STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CLARKE ENGINEERING COMPANY, )
)
Petitioner, )
)
vs. ) CASE NO. 79-1392
)
DEPARTMENT OF REVENUE, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, K. N. Ayers, held a public hearing in the above styled case on October 3, 1979, at Fort Lauderdale, Florida.
APPEARANCES
For Petitioner: David Clarke
1730 North Powerline Road Pompano Beach, Florida 33060
For Respondent: Linda C. Procta, Esquire
Assistant Attorney General Department of Legal Affairs The Capitol, Room LL04 Tallahassee, Florida 32301
By Petition forwarded with letter dated June 19, 1979, Clarke Engineering Company, Petitioner, seeks exemption from sales tax on eight items sold to the City of Pompano Beach in connection with a contract with the City to construct storm drainage improvements. Although Petitioner's true application at this state of the proceedings appears to be for a refund of sale taxes paid under protest he has failed to join the Comptroller as a necessary party. However, the petition, and all evidence submitted by the parties, would indicate this to be an appeal from the Respondent's denial of Petitioner's application for a certificate of registration as a dealer to allow him to purchase personal property for resale to the ultimate consumer with the sales tax deferred until the property goes to the ultimate consumer. The parties have so treated this petition and it will be so treated in this Recommended Order.
The facts here involved are undisputed. Mr. Clark testified on behalf of Petitioner, the area superintendent for Respondent testified on behalf of Respondent and 4 exhibits were admitted into evidence.
FINDINGS OF FACT
Clarke Engineering Company submitted a bid and was awarded a contract on 19 October 1978 by the City of Pompano Beach for the construction of storm drainage improvements in the City of Pompano Beach. In addition to the normal
provisions of public works contracts such as prevailing wage rates, bonds, subcontractors, etc., this contract included the following provision:
PRICES BID- The prices are to include selling directly to the City and delivering all materials, equipment supplies, [sic] including applicable taxes, and all other facilities at agreed prices, and the performance of all labor and services necessary or proper for the installation and completion of the work at additional agreed prices except as may be otherwise expressly provided in the contract documents. Under the present interpretation of statutes and rules of the Department of Revenue, items involving materials, equipment and supplies sold and delivered to the City of Pompano Beach, are exempt from sales tax, provided the Contractor meets the requirements of the Department of Revenue. Bid items involving labor and installation are not exempt from the Florida State Sales Tax. The Contractor will be responsible for reviewing the pertinent State Statutes and Florida Department of Revenue Rules and Regulations and any other applicable regulations or codes involving the sales tax and complying with all requirements.
Item No. 1 on this contract provided for the Contractor to sell and deliver to the City eight items of personal property at the bid price per unit. These items comprised 15", 18", 24", 27" and 42" diameter corrugated steel pipe; type "C" inlets; type "E" inlets; and manholes.
The total bid submitted by Petitioner for Item No. 1 was $69,466.00. Although this is an estimated total and not the dollar amount actually delivered to City, it is the sales tax on Item 1 that is in dispute. The exact amount of supplies and materials charged to the City pursuant to this item was not presented at the hearing but is obviously not in dispute. On all other supplies and materials used by the Contractor in connection with this contract, Clarke paid the sales tax without protest.
Upon acceptance of Clarke's bid by the City, Clarke, on 19 October 1978 submitted and application for a certificate of registration to conduct business as a dealer involving sales and use tax. (Exhibit 2). A copy of his contract with the City was forwarded with the application.
This application was forwarded by the local revenue office in Tallahassee on 14 November 1978 for review and appropriate action. (Exhibit 2).
By letter dated 20 November 1978 Respondent's Chief, Sales Tax Bureau, denied Petitioner's application for sales tax registration on the ground that in his opinion the contract did not "clearly meet the definition of Rule 12A- 1.52(2)(d)." Additional correspondence between Clarke and the Department of Revenue (DOR) failed to modify Respondent's position and by letter dated April 26, 1979, DOR advised Petitioner it could consult with an attorney if deemed aggrieved by the action of DOR. By letter dated May 17, 1979, Clarke requested
an administrative hearing to review this determination and this proceeding followed.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and subject matter of these proceedings.
Section 212.06(2), Florida Statutes, defines dealer to include:
. . . every person . . . who sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, or for consumption, or distribution, or storage to be used or consumed in this state, tangible personal property as defined herein.
. . . any person who has sold at retail, or used, or consumed, or distributed, or
stored for use or consumption in this state, tangible personal property and who cannot prove that the tax levied by this chapter has been paid on the sale at retail, the use, the consumption, the distribution, or storage of said tangible personal property.
Section 212.08(6), Florida Statutes, provides in pertinent part:
There shall also be exempt from the tax imposed by this chapter sales made to the United States government, the state, or any county, municipality or political subdivision of this state; provided this exemption shall not include sales of tangible personal property made to contractors employed either directly or as agents of any such government or political subdivision thereof when such tangible property goes into or becomes part of public works owned by such government or political subdivision thereof. . . .
This provision of the statutes amended a previous existing exemption in 1959. Prior to 1959, Section 212.08(7) provided:
There shall also be exempt from the tax imposed by this chapter sales made to the United States government, the state or any county, municipality, or political subdivision of this state, including sales of tangible personal property made to contractors employed by any such government or political subdivision thereof where such tangible personal property goes into and becomes part of a public works owned by such government or political subdivision thereof.
Accordingly, prior to 1959, all material purchased by the contractor which was used in and became part of a public work, for the construction of which the contractor had contracted with a political subdivision, was exempt from sales tax. This would include all materials and supplies purchased by the contractor for use in such public works.
In interpreting the present statute, it is important to know what was changed to determine the legislative intent. It is clear that the intent of this change was to tax materials and supplies purchased by contractors for use in constructing public works for governmental entities. The first part of this exemption, viz. that sales to political subdivisions of government are not taxed remains after the 1959 change exactly as before that change. The only thing changed was that contractors who purchased supplies and materials to be used in public works projects were no longer exempt from sales tax. DOR recognized the purpose of the 1959 amendment when Rule 12A-1.51, Florida Administrative Code, was adopted. This rule provides in pertinent part:
The method by which contractors or subcontractors arrive at the total contract price charged for repair, alteration, improvement and construction of real property or for a combination of work on both real and personal property must be determined for the purpose of ascertaining whether the receipts for sales made to or by them are taxable.
Such contractors may include, among others, building, electrical, plumbing, painting, decorating, ventilating, paper hanging, sheet metal, bridge, road, landscape or roofing contractors, and they may use one of the following methods in arriving at the total contract price:
Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services for a lump sum;
Contracts in which the contractor or subcontractor agrees to furnish the materials and supplies and necessary services on a cost-plus or fixed-fee basis;
Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services with an upset or guaranteed price which may not be exceeded; and
Contracts in which the contractor or subcontractor repairs, alters, improves, or constructs real property and wherein he agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and to complete the work either for an additional agreed price or on the basis of time consumed.
When a contractor or subcontractor uses materials and supplies in fulfilling either a
lump sum, cost plus, fixed fee, guaranteed price of any kind of contract except one falling in class (d) above, he becomes the ultimate consumer thereof. The person or dealer who sells such materials and supplies to such contractor or subcontractor is making sales at retail and is required to collect the tax from him based upon the receipts from such sales.
In cases falling in class (d) above, the contractor or subcontractor is deemed to be selling tangible personal property at an agreed retail price and shall collect tax from his purchaser based upon the amount of receipts from such sales, including installation charges if separately stated. A dealer selling to such contractor must obtain a resale certificate in lieu of tax.
The policy of Chapter 212, Florida Statutes, is expressed in Section 212.05, which provides in pertinent 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. . . . For the exercise of said privilege a tax is levied on each taxable transaction . . . [at the rate of 4 percent of the sales price of each item of
tangible personal property when sold at retail].
This policy was extant in 1959 but contractors doing business with political subdivisions (governments) were exempt from sales tax on materials and supplies used in public works projects. When this exemption was removed, no change was made in the legislative policy to collect sales taxes on all taxable sales to the ultimate consumer. The onus is placed upon the dealer to collect this sales tax and remit same to DOR.
Rule 12A-1.51, F.A.C., recognizes this policy in subparagraph (2)(d) of this rule which removes the contractor from the position of ultimate consumer when he agrees to sell specifically described and itemized materials and supplies at an agreed price. The contractor in such a situation becomes a dealer and is required to obtain a certificate of registration as such and collect the tax when he delivers the materials to the ultimate consumer.
This interpretation of the statute by the agency is not only entitled to great weight, Austin v. Austin, 350 So.2d 102 (Fla. 1st DCA 1977) but also the agency must honor its own rules until they are amended or abrogated. Gadsden State Bank v. Lewis, 348 So.2d 343 (Fla. 1st DCA 1977).
Here the contract expressly provided that the contractor would sell and deliver specifically described property to the City of Pompano Beach at an agreed (bid) price. This contract would undoubtedly have been found by DOR to exempt the contractor from the position of ultimate consumer had the other party to the contract been subject to sales tax.
Section 212.08(6) does not require a different result because the City is the other party to the contract. Section 212.08(6) specifically provides that governmental units are exempt from sales taxes on sales of personal property to them.
Respondent cites numerous cases to support its position that the contract between Petitioner and the City is simply a ruse to avoid sales tax. None of these cases in any way negate the obvious and clear wording of the contract that the Contractor agrees to sell and deliver specified supplies to the City. The fact that the intent of the City was to utilize its tax exempt status to reduce the total cost of the project does not render this contract void or voidable. Purchases of personal property by the City of Pompano Beach are exempt from sales tax. This is so regardless of from whom this purchase is made.
Section 212.08(6) did not change the tax exempt status of Pompano Beach when the exemption for supplies and materials used in public works projects was removed by the 1959 amendment.
From the foregoing it is concluded that Petitioner was wrongly denied a tax exemption certificate for the sale of specific items to the City of Pompano Beach pursuant to contract dated 19 October 1979. It is therefore
RECOMMENDED that Clarke Engineering Company be issued a certificate of registration as a dealer.
DONE AND ENTERED this 2nd day of November 1979 in Tallahassee, Florida.
COPIES FURNISHED:
David Clarke
1730 North Powerline Road Pompano Beach, Florida 33060
Linda C. Procta, Esquire Assistant Attorney General Department of Legal Affairs The Capitol, Room LL04 Tallahassee, Florida 32301
K. N. AYERS Hearing Officer
Division of Administrative Hearings
101 Collins Building Tallahassee, Florida 32399-1550 (904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings this 2nd day of November 1979.
================================================================= NOTICE AND AGENCY FINAL ORDER
=================================================================
STATE OF FLORIDA
DEPARTMENT OF REVENUE, TALLAHASSEE, FLORIDA
CLARKE ENGINEERING COMPANY,
Petitioner,
vs. CASE NO. 79-1392
DEPARTMENT OF REVENUE,
Respondent.
/
NOTICE
TO: DAVID E. CLARKE LINDA C. PROCTA
CLARKE ENGINEERING COMPANY ASSISTANT ATTORNEY GENERAL 1730 NORTH POWERLINE ROAD DEPARTMENT OF LEGAL AFFAIRS POMPANO BEACH, FLORIDA 33060 THE CAPITOL LL04
TALLAHASSEE, FLORIDA 32301
You will please take notice that the Executive Director of the Department of Revenue, on January 10, 1980, at 10:00 a.m. in Room 104, Carlton Building, Tallahassee, Florida, acting in behalf of the Governor and Cabinet, considered the Recommended Order which was entered in the above captioned case on November 2, 1979, by the Division of Administrative Hearings, Respondent's Written Exceptions to the Recommended Order received by the Department of Revenue on November 29, 1979, Respondent's Proposed Substituted Order, received by the Department of Revenue on November 29, 1979, Respondent's Memorandum of Law in support thereof, and other relevant facts in the case, as authorized by Rules 12-3.02 - 3.05, inclusive, F.A.C.
The Executive Director of the Department of Revenue approved and accepted the Findings of Fact set forth in the Recommended Order of the Division of Administrative Hearings, Department of Administration dated November 2, 1979, rejected the Conclusions of Law set forth in said Recommended Order, and accepted Respondent's Conclusions of Law set forth in Respondent's Proposed Substituted Order, which are incorporated in the Final Order of the Department of Revenue which was entered in the above captioned case on January 10, 1980, a
copy of which is enclosed. This constitutes final agency action by the Department of Revenue.
JOHN D. MORIARTY DEPUTY GENERAL COUNSEL DEPARTMENT OF REVENUE STATE OF FLORIDA
ROOM 104, CARLTON BUILDING TALLAHASSEE, FLORIDA 32301
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a true and correct copy of the foregoing Notice has been furnished by mail to Mr. David E. Clarke, Clarke Engineering Company, 1730 North Powerline Road, Pompano Beach, Florida 33060; by hand delivery to Linda C. Procta, Assistant Attorney General, Department of Legal Affairs, The Capitol LL04, Tallahassee, Florida 32301; and K. N. Ayers, Hearing Officer, Division of Administrative Hearings, Department of Administration, Room 101, Collins Building, Tallahassee, Florida 32301, this 15th day of January, 1980.
JOHN D. MORIARTY
STATE OF FLORIDA DEPARTMENT OF REVENUE
CLARKE ENGINEERING COMPANY,
Petitioner,
vs. CASE NO. 79-1392
DEPARTMENT OF REVENUE,
Respondent.
/
FINAL ORDER OF DEPARTMENT OF REVENUE
Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, K. N. Ayers, held a public hearing in the above styled case on October 3, 1979, at Fort Lauderdale, Florida.
APPEARANCES
For Petitioner: David Clarke
1730 North Powerline Road Pompano Beach, Florida 33060
For Respondent: Linda C. Procta, Esquire
Assistant Attorney General Department of Legal Affairs The Capitol, Room LL04 Tallahassee, Florida 32301
By Petition forwarded with letter dated June 19, 1979, Clarke Engineering Company, Petitioner, seeks exemption from sales tax on eight items sold to the City of Pompano Beach in connection with a contract with the City to construct storm drainage improvements. Although Petitioner's true application at this stage of the proceedings appears to be for a refund of sales taxes paid under protest he has failed to join the Comptroller as a necessary party. However, the petition, and all evidence submitted by the parties, would indicate this to be an appeal from the Respondent's denial of Petitioner's application for a certificate of registration as a dealer to allow him to purchase personal property for resale to the ultimate consumer with the sales tax deferred until the property goes to the ultimate consumer. The parties have so treated this petition and it will be so treated in this Recommended Order.
The facts here involved are undisputed. Mr. Clark testified on behalf of Petitioner, the area superintendent for Respondent testified on behalf of Respondent and 4 exhibits were admitted into evidence.
FINDINGS OF FACT
Clarke Engineering Company submitted a bid and was awarded a contract on 19 October 1978 by the City of Pompano Beach for the construction of storm drainage improvements in the City of Pompano Beach. In addition to the normal provisions of public works contracts such as prevailing wage rates, bonds, subcontractors, etc., this contract included the following provision:
PRICES BID- The prices are to include selling directly to the City and delivering all materials, equipment supplies, [sic] including applicable taxes, and all other facilities at agreed prices, and the performance of all labor and services necessary or proper for the installation and completion of the work at additional agreed prices except as may be otherwise expressly provided in the contract documents. Under the present interpretation of statutes and rules of the Department of Revenue, items involving materials, equipment and supplies sold and delivered to the City of Pompano Beach, are exempt from sales tax, provided the Contractor meets the requirements of the Department of Revenue. Bid items involving labor and installation are not exempt from the Florida State Sales Tax. The Contractor will be responsible for reviewing the pertinent State Statutes and Florida Department of Revenue Rules and Regulations and any other applicable regulations or codes involving the sales tax and complying with all requirements.
Item No. 1 on this contract provided for the Contractor to sell and deliver to the City eight items of personal property at the bid price per unit. These items comprised 15", 18", 24", 27" and 42" diameter corrugated steel pipe; type "C" inlets; type "E" inlets; and manholes.
The total bid submitted by Petitioner for Item No. 1 was $69,466.00.
Although this is an estimated total and not the dollar amount actually delivered to City, it is the sales tax on Item 1 that is in dispute. The exact amount of supplies and materials charged to the City pursuant to this item was not presented at the hearing but is obviously not in dispute. On all other supplies and materials used by the Contractor in connection with this contract, Clarke paid the sales tax without protest.
Upon acceptance of Clarke's bid by the City, Clarke, on 19 October 1978 submitted and application for a certificate of registration to conduct business as a dealer involving sales and use tax. (Exhibit 2). A copy of his contract with the City was forwarded with the application.
This application was forwarded by the local revenue office in Tallahassee on 14 November 1978 for review and appropriate action. (Exhibit 2).
By letter dated 20 November 1978 Respondent's Chief, Sales Tax Bureau, denied Petitioner's application for sales tax registration on the ground that in his opinion the contract did not "clearly meet the definition of Rule 12A- 1.52(2)(d)." Additional correspondence between Clarke and the Department of Revenue (DOR) failed to modify Respondent's position and by letter dated April 26, 1979, DOR advised Petitioner it could consult with an attorney if deemed aggrieved by the action of DOR. By letter dated May 17, 1979, Clarke requested an administrative hearing to review this determination and this proceeding followed.
CONCLUSIONS OF LAW
While the basis of this dispute is the interpretation of Section 212.08(6), Florida Statutes, to understand the purpose and function of that section it is important to look at other sections of Chapter 212. The intent of the Legislature in enacting the Revenue Act of 1949, Chapter 212, Florida Statutes, is expressed in Section 212.05, F.S.:
212.05 Sales, storage, use tax. --
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, 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. (emphasis supplied).
The basis of Petitioner's claim is that it is entitled to be registered as a sales tax "dealer" and to purchase supplies tax free. The term "dealer" is defined in Section 212.06(2)(c), Florida Statutes, as follows:
The term "dealer" is further defined to mean every person, as used in this chapter, who sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, or for consumption, or distribution, or storage
to be used or consumed in this state, tangible personal property as defined herein.
A dealer may purchase supplies free of tax when he gives a certificate of his intent to resell them to the ultimate consumer. These purchases by the dealer are not taxable because they are not "retail sales." The definition of "retail sales" is found in Section 212.12(3)(a), Florida Statutes:
(3)(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, and shall mean and include all such transactions that may be made in lieu of retail sales or sales at retail. A resale must be in strict compliance with rules and regulations and any dealer making a sale for resale which is not in strict compliance with rules and regulations shall himself be liable for and pay the tax. (e.s.)
In addition, Section 212.12(12), Florida Statutes, states:
(12) It is hereby declared to be the legislative intent that wherever in the constitution, administration or enforcement of this chapter there may be any question respecting a duplication of the tax, that the end consumer, or last retail sale shall be the sale intended to be taxed and insofar as may be practicable there be no duplication or pyramiding of the tax. (e.s.)
Thus, only "retail sales" are subject to tax and the legislative intent in these statutes is to tax only the last sale in which the goods retain their character as tangible personal property. The tax burden is thereby placed on the ultimate consumer.
In reading these sections of Chapter 212, Florida Statutes, together and applying them to the facts in this case, it is clear that the Petitioner is liable for the tax. Clarke Engineering Company is not engaging in "the business of selling tangible personal property at retail. . . ." They did not resell the building materials to their clients "in the form of tangible personal property" but rather made improvements to realty. As to who is the "end consumer" of the materials, the courts have consistently found it to be the contractors. In Utah Concrete Products Corp. v. State Tax Commission, 125 P.2d 408, (Utah 1942), the Utah Supreme Court held that contractors, engaged in the construction of a
public project for a lump sum, were "consumers", within the meaning of the Sales Tax Act, of the materials purchased and used by them in the performance of their contract and, therefore, the sale of these materials was subject to the imposition of the sales tax. Also, the Connecticut Supreme Court, in Fusco- Amatruda Company v. Tax Commissioner, 362 A.2d 847, (Conn. 1975), discussed a provision in the Connecticut Sales Tax Statute which requires the consumer to pay the tax. The court said:
While the statute does not define the term "consumer," it is generally held that a general contractor who purchases material from a retailer for use in the construction of a building for this customer is the "consumer" of those materials within the meaning of that terms as it appears in statutes similar to Section 12-408 imposing a sales tax. G.S. Lyon & Sons Lumber & Manufacturing Co. v. Department of Revenue, 23 Ill.2d 180, 185, 177 N.E. 2d 316; State v.
J. Watts Kearny & Sons, 181 La 554, 559, 160 So. 77; State v. Christhilf, 170 Md. 586, 591, 185 A. 456; St. Louis v. Smith, 342 Mo. 317, 321, 114 S.W. 2d 1017; Olson Construction Co. v. State Tax Commission, 12 Utah 2d 42, 44, 361 P.2d 1112. p. 850
Section 212.08(6), Florida Statutes, specifically exempts retail sales of tangible personal property made to government bodies. However, sales to government contractors of materials incorporated into public works are taxable since the ultimate consumer of the materials is the contractor and not the government. To fully understand this section it is important to look at its legislative history.
Prior to 1959, the sales tax exemption given to political subdivisions specifically included sales of tangible personal property made to contractors when such property went into public works.
Section 212.08(7) stated:
(7) EXEMPTIONS; POLITICAL SUBDIVISIONS, INTERSTATE TRANSPORTATION, COMMUNICATIONS, ETC. -- There shall also be exempt from the tax imposed by this chapter sales made to the United States government, the state or any county, municipality, or political subdivision of this state, including sales of tangible personal property made to contractors employed by any such government or political subdivision thereof where such tangible personal property goes into and becomes part of a public works owned by such government or political subdivision thereof.
In 1959, the Legislature took away this exemption for contractors and the current provision states: Section 212.08(6)
(6) EXEMPTIONS; POLITICAL SUBDIVISION COMMUNICATIONS. --
There shall also be exempt from the tax imposed by this chapter sales made to the United States government, the state, or any county, municipality or political subdivision of this state; provided this exemption shall not include sales of tangible personal property made to contractors employed either directly or as agents of any such government or political subdivision thereof when such tangible property goes into or becomes part of public works owned by such government or political subdivision thereof, except public
works in progress or for which bonds or revenue certificates have been validated on or before August 1, 1959; . . .
Thus, there can be no clearer statement of legislative intent to specifically exclude from the exemption given to political subdivision items of tangible personal property purchased by contractors and included in public works.
These statutes effectively separate government contracts into two categories: sales of materials and public works construction contracts. If the contracting party is selling materials, he may register as a dealer and make purchases free of tax. He may also make sales free of tax if the buyer is a governmental unit. If he is performing a public works construction contract, however, he must pay tax on his purchases of supplies and materials.
This issue is not entirely new to the Florida Courts. In King's Bay Yacht and Country Club v. Green, 173 So.2d 509 (Fla. 1st DCA 1965), the First District Court of Appeal set up a test, wherein the primary and predominant nature of the contract is considered in deciding the issue. In that case, the court reviewed contracts in which a materialman agreed to fabricate, supply and install shelving, furniture and appliances, and to relocate designated kitchen equipment for the Country Club. These materials constituted finished goods of a kind ordinarily sold separately, and the charge for these goods constituted over 90 percent of the total contract price. Id. at 510. Although the contract appeared to be a conventional construction contract in some respects, it provided that all supplies be deemed personal property between the parties, with title to remain in the materialman until paid for. Id. at 510-511. Based on these facts, the court ruled that the contract was predominantly for the sale of goods. The court used the following test:
If an examination of the contract establishes from a standpoint of the dollar value of the labor and materials to be furnished that it is primarily and predominantly for the purpose
of repairing, altering, improving, or constructing real property, then the contractor should be held to be the ultimate consumer and subject to the payment of sales tax on any items of tangible personal property furnished and supplied by him as an incidental obligation of the contract under Rule 4A-1.51(1)(2) of the Commission. If on the other hand an examination of the
agreement between the owner and contractor reveals from the dollar value of the tangible personal property to be manufactured, fabricated, supplied, furnished, and installed by the contractor that the contract is primarily one involving a sale of tangible personal property, then the owner shall be held to be the ultimate consumer obligated for the payment of sales tax under Rule 4A- 1.51(4) of the Commission, even though as an incident of the contract the contractor is required to furnish the labor and materials necessary to do a minor amount of repairs, alterations, improvements, or construction of the real property in which the tangible personal property is to be located. (E.s.) p. 513-514
(At the time of this case the State Revenue Commission made the preliminary finding of facts and the Rule that was the subject of the test was Commission Rule 4A-1.51(1)(2). The language of Commission Rule 4A-1.51(1)(2) is the same as that found in 12A-1.51(1)(2), F.A.C.)
It is important to note that the court used the ratio of the dollar value of the materials to the total contract price, as the primary factor in determining the intent of the contracting parties. If the same test is applied to the contract between Petitioner and the City of Pompano Beach, it is apparent that the primary and predominant nature of the contract is improving real property. While the King's Bay contract allowed only 10% of the total price for labor and installation, the terms of the contract in the instant case provided for over 65% of the total cost to be for actual construction. Thus, less than 1/3 of the contract price represented materials allegedly sold to the City.
More recently, in Lawrence Nail Construction Co. v. Dept. of Revenue, 366 So.2d 27 (Fla. 1st DCA 1978), the same court analyzed transactions in which an asphalt manufacturer sold and installed his product on a public roadway. The court ruled that this transaction was a sale of supplies rather than a construction contract, based on the following evidence:
Testimony at the hearing was that asphalt meeting the specifications of a particular governmental entity belongs to the purchaser "when it falls in that truck at the plant." Switching of loads from one purchaser to another, for instance from a county to a city project, after loading at the plant was done only with express permission of the owner of the load and required a "change in the ticket," the original of which accompanied the load. The testimony is consistent with the contractual arrangement between the parties and with the passing of title to the personality at Nali's plant.
Id. at 29. The court continued.
. . . (T)he call for bids in each instance of record is for "ASPHALTIC CONCRETE." That is the product bid on, and purchased by, the governmental entity. Likewise the bid specifications deal with the quality and composition of the asphaltic concrete purchased. Neither the call for bids nor the specifications are for a projected improvement to realty but are clearly for the material itself, i.e., asphaltic concrete.
Turning now to the bid itself, the format is prescribed in each instance by the governmental entity and it is mandatory that the prescribed form be used. The bid format requires that the bidder set out its bid in three distinct ways, giving the purchaser the option as to the alternative selected: (1) Asphaltic concrete F.O.B. (at the plant); (2) Asphaltic concrete placed by the vendor; and
(3) Asphaltic concrete delivered and placed by the vendor. Delivery charges are separately stated on a per-mile basis, so it is only as to placement service that DOR contends the "lumping" occurred.
Nali correctly points out that the contract in this case is the bid itself. The separate invoices are indicia of performance and not a series of separate contracts. All invoices are referable to the contract itself which clearly states that amount charged for asphaltic concrete F.O.B.
Id. at 29-30. The court also included, in a footnote, a copy of the company's bid showing the charge for materials F.O.B. was over 90 percent of the total charge for materials and installation. Id., N. 1 at 30.
The court in Nali looked at a wider range of facts and circumstances than did the court in King's Bay, and did not base its ruling exclusively on the ratio of "dollar value of materials" to the full contract price. Nevertheless, both courts attempted to determine the predominant nature of the contract from the objective facts, and not from the bare representations of the parties.
Courts in other jurisdictions apply the same rule. The application of sales tax to public works contract is a commonly litigated question, because public works contractors commonly attempt to conceal the true nature of their contracts. The resulting body of case law is persuasive authority for the Department's position in that the courts have repeatedly held that substance and not form must govern the determination of tax matters. Knetsch v. U.S., 364 U.S. 361 [81 S.Ct. 132, 5 L.Ed.2d 128] (1960); Comm'r v. Court Holding Co., 324
U.S. 331 [65 S.Ct. 707 89 L.Ed. 981] (1945); Bazley v. Comm'r, 331 U.S. 737 [67
S.Ct. 1489, 91 L.Ed. 1782] (1941); Higgins v. Smith, 308 U.S. 473 [60 S.Ct. 355,
84 L.Ed. 406] (1940). The Alabama Supreme Court addressed itself to this very issue in Rust Engineering Co. v. State, 243 So.2d 695, (Al. 1971). The case
involved a suit by a contractor to test the validity of a final assessment for sales taxes in connection with the performance of a contract for the construction of a grain elevator for the States' Docks Department. The Appellant contractor claimed that it was acting as the agent of the State Docks Department, by virtue of the contract agreement, and therefore no tax was due. The court said:
Moreover, such terms as 'Agent of the State' or similar expressions, when applied to a private contractor, as they have been in this case in the so-called Contract for Special Management Services and in the purchase orders, have been held to be nothing more than labels or nomenclature, and to have little or no meaning or effect, when as here, they are inconsistent with what actually took place and the facts.
* * *
[4] Notwithstanding then what appears to be conflicts in the contracts themselves, the established rule, where taxes of the rights of third parties are concerned is that the terms of the contract are not to be the controlling or governing factors, where they are in conflict with the actual facts and the way in which the contract was really carried out. (e.s.) p. 700
* * *
It is, therefore, obvious from the evidence that the so-called Contract for Special Management Services as well as the recitals contained in the purchase orders purporting to designate the contractor as the agent of the State Docks Department in purchasing the materials, etc., to be used by the contractor in performing the contract, were devices whereby said Department sought to relieve the contractor from the payment of State Sales and Use Taxes, in order to reduce the overall or lump sum amount originally bid by the contractor for the job. Such steps were said to be taken by the Department in order to assist in reducing the overall or lump sum amount originally bid by the contractor for the job, and as one of the means used in attempting to reduce the amount of the bid to the extent of fitting such amount into the amount appropriated for the job by the Legislature, which appropriation was said to be substantially less than the amount of the bid. As worthy as the end might appear to be in this regard, the means used in attempting to relieve the private contractor from state taxes in order to accomplish such result, does not appear to be within the powers of the State Docks Department, in absence of the
authority to do so from the Legislature or from the Constitution. (e.s.) p. 699-700
Thus, the court was more concerned with the overall intent of the contract then the specific language. In Olson Construction Company v. State Tax Commission,
361 P.2d 1112, (Utah 1961) the Illinois Supreme Court said:
We do not think that the inclusion of provisions in the contracts seeking to cast them in the mold of sales of tangible personal property alters the essential nature or effect of the contracts. . . . Olson [the contractor] purchased the materials, not to resell them in their original form, but for the purpose of changing their very nature from personal to real property. p. 1113.
In Steiner Construction Company v. Comptroller, 121 A.2d 838 (Md. 1956). The Maryland Court of Appeals held that a construction contractor who purchased building materials in order to carry out contract for altercations, additions or repairs to realty owned by a corporation which was exempt from sales and use taxes was not, by reason of corporation's exemption, exempt from sale and use taxes on the building materials. Maryland had a Rule very similar to Rule 12A- 1.51(2), F.A.C., which interpreted the Maryland Sales Tax Statute. The Appellant contractor was claiming that its contract with the exempt corporation was a class (d) contract and was therefore exempt from the payment of the tax.
The Court said that despite the efforts of both contracting parties to bring the contracts within the term of class (d) contracts, the facts of what actually transpired proved otherwise.
The nature of each of the 47 contracts is clearly shown. Every one of them called for the making of repairs or alterations to existing structures or additions thereto or additions in the form of new buildings or structures to some facility of the Railroad, and in every instance the end product was to constitute real estate. . . . That, we think, is the substance of the contracts; and we do not think that the inclusion of provisions in the contracts seeking to cast them in the mold of sales of tangible personal property as such, alters the essential nature of effect of the contracts. Likewise, the allocation of price as between materials on the one hand and labor or other items on the other, does not change the nature of the contracts. (e.s.) p. 845
The Maryland court also made some observations on the nature of building materials when used to improve real property.
Building materials when incorporated into a building lose their character as tangible personal property and are transformed into real estate. . . . We cannot agree with the view that there is a transfer of title to so
many feet of lumber, kegs of nails, thousands of brick, perches of stone, cubic yards of concrete, or other items of materials entering into a lump sum contract, for a complete job or structure, which, when erected on the customer's land, is as much real property as the land itself and is by no sort of definition or reasoning 'tangible personal property.' p. 842
This same point was made by the Illinois Supreme Court in a similar factual situation in Material Service Corporation v. Isaacs, 183 N.E. 2d 164 (Ill. 1962).
. . . the material is bought and used for the purpose of constructing buildings or otherwise improving real estate, and in either case the material, in the process of such use, loses its identity as personal property.
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Their customers are not interested in and do not bargain for so many feet of lumber, kegs of nails, thousands of brick, cubic yards of concrete and so on. It is unrealistic to say that the contractor purchases these things for resale as tangible personal property to his customers. . . . The sales to the contractors are not for resale as tangible personal property but for his own use or consumption, and the amount thereof is includable in measuring the tax on the materialman's occupation. p. 166
The Petitioner has also based its claim on its interpretation of Department of Revenue Rule 12A-1.51, Florida Administrative Code. The pertinent sections of that Rule state:
12A-1.51 Sales to or by contractors who repair, alter, improve and construct real property.
The method by which contractors or subcontractors arrive at the total contract price charged for repair, alteration, improvement and construction of real property or for a combination of work on both real and personal property must be determined for the purpose of ascertaining whether the receipts from sales made to or by them are taxable.
Such contractors may include, among others, building, electrical, plumbing, heating, painting, decorating, ventilating paper hanging, sheet metal, bridge, road, landscape or roofing contractors and they may use one of the following methods in arriving at the total contract price:
Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services for a lump sum;
Contracts in which the contractor or subcontractor agrees to furnish the materials and supplies and necessary services on a cost plus or fixed fee basis;
Contracts in which the contractor or subcontractor agrees to furnish materials and supplies and necessary services with an upset or guaranteed price which may not be exceeded; and
Contracts in which the contractor or subcontractor repairs, alters, improves or constructs real property and wherein he agrees to sell specifically described and itemized materials and supplies at an agreed price or at the regular retail price and to complete the work either for an additional agreed price or on the basis of time consumed.
When a contractor or subcontractor used materials and supplies in fulfilling either a lump sum, cost plus, fixed fee, guaranteed price of any kind of contract except one falling in class (d) above, he becomes the ultimate consumer thereof. The person or dealer who sells such materials and supplies to such contractor or subcontractor is making sales at retail and is required to collect the tax from him based upon the receipts from such sales.
In cases falling in class (d) above, the contractor or subcontractor is deemed to be selling tangible personal property at an agreed retail price and shall collect tax from his purchaser based upon the amount of the receipts from such sales, excluding installation charges if separately stated. A dealer selling to such contractor or subcontractor must obtain a resale certificate in lieu of tax. (e.s.)
The Petitioner alleges that the contract it had with the City of Pompano Beach was a contract that fell under subsection (d) above.
Petitioner misinterprets subsection (2)(d), giving it a broader scope than the Department intended, or than the statute permits. In order to qualify as a (2)(d) contract, the parties must first be engaged in a sale of goods.
Petitioner's contract, taken as a whole, does not meet this threshold requirement. Moreover, the goods sold must be "specifically described and itemized." This requirement means that individual gods must be identified. It is hardly sufficient for the contractor to agree to supply so many linear feet of steel pipe or "approximately" two manholes. Such an agreement hardly qualifies as a sale of specifically itemized and described goods.
Petitioner's interpretation of Rule 51 is incorrect because that interpretation causes the rule to conflict with the statutes. Such an interpretation would render the rule invalid as applied. This interpretation cannot be permitted or, in any event, cannot estop the Department to collect tax where tax is required by statute. The courts have held that, in the event of conflict, the taxability of transactions is governed by the statutes, not the administrative rules.
Facing an identical claim by a taxpayer, one Florida court recently held as follows in First Nat'l Bank of Birmingham v. Dept. of Revenue, 364 So.2d 38 (Fla. 1st DCA 1978).
It is only in very exceptional circumstances that the rule of estoppel may be imputed to the state in taxation matters. 68 Am.Jur.
2d, Sales and Use Taxes, Section 162. For example, a rule or regulation of a state tax commission purporting to exempt a taxpayer from the payment of his tax, where no authority to do so was granted to it by the legislature, cannot operate as a estoppel against the state to collect such tax in the case of transactions which have closed so that the seller cannot collect the tax from the purchaser. Id. The above rule was applied by the Florida Supreme Court in an action where a taxpayer sought to estop the state comptroller from collecting documentary stamps upon the transfer of certain shares of stock in North American Company v. Green, 120 So.2d 603, (Fla. 1959). Id. at 41 (emphasis supplied).
CONCLUSION
The facts in this case establish that Petitioner's contract with the City of Pompano Beach is a public works construction contract. Furthermore, the Petitioner has not met the burden of proof necessary in claiming an exemption to a taxing statute. The courts have repeatedly stated that exemptions to taxing statutes are special favors granted by the Legislature and are to be strictly construed against the taxpayer. State v. Thompson, 101 So.2d 381 (Fla. 1958); State ex rel. Szabo Food Service, Inc. of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1974). The Petitioner does not engage in the business of selling tangible personal property at retail in the state and, therefore, the Department of Revenue did not err when it refused to register the Petitioner as a sales tax dealer.
ORDERED that the Petitioner is not entitled to a certificate of registration from the Department of Revenue as a dealer engaged in the business of selling tangible personal property in the State of Florida.
DONE and entered this 10th day of January, 1980.
RANDY MILLER EXECUTIVE DIRECTOR DEPARTMENT OF REVENUE STATE OF FLORIDA
| Issue Date | Proceedings |
|---|---|
| Jan. 22, 1980 | Final Order filed. |
| Nov. 02, 1979 | Recommended Order sent out. CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Jan. 10, 1980 | Agency Final Order | |
| Nov. 02, 1979 | Recommended Order | Recommend Petitioner be certified as dealer. |
