Florida – Taxability of Racking Systems for Real Property Improvements

SALT Report 2254 – An Administrative Law Judge issued a ruling regarding a Taxpayer’s purchase of a Racking Distribution System, which included Storage Racks. The Taxpayer in this case is a nationwide retailer who built a 420,000 square foot Distribution Facility in Florida that will supply the Taxpayer’s various retail stores with perishable grocery items.

Prior to construction, the Taxpayer entered into two separate contracts. The first contract was for the construction of the building itself. The second contract, the one at issue in this case, is for the racking and distribution elements inside the building. The second contract provides for the sale of perishable food transport and handling equipment, improvements to real property, permanent storage racks, electrical work, computer control systems, and plumbing. This contract also clearly identified the price that was to be allocated to each element of the contract.

In 2007, the Taxpayer was audited and the Department issued a use tax assessment for certain purchases related to the Distribution Facility. In response, the Taxpayer filed a refund request for the sales and use taxes paid in conjunction with the design and construction of the Facility. The Department denied the Taxpayer’s refund and the Taxpayer filed a formal protest.

Upon review of the case, the ALJ stated that the issue was whether the second contract for furnishing and installing the Racking System qualified as an improvement to real property and was therefore not subject to use tax, or if it was a taxable purchase of machinery or industrial equipment.

The ALJ determine that because the Racking System was physically attached to the building and was required for the Facility to serve its purpose, it was intended to be a permanent addition. Therefore, the Racking System is considered a fixture and an improvement to real property. Further, permanent storage racks are not considered industrial machinery or equipment as provided in Rule 12A-1.051(2)(e). However, if the storage racks had not been permanently affixed to the real property they would be considered taxable property.

Based on the facts presented, the ALJ ruled that the Taxpayer was able to successfully prove that the contract for the entire system was a mixed contract and that the Racking System was a non-taxable part of the mixed contract. Accordingly, the Taxpayer was entitled to a refund of the use tax on the sales price allocated to the design, purchase, and installation of the racking system identified in the mixed contract.

For Further Information

Florida Department of Revenue – DOR 2013-003-FOF