Sales and Use Tax TAA 14A-011 Emergency Call Systems
QUESTION: IS TAXPAYER’S EMERGENCY CALL SYSTEM THE SALE AND INSTALLATION OF TANGIBLE PERSONAL PROPERTY OR AN IMPROVEMENT TO REAL PROPERTY?
ANSWER: TAXPAYER WILL NEED TO MAKE A DETERMINATION WHETHER EACH CONTRACT CONSTITUTES AN IMPROVEMENT TO REAL PROPERTY OR A SALE OF TANGIBLE PERSONAL PROPERTY ON A CONTRACT-BY-CONTRACT BASIS. THE DETERMINATION WILL DEPEND ON THE MAKEUP OF EACH CONTRACT, SINCE EACH CONTRACT IS BASED ON THE NEEDS OF THE CUSTOMER.
April 23, 2014
Re: Technical Assistance Advisement 14A-011
Sales and Use Tax – Emergency Call Systems
Subsection: 212.02, 212.05, 212.06, Florida Statutes (F.S.) Rules: 12A-1.051, Florida Administrative Code (F.A.C.) Petitioner: XXXX [hereinafter “Taxpayer”]
Dear XXXX:
This letter is a response to your petition dated July 19, 2013, 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 Section 213.22, F.S.
Issue
Whether Taxpayer’s emergency call system is the sale and installation of tangible personal property or an improvement to real property.
Presented Facts
Your petition sets forth the following information:
[Taxpayer] is in the business of manufacturing emergency call systems that can be sold as either “equipment only” which would be taxed as tangible personal property (TPP) or the purchaser can contract with the [Taxpayer] to provide and install the system. . . .
A previously performed Florida Sales and Use tax audit took the position that upon installation of the call system by the [Taxpayer], the [Taxpayer] was then the end user of the TPP and converted the TPP to real property (RP) requiring the company to calculate a manufactured cost upon which to remit use tax to Florida Department of Revenue. . . .
The emergency calls systems are installed in senior living facilities. According to Taxpayer’s website, the systems can be hardwired systems or wireless systems. Your petition includes an unexecuted sample contract for purchase and installation, as well as two executed contracts. According to the proposals, the customer is responsible for the wiring from the console to the head end equipment (p.3). Taxpayer does not commence installation of the equipment until the customer notifies Taxpayer that 120 volt power service is available at the installation locations (p.10).
The emergency call systems are comprised of a customizable set of equipment. Equipment can include emergency call station pull cords, intercom emergency call stations, pocket pagers, door monitors, emergency call cords, hardwired dome lights, staff radios, and blank cover plates (installed over existing stations). The system also includes various selected software interfaces and monitoring options, depending on the type of services the customer requires.
It appears that some of the equipment is hardwired, such as the pull cord stations, call stations, and hardwired dome lights. Receivers may be wireless or hardwired. The remainder of the equipment does not appear to be hardwired. Taxpayer does not install the wiring, but it does attach the equipment to the wiring, as needed. The console, head end equipment, staff radios and pagers, resident pendants, and transmitters are not hardwired.
Both executed contracts are lump sum contracts. Both include specific lists of equipment included in the contracts (Exhibits A of the contracts), but the price of the individual items are not listed. One contract, dated XXXX (herein “Contract A”) includes both hardwired equipment and wireless equipment. The other contract, dated XXXX (herein “Contract B”), appears to include only wireless and plug-in equipment, and it does not appear to include any hardwired equipment.
The customer may elect to purchase Taxpayer’s “Lifetime Upgrades and Care.” This option includes among other things, no-charge annual system upgrades which includes new software, new firmware, and new hardware (pendants, pull cords, desk consoles, etc.). It appears that Contract B includes this option.
Your petition asserts that the customers treat the systems as tangible personal property for income tax purposes.
Taxpayer believes that the system remains tangible personal property after installation.
Applicable Authority
Section 212.05, F.S., generally imposes tax on the sale of tangible personal property. The tax is based on the “sales price,” which term is defined in s. 212.02(16), F.S., in pertinent part to mean “the total amount paid for tangible personal property, including any services that are a part of the sale.”
Section 212.06(14), F.S., provides guidance in determining whether a person is making improvements to real property by providing the following relevant definition, stating 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, F.A.C., 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.
Discussion and Response
When Taxpayer enters into a contract for equipment only, then Taxpayer is making a sale of tangible personal property, and it should collect tax on the full sales price of the equipment from the customer, unless the customer extends to Taxpayer a valid exemption certificate.
When Taxpayer enters into a contract to furnish and install an emergency call system, the contract may contain items that do become improvements to real property upon installation (hardwired emergency call cords and hardwired dome lights), and it may contain items that remain tangible personal property after the installation process (Head End Equipment, Console, pagers, staff radios, etc.) Such contracts are known as "mixed contracts," and they are discussed in Rule 12A-1.051(8), F.A.C., quoted above.
Please note that elements of the emergency call system which Taxpayer hardwires into the building, such as hardwired emergency call cords and hardwired dome lights, do become improvements to real property upon installation. Taxpayer is making the improvement when it installs these items regardless that Taxpayer does not install the actual wiring inside the walls of the building.
There are three ways in which the tax can apply to a mixed contract, based on the predominant nature of the contract or whether a clear allocation of the price is made between the tangible personal property sold and the improvements to real property.
First, if the predominant nature of the mixed contract is for the improvement to real property, then the taxation of the contract is as if the entire job is an improvement to real property. The contractor will pay tax on its purchase of all materials and supplies used in the performance of the contract, and it will not charge tax to its customer in any amount.
Second, if the predominant nature of the mixed contract is for the sale of tangible personal property, then the taxation of the contract is as if the entire job is a sale of tangible personal property. The contractor, who must register as a dealer, will issue a copy of its valid Annual Resale Certificate to its supplier of the materials, and it will charge tax to its customer on the entire amount of the contract, including all materials and all labor.
Third, if the mixed contract clearly allocates the cost of the various elements of the contract, then the taxation of the contract will be in accordance with the allocation. The portion of the contract price allocated to improvements to real property will be taxed as improvements to real property. The contractor will pay tax on all materials and supplies used in the performance of the real property improvement portion of the contract, and no tax will be charged to the customer on this portion of the contract. The portion of the contract price allocated to the sale of tangible personal property will be taxed as a sale of tangible personal property. The contractor, who must register as a dealer, will issue a copy of its valid Annual Resale Certificate to its supplier of the materials, and it will charge tax to its customer on the entire amount of the contract allocated to the sale of tangible personal property, including all materials and all labor. Contractors using mixed contracts that clearly allocate the cost of the contracts may do business with suppliers that unable to charge tax on some materials but not on others to suit the contractor’s needs. Such suppliers may not collect tax on any of the materials. In such cases, the contractor will be responsible for tracking the materials, and accruing tax on those materials which are used in the performance of the real property improvement portion of the contract.
The documentation provided with the petition indicates that the contract price is not allocated among the various elements of the contract. The contracts should be taxed in accordance with the predominant nature of each individual contract. In some cases, the predominant nature may be that of an improvement to real property, depending upon the particular combination of elements the customer chooses. Taxpayer should treat the entire contract as an improvement to real property, even though a minority of the elements remains tangible personal property.
In other cases, the predominant nature of the contract will be that of a sale of tangible personal property. Contract B appears to be such a contract, since none of the elements included in the contract appear to be hardwired. Taxpayer should treat this contract as a sale of tangible personal property, and tax it accordingly.
Contract A contains elements that become improvements to real property upon installation, as well as elements that remain tangible personal property. Taxpayer must determine the relative cost of the various elements of the contracts to determine whether it is predominantly an improvement to real property or a sale of tangible personal property, and the contract should be taxed accordingly.
This TAA is only intended to address the issue of whether the sale of Taxpayer’s emergency call system is the sale and installation of tangible personal property or an improvement to real property, and it does not address the taxability of other aspects of the contracts/proposals provided.
Conclusion
Taxpayer will need to make a determination whether each contract constitutes an improvement to real property or a sale of tangible personal property on a contract-by-contract basis. The determination will depend on the makeup of each contract, since each contract is based on the needs of the customer.
Contract B appears to be a sale of tangible personal property, and the contract should be taxed as such. Contract A is a mixed contract, containing hardwired items that become improvements to real property upon installation, and items that remain tangible personal property.
Closing Statement
This response constitutes a Technical Assistance Advisement under s. 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 s. 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., and are subject to disclosure to the public under the conditions of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this response, deleting names, addresses, and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 10 days of the date of this letter.
Sincerely,
Sara D. Faulkenberry, Senior Tax Specialist Technical Assistance and Dispute Resolution
Control # 148945
