Was equipment sold below the seller's cost taxed on cost or on the separately stated customer price?

Plain-English summary

Florida taxed below-cost equipment sales on the separately stated amount paid by the customer, not on the seller's acquisition cost. The equipment was transferred for consideration to customers who also contracted for a taxable service, so the transfer remained a retail sale even when the stated price was lower than cost.

The ruling drew a line at zero consideration. If the provider gave equipment away, there was no sale; the provider instead exercised use of the property and owed use tax on its full cost.

Amounts from another source that compensated the seller for the equipment, and customer charges tied to the equipment sale such as per-device early-cancellation fees, could also be part of taxable sales price.

What this means for you

Bundled service providers should separately document the equipment price and every related payment. A discount below cost does not by itself change a sale into the seller's taxable use, but a true giveaway does.

Common questions

Q: Did Florida require tax on the seller's higher cost?
A: No for a genuine sale. Tax was based on the separately stated sales price.

Q: What if the equipment was free?
A: The seller owed use tax on its cost.

Q: Could cancellation fees be taxable?
A: Yes, when they were additional consideration related to the equipment sale.

Citations and references

• Fla. Stat. § 212.02 — cost price, retail sale, sale, sales price, and use
• Fla. Stat. § 212.05 — sales and use tax
• Fla. Stat. § 212.12(9) — historical tax-addition brackets
• Fla. Admin. Code r. 12A-1.004 — historical bracket guidance
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-018

Original ruling text

SUMMARY

QUESTION: How does sales tax apply to sales of equipment at
a price below the cost price of the equipment?

ANSWER - Based on Facts Below: Based upon these facts, a
sale of equipment at a price below the cost price of the
equipment is a retail sale and subject to tax based upon
the separately stated sales price.

Apr 21, 2003

Re: Technical Assistance Advisement 03A-018
XXX LLC [hereinafter "Taxpayer"]
XXX [hereinafter "affiliates"]
Sales and Use Tax - Taxability of Sales of Equipment
Sections 212.02, 212.05, Florida Statutes (F.S.)

Dear :

This is a response to your letter of March 12, 2003, requesting
a Technical Assistance Advisement (TAA) regarding the abovereferenced matter. This response to your request constitutes a
TAA under Chapter 12-11, Florida Administrative Code (F.A.C.),
and is issued to you under the authority of Section 213.22,
Florida Statutes (F.S.).

FACTS

This determination is based on the following provided
information:

1. Taxpayer and its affiliates are providers of a taxable
   service.
2. From time to time, Taxpayer and its affiliates furnish
   equipment to their customers at prices that are below the
   cost price incurred by the Taxpayer and its affiliates when
   the equipment is purchased from their own vendors of

equipment.

3. When Taxpayer or its affiliates sell the equipment to its
   customers at a price that is below the cost price of the
   equipment, the customers enter into a contract with the
   Taxpayer or its affiliates for a taxable service and
   receive equipment from the Taxpayer or its affiliates for a
   separately stated price.
4. The separately stated price for the equipment may range
   from $XX to any price that is below the cost price of the
   equipment

REQUESTED ADVISEMENT

You have asked for guidance regarding the taxability of sales of
equipment at a price below the cost price of the equipment.

APPLICABLE AUTHORITY

The applicable statutory authorities provide the following:

Section 212.02, F.S., provides, in part:

(4) "Cost price" means the actual cost of articles of
tangible personal property without any deductions therefrom
on account of the cost of materials used, labor or service
costs, transportation charges, or any expenses whatsoever.

(14)(a) "Retail sale" or a "sale at retail" means a sale to
a consumer or to any person for any purpose other than for
resale in the form of tangible personal property or
services taxable under this chapter, and includes all such
transactions that may be made in lieu of retail sales or
sales at retail....

(15) "Sale" means and includes:

(a) Any transfer of title or possession, or both, exchange,
barter, license, lease, or rental, conditional or
otherwise, in any manner or by any means whatsoever, of
tangible personal property for a consideration.

(16) "Sales price" means the total amount paid for tangible
personal property, including any services that are a part
of the sale, valued in money, whether paid in money or
otherwise, and includes any amount for which credit is
given to the purchaser by the seller, without any deduction
therefrom on account of the cost of the property sold, the
cost of materials used, labor or service cost, interest
charged, losses, or any other expense whatsoever....

(20) "Use" means and includes the exercise of any right or
power over tangible personal property incident to the
ownership thereof, or interest therein, except that it does
not include the sale at retail of that property in the
regular course of business....

Section 212.05, F.S., provides, in part:

It is hereby declared to be the legislative intent that
every person is exercising a taxable privilege who engages
in the business of selling tangible personal property at
retail in this state, including the business of making mail
order sales, or who rents or furnishes any of the things or
services taxable under this chapter, or who stores for use
or consumption in this state any item or article of
tangible personal property as defined herein and who leases
or rents such property within the state.

(1) For the exercise of such privilege, a tax is levied on
each taxable transaction or incident, which tax is due and
payable as follows:

(a)1.a. At the rate of 6 percent of the sales price of each
item or article of tangible personal property when sold at
retail in this state, computed on each taxable sale for the
purpose of remitting the amount of tax due the state, and
including each and every retail sale.

(b) At the rate of 6 percent of the cost price of each item
or article of tangible personal property when the same is
not sold but is used, consumed, distributed, or stored for
use or consumption in this state; however, for tangible

property originally purchased exempt from tax for use
exclusively for lease and which is converted to the owner's
own use, tax may be paid on the fair market value of the
property at the time of conversion. If the fair market
value of the property cannot be determined, use tax at the
time of conversion shall be based on the owner's
acquisition cost....

Section 212.12(9), F.S., provides:

(9) Taxes imposed by this chapter upon the privilege of the
use, consumption, storage for consumption, or sale of
tangible personal property, admissions, license fees,
rentals, communication services, and upon the sale or use
of services as herein taxed shall be collected upon the
basis of an addition of the tax imposed by this chapter to
the total price of such admissions, license fees, rentals,
communication or other services, or sale price of such
article or articles that are purchased, sold, or leased at
any one time by or to a customer or buyer; the dealer, or
person charged herein, is required to pay a privilege tax
in the amount of the tax imposed by this chapter on the
total of his or her gross sales of tangible personal
property, admissions, license fees, rentals, and
communication services or to collect a tax upon the sale or
use of services, and such person or dealer shall add the
tax imposed by this chapter to the price, license fee,
rental, or admissions, and communication or other services
and collect the total sum from the purchaser, admittee,
licensee, lessee, or consumer. Notwithstanding the rate of
taxes imposed upon the privilege of sales, admissions,
license fees, rentals, and communication services, or upon
the sale or use of services, the following brackets shall
be applicable to all transactions taxable at the rate of 6
percent:

(a) On single sales of less than 10 cents, no tax shall be
added.

(b) On single sales in amounts from 10 cents to 16 cents,
both inclusive, 1 cent shall be added for taxes.

(c) On sales in amounts from 17 cents to 33 cents, both
inclusive, 2 cents shall be added for taxes.

(d) On sales in amounts from 34 cents to 50 cents, both
inclusive, 3 cents shall be added for taxes.

(e) On sales in amounts from 51 cents to 66 cents, both
inclusive, 4 cents shall be added for taxes.

(f) On sales in amounts from 67 cents to 83 cents, both
inclusive, 5 cents shall be added for taxes.

(g) On sales in amounts from 84 cents to $1, both
inclusive, 6 cents shall be added for taxes.

(h) On sales in amounts of more than $1, 6 percent shall be
charged upon each dollar of price, plus the appropriate
bracket charge upon any fractional part of a dollar.

DISCUSSION

This determination is specifically limited to the sale of
equipment by Taxpayer or its affiliates and does not address any
other transactions. The determination is based on the provided
description of the transaction.

Sales tax is due at the rate of six percent (6%), plus any
applicable discretionary sales surtaxes, on the sale of tangible
personal property in Florida and is imposed upon the sales price
of a retail sale. See, s. 212.05(1)(a)1.a., F.S. Use tax is
due at the rate of six percent (6%), plus any applicable
discretionary sales surtaxes, on the use of tangible personal
property in Florida and is imposed upon the cost price of an
item or service that is used by a Taxpayer. See, s.
212.05(1)(b), F.S.

A retail sale exists when a sale is made to a consumer or other
person for any purpose other than for resale. See, s.
212.02(14)(a), F.S. A sale is made whenever property is
transferred for consideration. See, s. 212.02(15)(a), F.S.

There is no statutory requirement that the consideration must be
equal to the value of the property or the cost of the property
to the seller. The sales price is considered to be the total
amount paid by a purchaser and specifically includes any
services that are a part of the sale and any amount for which
credit is given to the purchaser. See, s. 212.02(16), F.S.

"Consideration" is defined by Black's Law Dictionary, Abridged
6th edition (1991), as: "The inducement to a contract. The
cause, motive, price, or impelling influence which induces a
contracting party to enter into a contract."

Taxpayer or its affiliates make retail sales of equipment to
their customers, even though the equipment may be provided at a
sales price below the cost price of the equipment and the
equipment is received by customers that contract for the taxable
service. As a retail sale, Taxpayer or its affiliates must
collect and remit sales tax at the rate of 6%, plus any
applicable discretionary sales surtaxes, on the separately
stated sales price of the equipment. The application of the
sales tax rate must be made in accordance with the bracket
system provided in s. 212.12, F.S., reprinted above. Further
guidance on the bracket system may be found in Rule 12A-1.004,
F.A.C., and at the Department's website at:
http://www.myflorida.com/dor.

Thus, equipment sold at a separately stated sales price between
$XX and $0.09 would not result in the addition of tax to the
invoice. When the sales price is $0.10 or more, tax must be
added to the invoice or other evidence of the sale.

In the event that Taxpayer or its affiliates provide equipment
at no charge, use tax would be due to the Department on the full
cost price of the piece of equipment. Giving away equipment at
no charge would be an exercise of dominion or control within the
meaning of s. 212.02(20), F.S. The lack of consideration would
prevent the transfer of the equipment from being a sale in that
case.

In conclusion, Taxpayer or its affiliates are making retail
sales of equipment when the equipment is sold for a separately

stated sales price.

Please be aware that any additional consideration received by
Taxpayer from any customer that is related to the sale of
tangible personal property, such as charges or termination fees
due to contractual nonperformance by the customer with respect
to a service contract obligation, would be subject to sales tax
and any applicable discretionary sales surtax as part of the
"sales price" of the equipment. This would include any charge
identified as a fee charged per piece of equipment for early
cancellation. Further, any consideration received by the
Taxpayer to compensate the Taxpayer for the cost of equipment
that is sold, from whatever source, would also be subject to
sales tax and any applicable discretionary sales surtax.

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 requests
for this advice, as specified in Section 213.22, F.S. Our
response is predicated on 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 than
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,

Jennifer J. Silvey

Senior Attorney
Technical Assistance & Dispute Resolution

JJS\
Control No: 54294
/hard copy to follow