FLORIDA SALES TAX HANDBOOK: CONSTRUCTION CONTRACTORS

Florida sales and use tax laws are very confusing, especially in the construction industry. To make matters even more confusing, the industry is filled with people that “think” they know the right way to handle sales and use tax and they vehemently share their opinions. Unfortunately, these well intended opinions can get other business owners in a lot of trouble. This article is written specifically on the Florida sales tax implications for construction companies and it is written by a CPA and Attorney who practices almost exclusively in Florida sales and use tax controversy. The author was also the CFO/in-house counsel for two construction companies before turning to full time sales tax controversy in 2011.

To understand Florida sales and use tax law in the construction industry, we need to start out with the basics. The heart of understanding sales tax on construction companies can be broken down into three questions:

  1. Is the project a real property improvement or the sale of tangible personal property?
  2. Is the project on state or federal government property?
  3. Presuming this is a real property improvement, is the construction company “manufacturing” any of the tangible personal property being installed into real property?

With these three questions as a blue print of the issues, let’s start with the first question:

What is the difference between real property improvement and the sale of tangible personal property?

Generally, you can think of “real property improvement” as (1) tangible personal property attached directly to the real property (b) that would cause damage to the property if removed, and which will likely (3) stay with the property when the real property is sold. For a simple example, a new roof on a residential or commercial building would be a real property improvement. It is permanent, would cause damage to be removed, and likely would stay with the building when the building is sold. So roofing contractors, counter top contractors, window and door contractors, cabinet contractors, HVAC contractors, plumbers, electricians, low voltage contractors, and many more types of contractors USUALLY, but not always, fall into this category.

On the other hand, blinds are usually considered tangible personal property even though they are screwed into the window frame. Window HVAC units that merely sit in the window and plug into the wall are also considered tangible personal property. However, the Department of Revenue does not consider an ATM machine installed into a bank to be a real property improvement. While the ATM is attached strongly to the building and would cause damage to be removed, you would not expect the occupying bank to leave the ATM machine in the building when they leave the building. This is one of those examples which catches a lot of people by surprise. Florida sales tax rules, when applied to very specific situations can have very unexpected answers if you haven’t run into the issue before. Whatever your company is selling/installing, it is best to triple check whether you are handling sales taxes the right way.

Anything you can touch it that is not considered a real property improvement is going to be considered tangible personal property. Why does the distinction between real property improvement and tangible personal property matter? Here is why:

Sale/Repair of Tangible Personal Property: The seller of tangible personal property is not supposed to pay sales tax when buying inventory, but it supposed to charge sales tax to the customer on the full, installed price, including labor, delivery, and any other charges paid by the customer.

Sale/Repair of Real Property: The sale or repair of “real property” is not subject to sales tax to the customer. The seller is considered the final consumer of the tangible personal property used in the contract. The real property contractor is supposed to pay sales tax on the contractor’s price of all materials purchased and no sales tax is charged to the customer.

So at the time a contractor bids a project, (s)he is expected to understand which projects are going to be considered real property improvements and which are merely the sale of tangible personal property because the sales tax treatment is dramatically different. I’ve run into far too many contractors that walked into my office with a complete misunderstanding of how to handle sales tax that I wager 1 out of every 3 smaller to medium sized contractors are not handling sales tax correctly. This is the primary reason the Department of Revenue loves to audit contractors – they make money assessing sales tax for every mistake.

What if the project is part real property improvement and part tangible personal property? This is not uncommon for many companies in the construction industry. Florida sales tax rules refer to these as “mixed contracts.” Florida sales tax rules provide that the sales tax treatment of a mixed contract is based on the “predominant nature” of the contract. If the contract is more than 50% real property, then the whole project will be treated as real property. If the contract is more than 50% tangible personal property, then the contactor is supposed to charge sales tax on the full contract as tangible. Note that this is a whole contract question. You can’t simply break out your invoices to charge sales tax on some tangible personal property then issue a separate invoice for real property improvement without sales tax. If the whole project is under one contract, then you have to analyze the whole contract. However, if there are two completely separate contracts that are not interdependent on each other, then you can have a tangible personal property contract and a real property contract, each taxed accordingly.

A common mixed use industry we run into often are interior designer companies. The interior design industry gets paid well for their creative ideas (services), but often end up selling some furniture (tangible personal property) or even remodeling projects that redo kitchens or bathrooms (real property improvement). At the end of this article is a link to an entire article on the interior decorating industry.

One of the most common mistakes I have seen contractors make when handling sales tax is to simply tax the customer on the materials provided and not tax any of the installation labor. The mistaken theory behind this concept is that everyone seems to believe that labor is not taxable in Florida. Labor itself is not taxable in most cases, but labor along with tangible personal property is taxable. Huge mistake for almost every contractor, but I have heard it so many times that it is worth mentioning in this article. As with the best misleading rumors in the tax world, they start with a grain of truth then get derailed in the details. There actually is a provision in Florida sales tax statutes that allows a contractor to charge sales tax on materials, but not on labor, even for real property improvement contacts. The problem is that the provision in the law is almost impossible to qualify for.

Florida provides special tax treatment for a “retail sale plus installation contract” which entitles the contractor to just charge sales tax to their customers on materials and not on labor. This provision is often referred to as a “3d” contractor because it is discussed in Rule 12A-1.051(3)(d), FAC. Unfortunately, there are two requirements that make it almost impossible for any contractor to reliably qualify as a 3d contractor. First, the initial contract must spell out every single item of tangible personal property sold with line item pricing. Every screw. Every shim. Every gallon of paint, stain, and tube of glue. This type of specificity is extremely rare, much less when you have to include line item pricing for each item in the contract. The second requirement that makes it almost impossible to have a 3d contract is that the risk of loss must pass to the customer as soon as the materials hit the jobsite. Virtually no construction contracts are designed this way because customers want the contractor to be responsible for the materials until the project is finished. In other words, far too many people will believe they are a “3d contractor” because someone told them they were. Unfortunately, when the contractor doesn’t qualify as a 3d contractor, the auditor will inform the contractor that they illegally collected sales tax from their customers, but still owe use tax on the contractor’s cost of materials for the last 3 years. Imagine having to pay sales tax on all your materials cost over the last 3 years as a single audit assessment. I have seen this happen repeatedly and it is never pretty.

The low voltage industry more than any other is where I have even seen the allusive “3d contractor” issue arise. Strangely enough, I have even seen a low voltage contractor survive a sales tax audit doing it completely wrong and the auditor didn’t call them on it. Then a few years goes by and the low voltage contractor goes through a second audit, but they have evolved into doing a lot of tax exempt clients like schools and churches. These types of entities can purchase goods exempt from sales tax, so when the contractor gives them what they believe to be a “3d” contact, the customer’s exemption certificate appears to extinguish any sales tax due. Unfortunately, the second auditor spots the error in the contractor’s ways and hits the contractor for all the sales tax not paid on the contractor’s cost of materials over the past 3 years. We can often use the prior auditor’s mistakes to help settle the second audit, but it is never settled at the audit level.

At the end of the day, almost no contractor will meet the requirements to be a “3d contractor.” Besides, who would want to? The contractor that pays sales tax on their lower cost of materials can either outbid or make more profit than the contractor who charges sales tax on the higher price for the materials the customer pays.

Government Contracts?

So far, we have covered the topics of tangible property vs real property contracts as well as mixed contracts and “3d” contracts. Perhaps you are starting to feel like you are getting the hang of Florida sales tax treatment for the construction industry? Time to throw a wrench into the mix. Construction contracts for governmental clients have a different set of tax rules. You will find a few things attached to real property, like blinds, that are considered tangible personal property when deal with “for profit” or 501(c)(3) companies. However, anything that is attached to real property in any way is going to be considered a real property improvement in a contract with the government.

Furthermore, Florida law allows for a special type of “public works contract” for government projects that completely avoids sales tax if certain procedures are followed. Under a public works contract, the government directly purchases all materials from (non-installing) vendors and the construction contractors are merely installing the tangible personal property purchased by the government.

Moral of the story, make sure you review you sales tax contract policies when dealing with the government. You can either get whipsawed and owe a lot of tax unexpectantly or you can be savvy enough to plan ahead of time and possibly get the lowest bid! There is a link below to an article completely focused on the topic of government real property contractors.

Manufactured Property that is Installed in Real Property

There are large segments of the construction industry that manufacture the materials that they install into real property. While framers, masons, and plumbers rarely fall into this category, cabinet companies, counter top companies, window and door companies, and iron/steel companies all tend to manufacture what they sell as installed products. These companies have the additional burden of charging themselves sales tax on the labor used to manufacture those products that are eventually installed into real property. That is right… manufacturing labor in Florida is subject to sales tax if the product manufactured is installed into real property by the same company that manufactured it. The same rules apply even if the property is installed into real property outside of Florida as long as the goods were manufactured in Florida. I have represented many cabinet and counter top companies that learned this lesson the hard way after getting a sales tax audit notice. There are links to articles below for specific types of industries in this category.

It is possible to have the manufacturing company in one legal entity sell the materials to the customer and a second “labor only” company do the installation as long as the customer signs separate contracts with each entity. This type of structure can be advantageous if (1) the customer is tax exempt, making the product completely exempt from sales tax or (2) the product is installed into real property outside of Florida, exempting both the installation labor and materials from Florida sales tax.

What should you do if your construction company has been doing things wrong?

This is a great question. First, I will tell you what not to do. I don’t recommend you simply change the way you handle sales tax. If you do this, then your sales tax returns will go from remitting a whole lot of tax to remitting almost nothing (or vice versa). Does anyone think for a second that this will not get the one-track minded attention of the Florida Department of Revenue? The realty is that such a dramatic change will likely trigger a sales and use tax audit. There is an easier, much less costly solution. I would recommend going through a voluntary disclosure with the state to admit you have been doing it wrong, request credit for taxes already paid (if applicable), and then change your method of handling sales tax during the disclosure. This will most likely avoid the sales tax audit and cause much, much less headaches for your business.

SUMMARY

In summary, construction companies need to distinguish between their projects that are taxable tangible personal property sales and non-taxable real property improvements. Construction companies need to understand how to handle mixed contracts as well as government contracts. Most importantly, even if you learn how sales tax is handled for one type of project, you really need to re-examine the sales tax treatment if your company moves into new types of products or different types of clients. Sales tax is just too illogical to assume you know the right answers when your company goes through changes. Finally, cleaning up the past for a company that has been doing things wrong is best accomplished by filing a voluntary disclosure rather then simply changing filing methods (to greatly lesson the chance of a sales tax audit).

Florida sales tax attorney; Florida sales tax audit; Florida sales tax audit defense; Florida sales tax construction; Tampa sales tax attorney; Miami sales tax attorney; Miami sales tax audit defenseAbout the author: James Sutton is a Florida licensed CPA and attorney as well as a partner in Moffa, Sutton, & Donnini, PA. Mr. Sutton is charge of the Tampa office of the firm and practices almost exclusively in the area of Florida Sales & Use Tax Controversy. Mr. Sutton handles audits, protest, litigation, criminal cases, revocations, collections, and consulting engagements all in the area of sales tax. Mr. Sutton is an active member in the FICPA, speaking at several conferences including the Construction Industry Conference held in Orlando every year. Mr. Sutton was also CFO an in-house counsel for two construction companies from 2003 to 2011, so he understands more about the construction industry than most tax attorneys. If you are interested in learning more about Florida sales tax from Mr. Sutton, you can find his speaking engagements around the state HERE. Otherwise, you can learn more about Mr. Sutton in his firm bio HERE.

About the firm: At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have been defending Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners throughout the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.

Want to learn more about sales tax? Click HERE to see a list of our future speaking engagements!

AUTHORITY

Rule 12A-1.051 Sales to or by contractors who repair, alter, improve, and construct real property

FL DOR Form GT-800067 – Sales and Use Tax on Construction, Improvements, Installations, and Repairs

ADDITIONAL RESOURCES

FLORIDA SALES TAX – VOLUNTARY DISCLOSURE PROGRAM, published April 09, 2018, by Jeanette Moffa, Esq.

WHAT SERVICES AE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, by James Sutton, CPA, Esq.

FL COUNTER TOP COMPANIES: SALES TAX PROBLEMS, published October 13, 2013, by James Sutton, CPA, Esq.

FL CABINET COMPANIES WITH SALES TAX PROBLEMS, published October 5, 2013, by James Sutton, CPA, Esq. and Gerald Donnini, Esq.

INTERIOR DESIGNERS: FL SALES TAX PLANNING, published July 16, 2015, by Amanda Levine, Esq.

PROTEST A FL SALES AND USE TAX AUDIT, published August 8, 2019, by Matthew Parker, Esq.

FLORIDA SALES TAX ON PUBLIC WORKS CONTRACTS – A TRAP FOR CONTRACTORS, published January 25, 2016, by Jeanette Moffa, Esq.

FLORIDA CONSTRUCTION ON TAX EXEMPT PROJECTS – MINIMIZING/ELIMINATING SALES AND USE TAXES, published December 4, 2011, by James Sutton, CPA, Esq.
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