self-assessing use tax on materials used in lighting and entertainment systems.

Proposed Practices:

Sales and use taxes do not apply to transfers of real property. Because the real property contractor does not resell the materials he uses as tangible personal property, the contractor is the ultimate consumer responsible for paying the sales tax on purchases within the definition in § 212.02(14)[, Florida Statutes,] and [] Rule 12A-1.051[, Florida Administrative Code.] Under subsections (2) and (3) of that rule, the portion of [Taxpayer’s] contracts allocated to predominantly real property contracts are taxable on the cost of the materials they use and should not collect any tax from their customers. As described above, this includes only the Security and Access Systems and Installations, if Access Systems and Installations prove to be real property transactions.

According to Rule 12A-1.051(8)(b)[, Florida Administrative Code,] sales and use taxes apply to transfers of tangible personal property. Since the taxes are being collected from [Taxpayer’s] customers, [Taxpayer] should not pay taxes on contracts that are predominantly tangible personal property. As described above, this includes all of [Taxpayer’s] product offerings with the exception of the Security Monitoring Services and the Security and Access Systems and Installations, if Access Systems and Installations prove to be real property transactions.

Pursuant to Rule 12A-1.0161(4)(a), (b), (c), and (d), [Florida Administrative Code, Taxpayer] can purchase the Security Monitoring Services tax exempt for resale.

[Taxpayer] is a “dual operator” and as such, proposes to purchase all materials tax exempt, and remit use tax to Florida at the time the materials are used by [Taxpayer] in a predominantly real property contract, as set forth in Rule 12A-1.051([8), Florida Administrative Code].

Taxpayer proposes that materials purchased for use in fulfilling Georgia contracts are not subject to Florida use tax, because they are “never intended for ‘use or consumption in this state.’”

REQUESTED ADVISEMENT

The petition sets forth the following questions:

  • Is [Taxpayer] correctly taxing its customers for all categories of sales? If not, which sales should be reclassified and why?
  • Do the Proposed Practices for sales of Access Systems and Installations and purchases accurately reflect a legal and proper manner of treatment for [Taxpayer’s] taxes related to sales of Access Systems and Installations to purchases? If not, what would be the correct treatment?
  • Do the Taxpayer’s tangible personal property contracts qualify as “items assembled to comprise a working unit” subject to the discretionary sales surtax exception for single items over $5,000?
  • As some systems are installed without all of the component parts listed, please identify the articles within each system that create a tangible personal property contract, which if not included in a particular contract would make that contract a real property contract.

Applicable Authority

Section 212.05, Florida Statutes, generally imposes tax on the sale of tangible personal property. The tax is based on the “sales price,” which term is defined in section 212.02(16), Florida Statutes, in pertinent part to mean “the total amount paid for tangible personal property, including any services that are a part of the sale.” Section 212.05(1)(i)1.a., Florida Statutes, specifically imposes tax on “detective, burglar protection, and other protective services,” which includes security alarm monitoring services.

Section 212.06(14), Florida Statutes, provides guidance in determining whether a person is making improvements to real property by providing the following relevant definition, which states in part:

(b)“Fixtures” means items that are an accessory to a building, other structure, or land and that do not lose their identity as accessories when installed but that do become permanently attached to realty. . . .

Rule 12A-1.051, Florida Administrative Code, discusses the taxability of improvements to real property, and it states in pertinent part as follows:

(8) Mixed contracts. A real property contract may also include materials and labor that are not real property improvements. A contract that includes both real property work and tangible personal property is referred to in this subsection as a mixed contract. . . . A mixed contract is one that involves a real property improvement, maintenance, or repair and also involves providing tangible personal property that remains tangible personal property and does not become part of the real property. In the case of a mixed contract, taxability depends upon the predominant nature of the work performed under the contract and upon the contract terms.

(a) If the predominant nature of a mixed contract is a contract for real property improvements, taxability will be determined as if the contract were entirely for real property. For example, a residential developer routinely provides some items of tangible personal property, such as free standing appliances, with new homes sold under cost-plus contracts. The predominant nature of the contract is for a dwelling. The developer should pay sales or use tax on the appliances. A contractor constructs a factory under a turnkey contract that includes providing and installing machinery and equipment that is not exempt from sales and use tax. The contract is predominantly for a factory, a real property improvement, and the contractor should pay use tax on the cost of the machinery and equipment. No tax is collected from the property owner in either case, even though some tangible personal property is included in the project.

(b) If the predominant nature of a mixed contract is a contract for tangible personal property, taxability of the contract will be determined as if the contract were entirely for tangible personal property. For example, a vendor of a mechanical conveyor system for a warehouse provides reinforced concrete foundations and embeds steel plates in the concrete to permit installation of the equipment by bolting it to the plates. The contract is predominantly for the sale of equipment. The contractor should buy the equipment, concrete, and steel plates tax exempt by extending a copy of the contractor's Annual Resale Certificate (form DR-13) to the selling dealer and charge tax on the full price charged to the customer.

(c) The determination of the predominant nature of a contract will depend upon the facts and circumstances of each case. Consideration will be given to the description of the project and the responsibilities of the contractor as set forth in the contract. Consideration will also be given to the relative cost of performance of the real property and tangible personal property components of the contract.

(d) If a mixed contract clearly allocates the contract price among the various elements of the contract, and such allocation is bona fide and reasonable in terms of the costs of materials and nature of the work to be performed, taxation will be in accordance with the allocation. For example, a residential developer builds and sells a home on a cost plus basis, but the contract provides separately stated prices for the sale and installation of certain optional free standing appliances that are tangible personal property and are not classified as real property fixtures. The contractor may purchase those appliances by issuing a copy of the contractor's Annual Resale Certificate (form DR-13) to the selling dealer and charge sales tax on the price paid for the appliances, including installation, by the home buyer. The contractor is responsible for paying tax on all the materials that are included in the cost plus price of the home, other than the separately itemized appliances. Similarly, a manufacturer who sells and installs a mechanical conveyor system in a warehouse could state a separate charge in the contract for providing reinforced concrete with embedded steel plates in the warehouse floor to support the conveyor. The conveyor system is machinery or equipment and is therefore tangible personal property. The concrete and plates would be considered a real property improvement. The contractor should pay tax on the materials used for the real property part of the contract and not charge tax to the customer on the related charge. The customer should pay tax on the rest of the contract price allocable to the conveyor machinery itself.