Were built-in hotel armoires, TV towers, drawers, and shelves taxable furniture or real-property improvements?

Plain-English summary

The specified recessed armoires, TV/VCR towers, drawers, and shelves were improvements to real property. The mixed contract separately allocated real-property improvements and tangible personal property, so the designer should not have billed sales tax as a separate line item on the qualifying built-ins.

The cost-plus calculation nevertheless produced no materials-tax refund for the hotel owner: the tax on materials was part of the designer's cost, and the Department's calculation found the owner actually owed one cent more. Tax charged on delivery and installation of the qualifying real-property improvements was refundable by the designer.

What this means for you

Classification and refund amount are separate questions. Even when an installed item is a real-property improvement, contract pricing and cost allocation can determine whether any materials-tax refund remains.

Common questions

Q: Was every furnishing in the hotel treated as real property? No. The ruling addressed specified built-ins and described the overall agreement as a mixed contract.

Q: Was a materials-tax refund due? No. The cost-plus calculation eliminated it.

Q: What tax was refundable? Tax charged on delivery and installation of the items classified as real-property improvements.

Citations and references

• Fla. Admin. Code r. 12A-1.051 — contractors and improvements to real property
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-049

Original ruling text

SUMMARY

QUESTION: Are the recessed TV armoires, Kidsuite TV/VCR
towers with sleeper compartments, Kidsuite TV/VCR towers
without sleeper compartments, and Kidsuite built-in drawers
with shelves above are properly classed as real property,
and, if so, was tax due on the purchase of these items?

ANSWER - Based on Facts Below: The items in question are
classed as improvements to real property. The contract is
a mixed contract, but the costs of the contract are clearly
allocated between items that are improvements to real
property and items of tangible personal property.
Therefore, Designer should not have charged tax as a
separate line item to Taxpayer on these items. However,
the contract between Designer and Taxpayer is a cost plus
contract. The net result of the Designer's adding the tax
on the materials that is part of the Designer's cost ends
with no refund due to Taxpayer for the materials charges.
Taxpayer is due a refund of tax from the designer for tax
paid on the delivery and installation charges for the items
classed as improvements to real property.

Nov 14, 2002

Re: Technical Assistance Advisement 02A-049
Sales and Use Tax - Interior Design Contract
Rule: 12A-1.051, F.A.C.
Petitioner: XXX (herein "Taxpayer")
FEI: XX

Dear :

This letter is a response to your undated petition received on
June 27, 2002, 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, 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.

FACTS

In January 1997, Taxpayer entered into an agreement for design
services with XX, (hereinafter "Designer"). The scope of the
work is set forth as follows:

Interior design services for (800) all-suite hotel
utilizing various suite themes to attract all markets.
Interior design of all public areas.

The agreement states in pertinent part as follows:

Services rendered will be interior design, specifications
for all furnishings, selection of colors, specification of
materials for surfaces: floors, walls, windows and ceiling,
lighting specifications, and d‚cor specifications.
[Designer] will furnish for owner's approval preliminary
design plans with elevations, reflected ceiling plan,
details, color/materials board, furnishing specifications
and on-site inspections during construction and
installation of design materials....

Materials purchased through [Designer] will be at 5% above
actual manufacturer cost.... All receiving and
installation of FF&E will be by owner unless otherwise
specified. All freight costs to be billed at net carrier
cost; Florida sales tax to be billed where applicable....

Three pages of the 16 total pages of specifications were
provided, which pages include information on the items that are
the subject of this advisement. These items are recessed TV
armoires, Kidsuite TV/VCR towers with sleeper compartments,
Kidsuite TV/VCR towers without sleeper compartments, and
Kidsuite built-in drawers with shelves above. It is obvious
from the other items listed in the provided pages of
specifications that the majority of the items are classed as
tangible personal property.

Based on the pictures provided of the items, it appears that the
items are built into recesses in the walls.

Also provided were the invoices for the items in question.
Delivery and installation charges were invoiced separately from
the items in question. The items in question were sometimes
included on invoices with other furniture, fixtures, and
equipment. Florida sales tax was charged on all items, and it
was also charged on the delivery and installation charges. The
delivery and installation charge invoices include only a single
lump sum charge; the delivery charge was not separately stated
from the installation charge.

REQUESTED ADVISEMENT

Advice is requested whether the recessed TV armoires, Kidsuite
TV/VCR towers with sleeper compartments, Kidsuite TV/VCR towers
without sleeper compartments, and Kidsuite built-in drawers with
shelves above are properly classed as real property, and, if so,
whether tax was due on the purchase of these items.

LAW AND DISCUSSION

Based on its language, the contract between Taxpayer and
Designer contemplates and intends that the materials involved in
the job are tangible personal property. It is also clear that
the four items in question are properly classed as improvements
to real property. A third thing that is clear is that the
materials total of the items in question is less than the
materials total of the items of tangible personal property on
the three pages of the sixteen total pages of the specifications
that were provided with the request. However, the contract,
which is a cost plus contract, clearly allocates costs between
items that are classed as improvements to real property, and
items of tangible personal property.

Rule 12A-1.051(8), Florida Administrative Code, discusses the
applicability of tax to contracts that include items of tangible
personal property and improvements to real property (known as
"mixed contracts"), and it states 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 not the
same as a contract described in paragraph (3)(d) of this
rule. Paragraph (3)(d) deals with a real property contract
in which the contractor separately itemizes and prices all
the materials that will be incorporated as part of the real
property. 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 costplus 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.

(e) This subsection does not affect any exemption provided
in Chapter 212, F.S., for machinery or equipment that may
be claimed by a contractor based on a temporary tax
exemption permit, affidavit, or other authorized
certification by the owner of real property. For example,
purchases of certain equipment for generating electrical
power or of certain machinery for manufacturing tangible
personal property for sale are exempt from sales and use
taxes. In order for the property owner to receive the
benefit of these exemptions, it has been specifically
provided that contractors who purchase and install the
exempt items may claim the exemption based on the property
owner's providing the required documentation of
entitlement. The guidelines on mixed contracts are not
intended to impact these exemptions. In the case of a mixed
contract that is treated as a real property contract, the
contractor is still entitled to purchase the qualified
equipment or machinery tax-exempt. In the case of a mixed
contract treated as a sale of tangible personal property,
the contractor would purchase the equipment or machinery by
issuing a copy of the contractor's Annual Resale
Certificate (form DR-13) to the selling dealer and accept
the property owner's authorized documentation of exemption
in lieu of charging tax on the subsequent sale of the
equipment or machinery to the property owner. See Rule 12A1.038, F.A.C., for tax exempt sales made to entities that
hold a valid Consumer's Certificate of Exemption. (Emphasis
Supplied)

As stated, in this contract, costs are clearly allocated between
improvements to real property and items of tangible personal
property. According to the terms of the contract, the price of
items to Taxpayer is the designer's cost plus 5 percent.

In a contract for an improvement to real property, the tax is
part of the contractor's cost. In this case the tax on the
subject items would be part of the designer's cost. Since the
contract is a cost plus 5 percent contract, the cost which the
designer will mark up by 5 percent is actually higher by the
amount of sales tax due on the designer's cost of the materials.
The mathematics for refunding Taxpayer the tax, marking up the
designer's cost by the amount of tax it now owes, and charging
Taxpayer the new contract amount for the materials works out as
follows. For purposes of these calculations, the amounts
presented by Taxpayer are used. The amounts are not verified or
audited.

Amounts originally charged by designer:

Price

Tax

Total Paid

Edgebanding

$ 4,242.28

$

254.54 $ 4,496.82

Electrical Plates

$ 1,002.24

$

60.13 $ 1,062.37

TV Amoire (F-12)

$ 362,612.25

$ 21,756.74 $384,368.99

Kidsuite TV/VCR
Tower w/Sleeper
(F-34)

$ 63,808.99

$ 3,828.54 $ 67,637.53

Kidsuite TV/VCR
Tower w/o Sleeper
(F-34A)

$ 60,125.65

$ 3,607.54 $ 63,733.19

Kidsuite Built-in
Drawers (F-37)

$ 77,080.44

$ 568,871.85

$ 4,624.83 $ 81,705.27

$ 34,132.32 $603,004.17

Designer's Cost plus 5 percent (excluding tax)

$568,871.85

Less: 5 percent markup

$ 27,089.14

Designer's Cost before tax

$541,782.71

Plus: Tax (Part of Designer's Cost)

$ 32,506.96

Designer's New Cost including Designer's Tax

$574,289.67

Plus: 5 percent markup on Designer's New Cost

$ 28,714.48

Correct Amount Due from Taxpayer

$603,004.18

Based on these calculations on the materials, Taxpayer is not
due a refund, but it actually owes Designer 1 cent more.

*Note: Taxpayer's figures include amounts of $9,998.10, $599.89,
and $10,597.99, respectively for item F-12A, Chest/Armoire in
Suiteheart. Taxpayer did not provide any information about this
item, and no opinion is made as to whether this item should be
classed and included as improvements to real property.

However, tax was not due on the delivery and installation
charges for the items classed as improvements to real property.
Taxpayer is due a refund of tax from the designer for tax paid
on the delivery and installation charges for the items classed
as improvements to real property.

CONCLUSION

The items in question are classed as improvements to real
property. The contract is a mixed contract, but the costs of the
contract are clearly allocated between items that are
improvements to real property and items of tangible personal
property. Therefore, Designer should not have charged tax as a
separate line item to Taxpayer on these items. However, the
contract between Designer and Taxpayer is a cost plus contract.
The net result of the Designer's adding the tax on the materials
that is part of the Designer's cost ends with no refund due to
Taxpayer for the materials charges. Taxpayer is due a refund of
tax from the designer for tax paid on the delivery and
installation charges for the items classed as improvements to
real property.

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., 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 15 days of the date of this letter.

Sincerely,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/414-9838

Control #50833