Did fabricated products sold to a related contractor qualify for Florida's export exemption?

Plain-English summary

A Florida fabricator proposed selling products at arm's length to its wholly owned LLC. The LLC would install the products for customers entirely outside Florida, making it a real-property contractor and the ultimate consumer of the purchased products.

Those purchases ordinarily would be taxable retail sales. Florida nevertheless approved the export exemption because the sales documents required from the outset that the seller deliver the products to the out-of-state job site by common carrier or its own transportation. Title and risk of loss passed only upon delivery outside Florida.

The seller had to retain records identifying the goods, purchaser, and ultimate destination so the Department could confirm export.

What this means for you

Related-party status did not supply the exemption; the seller's contractual delivery duty and the passage of title and risk outside Florida did. A buyer taking possession in Florida would present a different export issue.

Common questions

Why were the LLC's purchases retail sales? The LLC used the products as a real-property contractor rather than reselling them as tangible personal property.

Why did the export exemption apply? The seller was required to deliver outside Florida, and title and risk passed only at out-of-state delivery.

What records were required? Documentation identifying the items sold, purchaser, and ultimate destination.

Citations and references

• Fla. Stat. § 212.06(5)(a)1. (export exemption)
• Fla. Stat. § 212.05(1)(a)1.a. (retail sales tax)
• Fla. Admin. Code r. 12A-1.0015 (sales for export)
• Fla. Admin. Code r. 12A-1.051 (real-property contractors)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-040

Original ruling text

SUMMARY
Question: Whether sales by the Taxpayer to a wholly-owned limited liability company will qualify for the export
exemption provided by Section 212.06(5)(a)1., F.S., under the circumstances described below.
Answer - Based on Facts Below: Yes. The facts and sample documents provided indicate that the transactions
between the limited liability company and its purely out-of-state customers will constitute improvements to real
property and are therefore real property contracts for the purposes of Chapter 212, F.S. Because the limited liability
company is a real property contractor with respect to its contracts with customers, its purchases from Taxpayer will
constitute retail sales taxable under Section 212.05(1)(a)1.a., F.S., unless the conditions of an exemption are met.
Section 212.06(5)(a)1., F.S., and Rule 12A-1.0015(1)(a), F.A.C., provide a "safe harbor" for dealers that sell items of
tangible personal property that are exported from Florida. These provisions indicate that a seller is not required to
collect and remit tax to this Department when the seller is required by the terms of the sale to deliver the item: to a
licensed exporter for exporting; to a common carrier or forwarding agent for shipment outside Florida; to the U.S. mail
for mailing to a destination outside Florida; or using its own mode of transportation to a destination outside Florida.
The documents provided specify from the outset that the products purchased by the limited liability company are being
fabricated for delivery outside Florida, that Taxpayer is required to deliver the products to the non-Florida site via
common carrier or Taxpayer's own transportation, and contain provisions indicating that title and risk of loss pass only
upon the out of state delivery. Therefore, the requirements to claim the export exemption will be met.

October 13, 2005

Re: Technical Assistance Advisement 05A-040
Sales and Use Tax
Improvements to Real Property; Fabrication; Sales for Export
Section 212.02, Florida Statutes (F.S.)
Section 212.05, F.S.
Section 212.054, F.S.
Section 212.06, F.S.
Section 608.471, F.S.
Rule 12A-1.0015, Florida Administrative Code (F.A.C.)
Rule 12A-1.051, F.A.C.
XXX (Taxpayer)
FEIN: XX
BP #: XX
Dear :

This is a response to your letter of March 16, 2005, requesting a Technical Assistance Advisement (TAA) regarding
the above-referenced 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
Taxpayer, a Florida corporation, is a product contractor that manufactures signs ("products") for its customers. In
addition, Taxpayer also arranges installation of the products. Taxpayer contracts with and pays a subcontractor to
install the products, and then bills its customers for the products and installation costs. The Department has advised
Taxpayer that its contracts with customers constitute improvements to real property, and that Taxpayer should not
collect and remit sales tax on its Florida sales. In addition, the Department has advised Taxpayer that it must pay use
tax on the fabricated cost of all products sold and installed pursuant to such contracts (regardless of whether the
products are delivered in Florida or elsewhere).
Taxpayer's sales to Florida customers are not the subject of this request for advisement. Rather, Taxpayer proposes
to restructure its operations with regard to out-of-state sales. To this end, Taxpayer is creating a single-member
Florida limited liability company, XXX (LLC), which will be disregarded for federal and state income tax purposes. LLC
will purchase products from Taxpayer, in arm's length transactions, for sale and delivery to its out-of-state customers.
LLC will market exclusively to non-Florida customers. The contracts between Taxpayer and LLC will be contracts for
sale of products that Taxpayer will fabricate to LLC's specifications. Taxpayer will deliver the products on behalf of
LLC via common carrier or utilizing Taxpayer's own transportation. LLC will contract with and pay a subcontractor to
install the products. LLC will bill its customer for the product and installation and collect and remit tax according to the
law of the state where the product is delivered.
Taxpayer has provided draft documents that will be used to form LLC, including Articles of Organization, Limited
Liability Company Operating Agreement, and Organizational Consent of Members. In addition, sample invoices of
transactions between Taxpayer and LLC and LLC and its customers have also been provided.
The sample Customer Proposal between LLC and its customer indicates that the customer is purchasing the fully
installed real property improvement (not, e.g., purchasing products at retail from LLC). LLC will place a Purchase
Order with Taxpayer for the required product. The Purchase Order will indicate the out-of-state site and installation
subcontractor to which the Taxpayer will deliver the completed product on LLC’s behalf. Taxpayer will separately
invoice LLC for the products and transportation costs. LLC will separately invoice its customer for the installed
products. The Purchase Order indicates that the subcontractors (designated “Contractor” in the Purchase Order) will
act as LLC’s agent with regard to the accepting delivery and completing the installation portion of the agreement.
Materials shipped to the job site and accepted by the subcontractor remain the property of LLC. The subcontractor is
charged with examining the materials for defects, and for handling and safekeeping until the work is completed and
accepted by the customer. Upon completion, the subcontractor will send LLC a final invoice, which must include all
applicable items required by section 12. of the Purchase Order, including: photographs of the completed work and any
applicable damage; a signed certificate of completion (a copy of which is attached to the Purchase Orders); Purchase
Order number and signed copy of the Purchase Order; and copies of any applicable permits.

Requested Advisement
Whether the sale of products by Taxpayer to LLC qualifies for the export exemption provided by Section
212.06(5)(a)1., F.S.
Taxpayer's Position
Taxpayer takes the position that sales of products to LLC will be nontaxable sales for export pursuant to Section
212.06(5)(a)1., F.S., and Rule 12A-1.0015, F.A.C.
Applicable Authority
The declaration of legislative intent for Chapter 212, F.S., Tax on Sales, Use, and Other Transactions, is contained in
Section 212.21(2), F.S., and provides in relevant part:
It is hereby declared to be the specific legislative intent to tax each and every sale, admission, use, storage,
consumption, or rental levied and set forth in this chapter, except as to such sale, admission, use, storage,
consumption, or rental as shall be specifically exempted therefrom by this chapter subject to the conditions
appertaining to such exemption.... (emphasis supplied)
Section 212.05, F.S., similarly declares the legislative intent to tax retail sales of tangible personal property and uses
of tangible personal property. Subsection (1) of Section 212.05, F.S., provides in pertinent part:
(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;....

Section 212.06, F.S., provides in pertinent part:
(1)(a) The aforesaid tax at the rate of 6 percent of the retail sales price as of the moment of sale, 6 percent of the cost
price as of the moment of purchase, or 6 percent of the cost price as of the moment of commingling with the general
mass of property in this state, as the case may be, shall be collectible from all dealers as herein defined on the sale at
retail, the use, the consumption, the distribution, and the storage for use or consumption in this state of tangible
personal property....
(b) Except as otherwise provided, any person who manufactures, produces, compounds, processes, or fabricates in

any manner tangible personal property for his or her own use shall pay a tax upon the cost of the product
manufactured, produced, compounded, processed, or fabricated....

(5)(a)1. Except as provided in subparagraph 2., it is not the intention of this chapter to levy a tax upon tangible
personal property imported, produced, or manufactured in this state for export, provided that tangible personal
property may not be considered as being imported, produced, or manufactured for export unless the importer,
producer, or manufacturer delivers the same to a licensed exporter for exporting or to a common carrier for shipment
outside the state or mails the same by United States mail to a destination outside the state;... nor is it the intention of
this chapter to levy a tax on any sale which the state is prohibited from taxing under the Constitution or laws of the
United States. Every retail sale made to a person physically present at the time of sale shall be presumed to have
been delivered in this state. (emphasis supplied)

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

(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....
(21) The term "use tax" referred to in this chapter includes the use, the consumption, the distribution, and the storage
as herein defined.

Section 608.471(3), F.S., provides in pertinent part:
Single-member limited liability companies and other entities that are disregarded for federal income tax purposes must
be treated as separate legal entities for all non-income-tax purposes....
Section 12A-1.0015, F.A.C., provides in pertinent part:

(2) SALES OF PROPERTY IRREVOCABLY COMMITTTED TO EXPORTATION.

(b) When a dealer sells tangible personal property, commits the property to the exportation process at the time of sale,
and the exportation process remains continuous and unbroken until the property is exported from Florida, the dealer is
not required to collect tax. The intent of the seller and the purchaser to export the property is not sufficient to establish
that the property is not subject to tax in Florida. The delivery of the property to a location in Florida for subsequent
export from Florida is insufficient to establish documentary evidence that the property sold was irrevocably committed
to the exportation process. The following are examples of methods to commit the property to the exportation process
at the time of sale:

1. The dealer is required by the terms of the sale contract to deliver the property outside Florida using the dealer's
   own mode of transportation;
2. The dealer is required by the terms of the sale contract to mail the property by United States mail to a destination
   located outside Florida; or
3. The dealer is required by the terms of the sale contract to deliver the property to a carrier, licensed customs broker,
   or forwarding agent for final and certain movement of the property to a destination located outside Florida.
   a. The term "carrier" means a person regularly engaged in the business of transporting tangible personal property
   owned by other persons for compensation. The term "carrier" includes common carriers and contract carriers.

(c) Any dealer who makes tax-exempt sales of tangible personal property for export outside Florida is required to
maintain records to document that the property is committed to the exportation process at the time of sale and that the
exportation process is continuous and unbroken until the property is exported from Florida. The dealer is required to
maintain records that identify the tangible personal property sold and the delivery destination of the property. The
documentation must clearly establish that the property was not commingled with the mass of property within Florida. If
the purchaser exercises any act of dominion or control that would constitute "use" of the property by the purchaser in
Florida within the meaning of that term set forth in s. 212.02(20), F.S., the property was not irrevocably committed to
the exportation process. Examples of records to document sales for export to points outside Florida are:
1. Internal delivery orders identifying the property sold and the destination and date of delivery that are supported by
receipts of expenses incurred in delivering the property, such as trip tickets or truck logs signed by the person who
delivers the property;
2. United States Postal Service parcel post receipts with supporting documentation identifying the property and the
destination;
3. Common carriers' receipts, bills of lading, or similar documentation that evidences the delivery destination;

Rule 12A-1.051, F.A.C., provides in pertinent part:
(1) Scope of the rule. This rule governs the taxability of the purchase, sale, or use of tangible personal property by

contractors and subcontractors who purchase, acquire, or manufacture materials and supplies for use in the
performance of real property contracts....
(2) Definitions. For purposes of this rule, the following terms have the following meanings:
(a) "Fabricated cost" means the cost to a real property contractor of fabricated items, as defined in the following
paragraph. The elements of cost included in fabricated cost are set forth in Rule 12A-1.043, F.A.C. Fabricated cost
does not include the cost of transporting fabricated items from the contractor's plant to the job site or the cost of labor
at the job site where the fabricated items are incorporated into the real property improvement.
(b) "Fabricated items" means items contractors manufacture, produce, process, compound, or fabricate for their own
use in performing contracts for improvements to real property. The term applies only to items the contractor
manufactures, produces, processes, compounds, or fabricates at a plant or shop maintained by the contractor. For
this purpose, a temporary facility established at a job site that is used exclusively in connection with performing a
contract for a real property improvement at that job site is not considered to be a plant or shop maintained by the
contractor.

(d) "Improvement to real property" or "real property improvement" includes the activities of building, erecting,
constructing, altering, improving, repairing, or maintaining real property.

(f) "Manufacture, produce, compound, process, or fabricate" means:

1. To convert or condition tangible personal property by changing the form, composition, quality, or character of the
   property;
2. To make, build, create, produce, or assemble components or items of tangible personal property in a new or
   different manner;
3. To physically apply materials and labor necessary to modify or change the characteristics of tangible personal
   property. The terms do not include activities that do not result in any change in the character or quality of tangible
   personal property. For example, a repair or restoration of property to return it to its original state and level of
   functionality is not included within the defined activities.
   (g) "Real property" means land, improvements to land, and fixtures. It is synonymous with the terms "realty" and "real
   estate."
   (h)1. "Real property contract" means an agreement, oral or written, whether on a lump sum, time and materials, cost
   plus, guaranteed price, or any other basis, to:
   a. Erect, construct, alter, repair, or maintain any building, other structure, road, project, development, or other real
   property improvement;

2. The term "real property contract" does not include:
a. A contract for the sale or for the sale and installation of tangible personal property such as machinery and
equipment; or
b. A contract to furnish tangible personal property that will be installed or affixed in such a way as to become a fixture
or improvement to real property if the person furnishing the property has not also contracted to affix or install it.

(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 contracts
described in paragraphs (3)(a), (b), (c), or (e) 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.

(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 12A-1.043, F.A.C. 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.

(17) Specific activities classified as real property contracts. Contractors who are engaged in the following activities are
generally considered to be real property contractors, although any particular job may be determined not to involve an
improvement to real property:

(hh) [Products] that are permanently attached to realty;

Discussion and Response
Section 212.05(1)(a)1.a., F.S., imposes a sales tax on the retail sale of tangible personal property.(FN 1) A "retail
sale" is defined by Section 212.02(14)(a), F.S., as a sale for any purpose other than for resale. Section 212.02(15)(a),

F.S., defines "sale" broadly as "[a]ny 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." Section 212.06(1)(b), F.S., provides that any person(FN 2) who manufactures, produces, compounds,
processes, or fabricates tangible personal property for their own use is required to pay tax upon the cost of
manufacturing, producing, compounding, processing, or fabricating such items ("fabricated cost"). See also Rule 12A1.043(1), F.A.C.; Rule 12A-1.051(10), F.A.C. Tax is levied upon each retail sale or the fabricated cost of
manufacturing, producing, compounding, processing, or fabricating items at the rate of six percent (6%), plus any
applicable local discretionary surtax. Sections 212.05(1)(a)1.a. and 212.06(1)(a), F.S.; see Section 212.054(2), F.S.
The tax levied pursuant to Chapter 212, F.S., is imposed at the level of the purchaser or ultimate consumer/user of
tangible personal property. See Sections 212.02(14)(a) and 212.07(1)(a), F.S.; see also Section 212.06, F.S. Real
property contractors are generally considered to be the ultimate consumers or users of the tangible personal property
they purchase to perform a real property contract (i.e., they are not reselling the tangible personal property). See Rule
12A-1.051(4), F.A.C.; Kings Bay Yacht and Country Club, Inc. v. Green, 173 So.2d 509 (Fla. 1st DCA 1965). The
stated general rule for real property contractors is that they should not charge tax to their customers, regardless of
whether or not they itemize charges for materials or labor, because they are not engaged in the activity of selling
tangible personal property. Rule 12A-1.051(4), F.A.C.(FN 3) Real property contractors are considered the ultimate
consumers of the materials and supplies they use to perform real property contracts, so they must pay tax on the
costs of those materials and supplies. Rule 12A-1.051(4), F.A.C. The tax upon the fabricated cost of items
manufactured, produced, compounded, processed, or fabricated for one's own use applies to real property
contractors. Rule 12A-1.051(2)(a) and (b) and (10), F.A.C.
The Department has advised Taxpayer that the transactions between Taxpayer and its customers constitute
improvements to real property and are therefore real property contracts for the purposes of Chapter 212, F.S. Here,
out-of-state customers will contract directly with LLC. The facts and sample documents provided indicate that the
transactions between LLC and its purely out-of-state customers will be identical to those between Taxpayer and its
customers. The transactions between LLC and its customers should therefore also be considered real property
contracts.
LLC, instead of manufacturing products for its customers, will purchase products fabricated to its specifications from
Taxpayer. Taxpayer stated in the facts presented that LLC will purchase the products from Taxpayer in arm's length
transactions. Thus, Taxpayer's sales to LLC will be made at fair market value, and will reflect Taxpayer's direct and
indirect costs incurred in manufacturing, insuring, and delivering the products to LLC. Because LLC is a real property
contractor with respect to its contracts with customers, its purchases from Taxpayer will constitute retail sales taxable
under Section 212.05(1)(a)1.a., F.S., unless the conditions of an exemption are met. See Section 212.21(2), F.S.;
Rule 12A-1.051(4), F.A.C.
Taxpayer's position is that sales of products by Taxpayer to LLC will constitute nontaxable sales for export pursuant to
Section 212.06(5)(a)1., F.S., and Rule 12A-1.0015, F.A.C. Section 212.06(5)(a)1., F.S., and Rule 12A-1.0015(1)(a),
F.A.C., provide a "safe harbor" for dealers that sell items of tangible personal property that are exported from Florida.
These provisions indicate that a seller is not required to collect and remit tax to this Department when the seller is
required by the terms of the sale to deliver the item:

> to a licensed exporter for exporting;

to a common carrier or forwarding agent for shipment outside Florida;
to the U.S. mail for mailing to a destination outside Florida; or
using its own mode of transportation to a destination outside Florida.
The contracts provided by Taxpayer specify from the outset that the products are being fabricated for delivery outside
Florida, that Taxpayer is required to deliver the products to the non-Florida site via common carrier or Taxpayer's own
transportation, and contain provisions indicating that title and risk of loss pass only upon the out of state delivery.(FN
4) Therefore, the requirements to claim the export exemption will be met.
Taxpayer, as the selling dealer, is required to keep sufficient records to document that the item was exported outside
Florida, such as the nonexhaustive list of examples provided in Rule 12A-1.0015(2)(c), F.A.C. As long as the
necessary documentation is maintained, the Department will be able to confirm that Taxpayer was not required to
collect and remit sales tax on the transaction pursuant to Section 212.06(5)(a)1., F.S. Such documentation should
identify: (a) the item(s) sold; (b) the purchaser; and (c) the ultimate destination of the item(s). The required
documentation must be maintained until the tax imposed by Chapter 212, F.S., may no longer be determined and
assessed under Section 95.091(3), F.S. (currently, for three years from the later of: the date the tax is due, the date
the return with respect to the tax is due, or the date such return is filed).
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 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.
If you have any further questions with regard to this matter and wish to discuss them, you may contact me directly at
(850) 922-4710.
Sincerely,
Thomas K. Butscher
Senior Attorney
Technical Assistance & Dispute Resolution

TKB\
Control #13297

FOOTNOTE 1. "Tangible personal property" is defined in pertinent part as "personal property which may be seen,
weighed, measured, or touched or is in any manner perceptible to the senses...." Section 212.02(19), F.S.
FOOTNOTE 2. For the purposes of Chapter 212, F.S., "person" is defined to include "any individual, firm,
copartnership, joint adventure, association, corporation, estate, trust, business trust, receiver, syndicate, or other
group or combination acting as a unit...." Section 212.02(12), F.S. For the purposes of Chapter 212, F.S., LLC is a
"person" separate and distinct from Taxpayer. See Section 608.471(3), F.S.
FOOTNOTE 3. Retail sale plus installation contracts, described in Rule 12A-1.051(3)(d), F.A.C., are treated
differently. See Rule 12A-1.051(5), F.A.C. It is noted that contracts qualifying under Rule 12A-1.051(3)(d), F.A.C., are
very rare.
FOOTNOTE 4. When goods are required to be delivered at a particular destination, the general rule is that title and
risk of loss pass to the buyer when the purchaser takes delivery at the specified destination absent a contrary
agreement between the parties. See Sections 672.401(2)(b) and 672.509(1)(b), F.S. The contracts provided by
Taxpayer are consistent with the general rule.