How did Florida tax a cultured-marble fabricator's retail sales versus its lump-sum fabrication-and-installation contracts?

Plain-English summary

Florida applied two different tax methods depending on whether the company sold a fabricated product at retail or fabricated and permanently installed it as a real-property improvement. The company made cultured-marble and solid-surface sinks, tubs, shower basins, backsplashes, wall panels, and related products.

Retail sale without installation

When the customer bought the product and the company did not install it, the company had to collect sales tax on the total sales price. That price included fabrication services such as cutting, shaping, or forming the materials to the customer's specifications.

A separately stated delivery charge appeared nontaxable when the customer could choose pickup at the manufacturing facility. If pickup was not offered and delivery was mandatory, the delivery charge was taxable.

If the company installed an item that otherwise resembled a retail sale, the TAA said the transaction became a real-property improvement instead.

Lump-sum fabrication and permanent installation

The company used permanent adhesives and mechanical fasteners to install its custom products in residential and commercial property. For those lump-sum contracts, it was a real-property contractor and ultimate consumer rather than a retailer of the installed property.

It therefore should not charge sales tax to the customer. Instead, it owed use tax on:

• the fabricated cost of products made in its shop for the contract; and
• the purchase price of tax-exempt supplies it used without further fabrication, such as adhesives and mechanical fasteners.

Fabricated cost included the production-related materials, labor, services, and transportation elements described in Rule 12A-1.043, but the quoted real-property rule excluded job-site labor and transportation from the fabrication plant to the job site.

Dual-operator treatment

Because the company both made retail sales and used materials in real-property contracts, it was a dual operator and should be registered as a dealer. It could buy materials using its Annual Resale Certificate. When a later event determined the use, it collected sales tax if the material was resold or accrued use tax if it was consumed in a contract.

Refund of tax collected on installation contracts

The company had previously collected sales tax from customers on its real-property contracts. Before receiving a state refund, it had to refund the entire tax collected to those customers. Its state refund would then be limited to the difference between the customer refunds and the use tax actually due on fabricated cost.

What this means for you

Fabricators should classify each transaction based on installation and permanence, not merely how the invoice labels materials and labor. The same product can produce sales tax on its full selling price when sold over the counter and use tax on fabricated cost when permanently installed under a real-property contract.

Common questions

Q: Should the fabricator separately charge sales tax on a lump-sum installation contract?
A: No. It owed use tax as the ultimate consumer instead.

Q: Was optional delivery on a retail sale taxable?
A: Not when separately stated and avoidable through customer pickup under the facts described; mandatory delivery was taxable.

Q: Could the company use a resale certificate for raw materials?
A: Yes, as a registered dual operator, with sales or use tax determined when the materials were resold or consumed.

Q: Could it recover tax mistakenly collected from installation customers without refunding them?
A: No. The customers had to receive the full collected tax first.

Citations and references

• Fla. Stat. § 212.02(16) — sales price
• Fla. Stat. § 212.05 — retail sales tax
• Fla. Stat. § 212.15(1) — collected tax as state funds
• Fla. Admin. Code r. 12A-1.043 — fabricated cost
• Fla. Admin. Code r. 12A-1.045 — delivery charges
• Fla. Admin. Code r. 12A-1.051 — real-property contractors and dual operators
• Fla. Admin. Code r. 12A-1.014(3) — erroneous-tax refunds

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-003

Original ruling text

SUMMARY
QUESTION: What is the proper tax application to the retail sales transactions and the contract transactions when
Taxpayer fabricates the items sold as tangible personal property or used in the improvement to real property?
ANSWER - Based of Facts Below: Taxpayer should collect tax on the total sales price of tangible personal property
it sells. Taxpayer also owes use tax on the fabricated cost of materials it fabricates and installs in a contract for the
improvement to real property.

January 12, 2005
Re: Technical Assistance Advisement 05A-003
Sales and Use Tax - Fabrication & Improvements to Real Property
Section: 212.02, 212.05, F.S.
Rules: 12A-1.043, 12A-1.045, 12A-1.051, F.A.C.
Petitioner: XXX (herein "Taxpayer")
FEI: XX
Dear :
This letter is a response to your undated petition received in this office on October 28, 2004, 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.
FACTS
The petition sets forth the following facts:
[Taxpayer] is a manufacturer, fabricator, installer, and retailer of custom cultured marble and solid surface products
in... Florida.
Cultured marble products are usually manufactured with a high-gloss coating, called a "gel coat[,"] applied during the
manufacturing process, which becomes an integral part of the cultured marble product. Colorants may be added to
the polymer/filler matrix in a manner which provides a "veining" which mimics the appearance of natural products. The
polymer casting process yields a rock hard, durable product which takes on the look and feel of the natural product.
[Taxpayer] purchases raw materials from various manufacturers and combines them to produce compounds which are

molded into various shapes in the form of sinks with integral tops, bathtubs, whirlpool baths, shower basins, back
splashes, wall panels, and other forms and shapes used for trimming out and finishing the installation process.
The resulting products are installed in residential and commercial real property and are affixed by permanent
attachment to the real property by means of permanent construction adhesives, product specific adhesives, and
mechanical fasteners in the form of screws, nuts and bolts.
The installations are intended to be permanent, and are necessary to the proper functioning of the baths, showers,
and other areas where they are installed.
[Taxpayer] has been charging tax on the retail selling price of items sold in a retail manner. [Taxpayer] has also been
showing sales tax on contract type transactions where [Taxpayer] is manufacturing and installing the cultured marble
products. All sales taxes collected have been remitted to the State in monthly sales and use tax filings.
[Taxpayer] purchases all manufacturing materials tax exempt by extending [its] resale certificate to [its] suppliers.

Retail Transactions
[Taxpayer] may sell custom made products in a retail sale transaction. This may occur [when] a customer is
remodeling a home and wishes to either replace an existing cultured marble product, or may wish to install a new
cultured marble product to replace an existing cast iron or steel product in a bath or shower area.
The customer may take delivery of the product at [Taxpayer's] manufacturing facility, or in the alternative[, Taxpayer]
may deliver the product to a specified location. [Taxpayer] will not usually participate in the installation of the product
in this type of sale. (FOOTNOTE #1)
[Taxpayer] generally carries a small amount of manufactured product in stock. This consists mainly of small panels
that can be used in trim out activities for bathrooms, kitchens, window sills, or to repair pieces that may be damaged
during the construction process by other tradesmen who are responsible for the repairs. These may be sold at retail.
[Taxpayer] may or may not charge a fee for delivery based on the circumstances of the job.
Contract Transactions
[Taxpayer] enters into lump sum purchase agreements with contractors to manufacture, fabricate and install custom
designed cultured marble products for baths, showers, and other similar installations.

The Taxpayer will issue a payment request to the builder that may either be for the total lump sum price, or it may be
an agreed upon percentage for various stages of completion with a final payment when the job is completed and

accepted.
When preparing the payment request, [Taxpayer] has been calculating the sales price shown on the payment request
by taking the lump sum contract amount, and dividing it by one plus the tax rate in the county where the job is located.
This amount is considered the selling price.
The selling price is then multiplied by the tax rate in the county where the job is located to calculated the sales tax
which would be due as though this was a sale of tangible personal property. The payment request then shows both
the calculated selling price and an amount for sales tax which equals the agreed upon lump sum amount for the
purchase order/contract.
The payment request is then forwarded to the customer for processing and payment.
REQUESTED ADVISEMENT
Advice is requested on the proper tax application to the retail sales transactions and the contract transactions. Advice
is also requested whether Taxpayer is due a refund of tax collected on the contract transactions.
LAW AND DISCUSSION
Section 212.05, Florida Statutes, generally imposes tax on the sale of tangible personal property. The tax is calculated
on the "sales price" of the item(s) sold; the term "sales price" is defined in section 212.02(16), Florida Statutes, to
mean "... the total amount paid for tangible personal property, including any services that are a part of the sale...."
Tax should be charged on the full sales price of any transaction in which Taxpayer sells the materials, but does not
provide the installation. The sales price would generally include the total amount paid for the materials, plus any
additional services, such as cutting or otherwise shaping or forming the materials to the customer’s specifications.
Rule 12A-1.045, Florida Administrative Code, specifically discusses the taxability of delivery charges as part of the
sales price of tangible personal property, and it states in pertinent part as follows:
(4)(a) The charge for transportation services is not subject to tax when both of the following conditions have been met:

1. The charge is separately stated on an invoice or bill of sale; and
2. The charge can be avoided by a decision or action solely on the part of the purchaser.
   It does not appear, based on the information stated in the petition, that the delivery charge should be included as part
   of the taxable sales price of tangible personal property, since it appears that Taxpayer allows the customer to pick up
   the materials at Taxpayer's facility if customer so chooses. However, if Taxpayer does not give a customer the option
   of picking up materials, perhaps due to the materials size or nature, but instead delivers the materials and charges the
   customer for such delivery, the delivery charge would be subject to tax.

When Taxpayer enters into a contract or other transaction in which as part of the terms of the sale, Taxpayer installs
the materials, Taxpayer is making an improvement to real property. Rule 12A-1.051, Florida Administrative Code,
discusses the taxability of improvements to real property, and it states in pertinent part as follows:
(4) General rule of taxability of real property contractors. Contractors are the ultimate consumers of materials and
supplies they use to perform real property contracts and must pay tax on their costs of those materials and supplies,
unless the contractor has entered a retail sale plus installation contract. Contractors performing only [lump sum]
contracts... do not resell the tangible personal property used to the real property owner but instead use the property
themselves to provide the completed real property improvement. Such contractors should pay tax to their suppliers
on all purchases. They should also pay tax on all materials they fabricate for their own use in performing such
contracts, as discussed in subsection (10). They should charge no tax to their customers, regardless of whether they
itemize charges for materials and labor in their proposals or invoices, because they are not engaged in selling tangible
personal property. Such contractors should not register as dealers unless they are required to remit tax on the
fabricated cost of items they fabricate to use in performing contracts.

(9) Dual operators. Some contractors both use materials themselves in the performance of contracts and resell
materials either in over-the-counter sales or under contracts described in paragraph (3)(d). Those contractors should
register as dealers. When they purchase materials that they may either use themselves or that they may resell, they
may issue a copy of the contractor's Annual Resale Certificate (form DR-13) to the selling dealer. Florida tax should
be remitted when a subsequent event determines the appropriate taxation of the materials. If the materials are
subsequently resold, tax should be collected from the buyer and remitted to the state. If the materials are used by the
contractor, use tax should be paid to the state instead.
(10) Use tax on fabrication costs. Contractors may maintain shops, plants, or similar facilities where they manufacture,
produce, compound, process, or fabricate items for their own use in performing contracts. Contractors are required to
pay use tax on the fabricated cost of those items. The elements that must be included in the taxable cost of such
items are set forth in Rule In the case of real property contractors, the taxable cost of an item manufactured,
produced, compounded, processed, or fabricated for use in performing a contract does not include labor that occurs at
the job site where the item will be incorporated into a real property improvement or transportation from the plant where
an item was fabricated to the job site. Examples of real property contractors who are subject to tax under this
subsection include cabinet contractors who build custom cabinets in their shops, roofing contractors who operate tile
plants, or heating/air conditioning/ventilation contractors who maintain sheet metal shops for making ductwork. Real
property contractors that are required to remit use tax on fabricated items must register as dealers for purposes of
remitting such tax if they are not already registered as dual operators. (Emphasis Supplied)
When Taxpayer fabricates and installs the cultured marble products, it is making improvements to real property.
Taxpayer should not charge tax to the customer in any amount, but it should accrue tax on its fabricated cost of
materials it makes, as well as on the purchase price of materials that it buys outright (such as adhesives, mechanical
fasteners, etc.). Rule 12A-1.043(1), Florida Administrative Code, discusses the calculation of the fabricated cost of
materials, and it states as follows:

(1)(a) Any person who manufactures, produces, compounds, processes, or fabricates in any manner an article of
tangible personal property for his own use shall pay a tax upon the cost of the property manufactured, produced,
compounded, processed, or fabricated without any deduction therefrom on account of the cost of material used, labor
or service costs, or transportation charges.
(b) Elements of cost will include the following materials, labor, service, or transportation costs that are attributable to
manufacturing, producing, compounding, processing, or fabricating an article of tangible personal property for one's
own use and which are properly chargeable to the cost of the product under generally accepted cost accounting
standards.

1. Material costs include the following:
   a. All direct materials and related freight costs that are physically observable as being identified to the finished
   tangible personal property, that are consumed in producing the property, or that become a component or ingredient of
   the finished property. See paragraphs (c) and (d), below, for calculating the tax on the cost of the finished product
   when sales tax has or has not been paid on direct materials.
   b. Material handling and warehousing of direct materials and goods in process.
   c. Manufacturer's excise taxes on materials.
2. Labor costs include the following:
   a. The total direct labor costs for employees or contract labor that are allocable to the production of the finished
   property, including the entire amount of payroll burden, which includes but is not limited to overtime premium, vacation
   and holiday pay, sick leave pay, shift differential, payroll taxes, payments to a supplemental unemployment benefit
   plan, and employee fringe benefits.
   b. Compensation of officers, to the extent it is allocated to production and not administrative functions.
   c. Costs of service, engineering, design or other support employees allocated to production.
3. Service costs include the costs of non-employee services that are allocated to the production of the tangible
   personal property, such as engineering, design or similar consulting or professional services.
   (c) Direct materials on which the tax has been paid shall not be included when computing the tax on the cost of items
   of tangible personal property manufactured, produced, compounded, processed, or fabricated.
   (d) Persons who manufacture, produce, compound, process, or fabricate items of tangible personal property for resale
   or for their own use or consumption may purchase direct materials tax exempt but shall include the cost of the direct
   materials when computing tax on the cost of the items so manufactured, produced, compounded, processed, or
   fabricated for such persons' own use or consumption. If tax has been paid on the direct materials, the method

described in paragraph (c) should be used when computing the tax on the cost of the items so manufactured,
produced, compounded, processed, or fabricated.
(e)1. To purchase direct materials tax exempt, dealers registered with the Department to sell tangible personal
property may extend a copy of their Annual Resale Certificate (form DR-13) to the selling dealer in lieu of paying tax at
the time of purchase. The cost of such materials is subject to tax on the cost of the items so manufactured, produced,
compounded, processed, or fabricated, as provided in paragraph (d).

2. Persons who do not sell tangible personal property are not required to register with the Department as a dealer.
   However, to purchase direct materials tax exempt, such persons may extend an Exemption Certificate, as provided in
   Rule , to the selling dealer in lieu of paying tax at the time of purchase. The cost of such materials is subject to tax on
   the cost of the items so manufactured, produced, compounded, processed, or fabricated, as provided in paragraph
   (d).
   (f) The tax is due at the time the article of tangible personal property is manufactured, produced, compounded,
   processed, or fabricated for use or consumption, and such tax shall be remitted to the Department of Revenue in
   accordance with Rule
   Taxpayer is a "dual operator" as described in Rule 12A-1.051(9), Florida Administrative Code, since it both sells
   tangible personal property and makes improvements to real property. Additionally, Taxpayer owes use tax on its
   fabricated cost of materials. Therefore, Taxpayer should be registered as a dealer. When purchasing materials,
   Taxpayer may extend a copy of its Annual Resale Certificate (Form DR-13). When Taxpayer sells the materials at
   retail, it should collect the tax from its customers, and when it uses the materials in an improvement to real property
   contract or job, it should accrue use tax on its fabricated cost of the materials used, plus use tax on the purchase price
   of any materials purchased exempt from tax that Taxpayer does not further fabricate (i.e., adhesives, mechanical
   fasteners, etc.).
   Taxpayer reports that it has been collecting and remitting tax on its real property improvement contracts, and advice is
   requested whether Taxpayer is due a refund of tax on the difference between the amount actually collected and
   remitted and the tax due on the fabricated cost. Section 212.15(1), Florida Statutes, specifically states that taxes
   become state funds at the moment of collection. Rule 12A-1.014(3), Florida Administrative Code, states that when tax
   is erroneously collected from a customer, the tax must be refunded to the customer before the dealer can receive a
   refund of the tax from the state. In order to receive a refund from the state, Taxpayer would be required to refund the
   entire amount of the tax collected back to the customer, then Taxpayer would be due a refund only on the difference
   between the amount refunded to the customers and the tax due on the fabricated cost of the materials.
   CONCLUSION
   Taxpayer should collect tax on the total sales price of tangible personal property it sells. Taxpayer also owes use tax
   on the fabricated cost of materials it fabricates and installs in a contract for the improvement to real property.
   This response constitutes a Technical Assistance Advisement under Section 213.22, Florida Statutes, 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, Florida Statutes. 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, Florida Statutes, and are subject to disclosure to the public under the conditions of s. 213.22, Florida
Statutes. 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
Control #61933

FOOTNOTE #1 - Taxpayer is advised that if it does install items sold in this type of sale, the transaction is no longer
classed as a retail sale, and is classed instead as an improvement to real property.