MANUFACTURED / FABRICATED TANGIBLE PERSONAL PROPERTY INSTALLED INTO REAL PROPERTY IS SUBJECT TO FLORIDA USE TAX EVEN WHEN INSTALLED OUTSIDE FLORIDA.
Florida is not known for having many manufacturing or fabricating companies, but every single manufacturer / fabricator that we have is extremely valuable to the local and state economy, and particularly to our precarious job market. The state of Florida is regularly trying to attract more manufacturing companies by offering numerous tax incentives. So it will likely surprise you that the Florida Department of Revenue has taken a very aggressive position that is likely to drive manufacturing and fabricating companies away from our great state (or possibly out of business all together). Does your company (or your client's company) manufacture or fabricate tangible personal property which is then installed as real property improvements, such as cabinets, elevators, screened porches, fabricated steel, bleachers, custom stairs, solar panels, or other similar items? Do some of these products get installed into realty outside the state of Florida? If so, then you should prepare for a tax shock.
First – it should not shock you that when a company fabricates or manufactures goods that are then installed by the same company into Florida realty (e.g. a cabinet maker that fabricates and installs cabinets) the company is not supposed to charge sales tax to the customer. Instead, the fabricator/installer is supposed to pay Florida Use Tax on the "cost price" of the cabinets that includes not only materials, but also the labor and overhead allocated to the fabrication process (but not the installation labor). Hopefully you knew this already. What most Florida based manufacturers and fabricators do not know is that the same use tax applies EVEN if the manufactured or fabricated product is installed into realty in another state. At least, this is the position the Florida Department of Revenue is taking.
How can our comrades at the Florida Department of Revenue believe this type of taxpayer extortion is justified? Section 212.06, Florida Statutes ("F.S."), provides:
(1)(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 [use] tax upon the cost of the product 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, notwithstanding the provisions of s. 212.02 defining "cost price."
Because the statute doesn't say for their "own use in Florida," our friendly tax officials in Tallahassee deem this statute to mean tax is due on fabricated tangible personal property that is used or installed "anywhere." Therefore, the Florida Department of Revenue ("FL DOR") takes the position that you owe a use tax to Florida on these items whether you installed these products in North Carolina, Georgia, or even the Bahamas. Our extremely valued manufacturing companies based in Florida, lured here with warm smiles, open arms, and over flowing tax incentives, are now being hit with huge assessments for at least 6% of the fabricated cost price of all items installed out of Florida over the last 3 years.
And the surprises surrounding this situation do not end with Florida's use tax. Of course, the state where the property is installed may also (and usually does) claim a right to a use tax on the fabricated property because the final use of the tangible personal property is technically happening in that other taxing jurisdiction. Surely Florida will allow a credit for taxes paid to the other jurisdiction? Not a chance. Our friends at the Florida Department of Revenue will politely tell you to get a refund from that other jurisdiction. Even if the other jurisdiction will allow you a credit for use taxes paid to Florida, the amount of the taxpayers refund will usually not be 100% due to varying statute of limitations periods for refund claims in the other jurisdiction and the amount of time it takes for the issue to come to light during a Florida sales and use tax audit. So the likely outcome is double taxation and a considerable amount of frustration to the owners and tax departments of our Florida based manufacturing and fabricating companies.
If the FL DOR has already brought this up on audit, then you very well may want to fight this injustice and we would be glad to help. We could either attack this issue head on or there may be other technical or objective arguments at your disposal. For example, if your company (or your client) was audited before and FDOR did not assess use tax on the same out of state installations (leaving your company with the understanding that the method you used was correct). This might be a viable argument for protest, but likely will not hold water during the audit. However, you better have a copy of the prior audit's work papers to seek a compromise based on a prior written determination, since we have had prior auditors develop amnesia about what (s)he did during an audit years ago.
If your company, or one or more of your clients, falls into this scenario before the issue has been raised on audit, then there is something proactive that you can do. As long as you plan ahead, there are ways to strategically plan around Florida's crazy position of extorting use tax on exported goods. Section 212.06(5), F.S., references an exemption for a manufacturer or fabricator who properly exports an item of tangible personal property. Specially, section 212.06, F.S., provides:
(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;
A reading of this statute would imply that a fabricator merely needs to deliver the fabricated product to the out of state job site via common carrier to avoid the use tax. While this is not as easy (or as cheap) as it sounds for most types of fabricated property due to size and weight limitations, the Florida Department of Revenue ("FL DOR") does not make it this easy. The FL DOR requires the products to the shipped to a 3rd party out of state. e.g.
see TAA 11A-012 (fabricated goods installed out of state requires use tax).
The interesting concept here is that Florida sales and use tax law has always respected the simplest of legal entities, even if commonly owned and even if completely disregarded for Federal Income Tax purposes. This has created a windfall of tax revenue for the state in some areas, such as intercompany rent, but creates a perfect and completely legal loop hole in our particular use tax scenario.
The saving solution is to set up a separate, wholly owned company to do the installation work, such as a Limited Liability Company. This separate "installation company" can then purchase the goods from the related entity, but the goods must be transported by the manufactuer to the out of state job site. The installation company must separately contract with the client to do the installation work for this solution to apply. If the formalities for exporting the goods out of Florida are followed (qualifying as a tax free export), then this should eliminate the Florida use tax as well.
If you have any questions about Florida sales and use tax as it applies to manufactured or fabricated goods installed into realty, then please feel free to contact one of the professionals from Moffa, Gainor, & Sutton, PA for a free initial consultation. You may click on either of the links at the top of this page to email or call our firm.
ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM MOFFA, GAINOR, & SUTTON, PA. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS FIRM BIO.
Special thanks to Glenn A. Bedonie, CPA for his contributions to this article. Mr. Bedonie is the former Director of Technical Assistance and Dispute Resolution for the Department of Revenue, having retired after thirty years of distinguished service. Mr. Bedonie is currently the owner of Glenn A. Dedonie, CPA, PA, specializing in state and local tax matters and regularly consults with other professional practitioners.
§ 212.02(14), F.S.
§ 212.05, F.S.
§ 212.06, F.S.
Rule 12A-1.0015, Florida Administrative Code ("F.A.C.")
Rule 12A-1.005, F.A.C.
Rule 12A-1.43, F.A.C. (how to determine tax base for use tax)
Rule 12A-1.051, F.A.C. (real property improvement contractor)
Rule 12A-1.063, F.A.C.
TAA 11A-012 (Taxability of Sales of Stairs and Stair Parts) (May 2, 2011)
LETTERS FROM CONCERNED FLORIDIANS
LETTER FROM JOSPEH P HANDY, CPA TO GOVENOR RICK SCOTT, June 19, 2012
© 2012 All rights reserved - James H Sutton Jr