Reviewer Wayne Eggert
Overview
Please provide an overview of how sales and use tax is imposed generally and how it is imposed on contractors.
The Florida sales tax is imposed on the sale of tangible personal property, rentals, and certain enumerated services. The use tax is imposed on the use, storage, distribution or consumption of tangible personal property and certain enumerated services. In general, contractors are considered the final consumers of materials used when performing services on real property. The contractor is liable for payment of sales tax at the time of purchase, or use tax at the time of consumption.
Contracts falling into the ?itemized contract? category require that the final consumer pay sales tax to the contractor.
Sales and Use Tax Imposition on Contractors
a. What are the sales tax requirements of purchasing materials and supplies for use in a construction project? (e.g., is the tax based on the lump sum amount of the contract, or is the tax based on the supplies and materials used by the contractor, or some other alternative ? please explain)?
The sale of materials and supplies to contractors are considered retail sales if the contract is a lump sum, cost plus, fixed fee or guaranteed price contract. F.A.C. Rule 12A-
1.051(1)(e). Contracts in which materials are itemized and the completion of work is done for an additional price or on the basis of time consumed are considered sales of tangible personal property and tax must be collected from the purchaser. Installation charges are exempt even if separately stated, unless the installation is for items in Rule 12A-1.016 (e.g. window air conditioning units, satellite dishes). F.A.C. Rule 12A- 1.051(1)(f), TAA. No. 83(A)-083.
b. Does the State allow contractors to purchase materials exempt: 1) for resale; 2) under direct permit authority; 3) for use in a project of an exempt organization; 4) other? If yes, what documentation must the contractor retain to evince the exempt character of the transaction?
1) Contractors purchasing materials for an itemized contract may provide a resale
certificate in lieu of paying tax. F.A.C. Rule 12A-1.051(1)(f). 2) Direct pay permits are issued for purchases which, at the time of purchase, it is unknown whether the purchases will be consumed for the dealer?s own use, or will become part of a product
manufactured for sale. In order to qualify for a direct pay permit, the contractor would have to purchase at least $100,000 worth of taxable tangible personal property anually. F.A.C. Rule 12A-1.0911(1)(b). 3) Contractors purchasing materials for use in public works contracts for governmental bodies must pay sales tax as the final consumer. F.A.C. Rule 12A-1.094(2), TAA No. 85A-024.
Improvements to Realty
a. Please describe the sales and use tax implications of improving realty. Please address factors used to determine whether the installation of property constitutes a capital improvement.
If property purchased under the terms of a construction contract is incorporated into real property, the contractor is responsible for sales tax on the materials and supplies used, except in the case of an itemized contract, in which case the final consumer is responsible for the sales tax on materials. F.A.C. Rule 12A-1.051(2). A consumer should expect to have sales tax included as a component part of the contract. It is recommended that a consumer obtain a statement from the contractor indicating that all sales and use taxes have been paid on the materials and supplies consumed in the project.
A contractor does not have to collect tax on its charge for installing tangible personal property if the personal property becomes part of real property (Except as in III a. above). Real property is defined as the “surface land, improvements thereto, and fixtures.” Sec. 212.02(10)(h) F.S.
The taxability to the final consumer in contracts where both real and personal property is installed is dependent upon the dollar value of labor and materials furnished. King’s Bay Yacht and Country Club, Inc. v. Ray E. Green, etc. et al., 173 So.2d 509, (April 6, 1965). Repair and Maintenance Contracts/Services
a. Please discuss the sales and use taxation of repair and maintenance contracts. Please include a description of the tax base.
Sales tax is not charged to the final consumer for contracts to repair real property as listed in III.a. above. Sales tax is due from the final consumer for both labor and materials used in performing repair and maintenance services on personal property, even if the charges are separately stated. F.A.C. Rule 12A-1.016(2), (3a).
b. Please discuss taxable services related to the use of contractors.
Installation of tangible personal property not becoming part of real property is taxable. Specific items for which the installation is taxable are enumerated in F.A.C. Rule 12A- 1.016 (3). The fabrication or manufacturing of tangible personal property by a contractor to be used in a contract is subject to tax. F.A.C. Rule 12A-1.051(5)(a).
Use Taxes
a. Describe the application of the State’s use tax on material, supplies, and services purchased outside the State and used within the State?
The use in Florida of materials and supplies purchased outside of the state are subject to use tax on their purchase price. Sec. 212.06(1)(a) F.S. No tax is due, however, if the materials and supplies were purchased and used six months or more in another state previous to their use in Florida. F.A.C. Rule 12A-1.091(2)(a). If tax has been paid in another state, the tax previously paid can be subtracted from the use tax due to arrive at the use tax that is payable. F.A.C. Rule 12A-1.091(3). TAA No. 91A-041.
Construction Contracts
a. Type of Contract Issues: Does the State address different types of contracts and, if so, does the State have specific rules that apply to different types of contracts? Are there specific elements of contracts that are looked to by the state?
The state addresses four different types of contracts for services to real property. The first three types are lump sum, cost plus or fixed fee, and guaranteed price. For these types of contracts, the contractor must pay tax on the supplies and materials used. In the fourth type, the materials are specifically described or itemized for an agreed price, and the work is completed either for an additional price or on the basis of time consumed. For these contracts, the final consumer must pay the tax on the materials. The cost of installation is not taxable if separately stated. F.A.C. Rule 12A-1.051(2).
b. Does an exemption exist for the transfer of tangible personal property from a contractor to a customer, which would allow the use of a split contract (not an exemption for direct purchases by the contractor).
No.
c. Does the State have specific contractor regulations?
Yes, Rule 12A-1051 ? Sales to or by Contractors Who Repair, Alter, Improve and Construct Real Property.
d. What other definitions or terms of contracts are addressed in the sales and use tax statutes and regulations?
Rule 12A-1.016 discusses installation of tangible personal property by contractors. Rule 12A-1.094 (1)(a) defines ?contractor?. ?Contractor is one who is engaged in the repair, alteration, improvement, or construction of real property. Contractors include, but are not limited to, persons engaged in building, electrical, plumbing, heating, painting, decorating, ventilating, paperhanging, sheet metal, roofing, bridge, road, waterworks, landscape, pier, or billboard work. This definition includes subcontractors.?
e. Discuss the tax obligations of subcontractors.
Purchases of materials and supplies by a subcontractor are subject to the same rules that are applied to contractors. Subcontractors must maintain records to show that the
appropriate tax has been accrued and remitted or paid to their vendors. F.A.C. Rule 12A-1.051(3).
Machinery and Equipment Exemption and Contractors
a. Does the State have a manufacturing exemption for machinery and equipment purchased to produce tangible personal property? Mention any permits or
certificates which must be obtained to qualify for the exemption.
The State has a manufacturing exemption for industrial machinery and equipment used in a new manufacturing or processing business. There is also an exemption for tax in excess of $50,000 per calendar year for industrial machinery and equipment used to increase the productive output of an expanding manufacturing or processing business by 10 per cent or more. Sec. 212.08(5) F.S., F.A.C. Rule 12A-1.096.
Permits and certificates required include:
(1) Temporary tax exemption permit requested from the State Bureau of Tax Information and Assistance.
(2) Registration with the WAGES Program Business Registry which establishes a commitment on the part of the taxpayer to hire WAGES program participants. Tax previously paid on qualified machinery and equipment may be refunded by following the procedures set forth in Rule 12A-1.096.
b. Is there a specific State exemption for a contractor to take advantage of the machinery and equipment exemption?
The temporary tax exemption permit may be extended to vendors or authorized
contractors operating under the lump sum, cost plus, fixed fee guaranteed price or any other type of contract. The authorized contractor may extend the temporary tax
exemption permit to its vendors for the purpose of purchasing qualifying machinery and equipment tax exempt. F.A.C. Rule 12A-1.096(4)(b)1.
c. How may a customer take advantage of the machinery and equipment exemption in the State when using a contractor?
See VII. b. above.
d. What are the rules for obtaining an exemption certificate or permit in the State? See F.A.C. Rule 12A-1.038.
A resale certificate may be issued by a contractor for purchases of materials and supplies for an ?itemized contract?. F.A.C. Rule 12A-1.051(1)(f). The contractor may not issue a resale certificate for materials purchased for other types of contracts. While the state of Florida does not issue an official resale certificate form, a suggested format is provided (DR-97).
An authorized contractor may extend a temporary tax exemption permit to its vendors for the purpose of purchasing qualifying machinery and equipment tax exempt. F.A.C. Rule 12A-1.096(4)(b)1.
Contractors may also utilize a direct pay certificate (see II.b. above). GENERAL PLANNING SUGGESTIONS
Please discuss any planning opportunities or methods to reduce sales and use tax exposure.
While Florida does not have an exemption for manufacturing machinery and equipment per se, there is an exemption for a new manufacturing or processing business. Also, purchases of machinery and equipment that achieve an annual threshold where expansion of business is 10 per cent or more are eligible for exemption.
Manufacturing businesses will want to be alert to these opportunities to minimize sales and use tax on purchases of machinery and equipment. Also, many businesses
accomplish purchasing by having contractors purchase machinery and equipment. In Florida, there is a process available for the contractor to step into the shoes of the manufacturer to insure an exemption is obtained even though equipment is not directly purchased by the manufacturer.
Finally, being aware of the differences in tax liability for the four types of contracts will allow the customer to make informed choices as to how the contract should be structured and who is responsible for the sales or use tax.
Conducting Business with a Registered Contractor
Doing business with a contractor that is properly registered for sales and use tax in the state where the project is located is advised. Ideally, a contractor would be required to prove sales and use tax registration before the contract is awarded. The biggest tax problems under audit arise when a contractor is not registered in the state where the work is performed, leaving the customer footing the tax bill on a contract that was believed to be tax inclusive. Dealing with a reputable and registered contractor is the best tax advice that can be given to a project manager.