SUMMARY

QUESTION: Is the conveyor system classed as an improvement to real property?

ANSWER: The baggage conveyor system is classed as an improvement to real property, since Aviation Authority owns the land and the conveyor system, and it is Aviation Authority’s intention that the baggage conveyor system be permanently attached. This response does not apply to the other equipment included in the baggage handling system, such as the closed circuit television system, scanners and coders.

Taxpayer owes Florida use tax on its cost price or the fabricated cost of the materials used in the performance of the contract.

October 31, 2007

XXX XXX XXX XXX

Re: Technical Assistance Advisement 07A-039 Sales and Use Tax – Baggage Conveyor Systems Section: 212.06, Florida Statutes Rules: 12A-1.070, 12A-1.094, Florida Administrative Code Petitioner: XXX (herein “Taxpayer”) FEI: XXX

Dear XXX:

This letter is a response to your petition dated July 13, 2007, for the Department’s issuance of a Technical Assistance Advisement (“TAA”) concerning the above referenced party and matter. Your petition has been carefully examined and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, Florida Administrative Code. This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22, Florida Statutes.

PRESENTED FACTS

The petition sets forth the following information:

Taxpayer is a specialty contractor registered to do business in the State of Florida. Taxpayer has entered into a $XXX million [lump sum] written agreement with a general contractor to design, manufacture and install a new baggage handling system at [] . The general contractor is engaged by the [] XXX XXX to construct an addition to the current airport to house the new baggage system and related explosive detection machines. Taxpayer is contracted to furnish and install a complete baggage handling system for this Technical Assistance Advisement Page 2

improvement project. The [] XXX XXX is the owner of the property into which the system will be permanently installed and will own the system once it is installed.

Baggage Handling System

A baggage handling system is a series of conveyors and other equipment assembled and permanently installed in an airport to make one working unit. The system utilizes high speed belt conveyors to move thousands of bags per hour from the airport check-in areas, through government security equipment, and then on to departing flights. The system is supervised by high technology controls and computer monitored conveyor systems which ensure timely and accurate processing of baggage.

The baggage handling system is made up of various components. These components include but are not limited to high-speed transport conveyors, high-speed baggage diverters, tray sorters, ticketing and scale conveyors, slope plate/flat plate devices, custom counter and agricultural stations, bar code scanners, unmanned automatic bag screening equipment, motor control panels, closed circuit television, early bag storage systems and identification systems. All of the components are assembled into one integrated system.

Each baggage handling system is unique, since every airport has a different physical layout and different operational requirements. Using the airport’s architectural designs and the customer’s detailed specifications and drawings, Taxpayer’s engineers and architects design the system to meet these requirements.

The main components of the baggage handling system and the specifications of such system are detailed in the written agreement. The delivery period and installation guidelines are also specified in this agreement. Due to the size and complexity of the project, Taxpayer will make multiple deliveries of the components of the baggage handling system. The components will be assembled and installed at the airport. When installed, these components will be a single working baggage handling unit.

***

The physical components of the conveyor systems [] are permanently affixed in place using screws and bolts, either to the floor or to the structural steel. The conveyor motors, bar code scanners, and other electrical equipment are then wired to the “motor control panels” – electrical boxes somewhat similar to fuse boxes – that are in turn directly wired to the main power supply. All of this work is within Taxpayer’s Scope of Work as defined in the Contract.

***

The baggage handling system is part of an overall construction contract valued at over $XXX million. The baggage handling system represents approximately XXX% of this contract, including conveyor systems exceeding a mile in length. The building was designed specifically to hold the security equipment to existing airport operations. Technical Assistance Advisement Page 3

The baggage handling system will be custom engineered to be installed within specific “right-of-ways” delineated on the architectural drawings and to connect seamlessly to the explosive detection equipment being installed by the federal government. Further, funding for this project will come in large part through usage fees to be paid by future airport passengers over many years, this demonstrating that the Owner intends that the baggage handling system will remain in place for an extended period of time.

***

It is unlikely that public transportation infrastructure like the [] Airport would ever be sold. However, if a decision was made to privatize the airport, then it would be absolutely essential that the airport be sold with the baggage handling system intact. It is a critical component of overall airport operations.

In addition, since the system is custom designed for the buildings at [] Airport, the existing owner would have no use elsewhere for the baggage handling system, whose components have minimal resale value compared to the contract price. The cost of removal of the baggage handling system would likely exceed its resale value.

***

Installation of airport baggage handling systems does not require a state-wide construction license, or a local license in [City/County of installation]. . . .

An additional letter dated September 25, 2007, states in pertinent part as follows:

. . . The bid documents [] submitted include several construction projects, such as a baggage conveyor system, closed circuit television system and scanners and coders, and the general contractor is responsible for all of these projects. However, the contract between [Taxpayer] and the general contractor, which is the contract at issue [], is only for the installation of a baggage conveyor system and not for the installation or construction of other systems that are part of the greater construction project. . . .

REQUESTED ADVISEMENT

Advice is requested whether the baggage handling system is classed as an improvement to real property.

LAW AND DISCUSSION

Section 212.06(14), Florida Statutes, provides the following information:

(14) For the purpose of determining whether a person is improving real property, the term: (a) "Real property" means the land and improvements thereto and fixtures and is synonymous with the terms "realty" and "real estate." Technical Assistance Advisement Page 4

(b) "Fixtures" means items that are an accessory to a building, other structure, or land and that do not lose their identity as accessories when installed but that do become permanently attached to realty. However, the term does not include the following items, whether or not such items are attached to real property in a permanent manner: property of a type that is required to be registered, licensed, titled, or documented by this state or by the United States Government, including, but not limited to, mobile homes, except mobile homes assessed as real property, or industrial machinery or equipment. For purposes of this paragraph, industrial machinery or equipment is not limited to machinery and equipment used to manufacture, process, compound, or produce tangible personal property. For an item to be considered a fixture, it is not necessary that the owner of the item also own the real property to which it is attached. (c) "Improvements to real property" includes the activities of building, erecting, constructing, altering, improving, repairing, or maintaining real property. (Emphasis Supplied)

Although not specifically on point, Rule 12A-1.070, Florida Administrative Code, discusses the leases and licenses to use real property, and it provides the following information concerning jetways (passenger bridges) and baggage conveyor systems:

(1)(a) Every person who rents or leases any real property or who grants a license to use, occupy, or enter upon any real property is exercising a taxable privilege unless such real property is: *** 6.a. Property used at an airport exclusively for the purpose of aircraft landing or aircraft taxiing or property used by an for the purpose of loading or unloading passengers or property onto or from aircraft or for fueling aircraft. See subsection (3). b. Property which is used by an airline for loading or unloading passengers onto or from an aircraft is exempt. This property includes: common walkways inside a terminal building used by passengers for boarding or departing from an aircraft, ticket counters, baggage claim areas, ramp and apron areas, and departure lounges (the rooms which are used by passengers as a sitting or gathering area immediately before surrendering their tickets to board the aircraft). Departure lounges commonly known as VIP lounges, or airport clubs which are affiliated with an airline or a club which requires a membership or charge or for which membership or usage is determined by ticket status are not included as property exempt from tax. The lease or license to use passenger loading bridges (jetways) and baggage conveyor systems comes under this exemption, provided that the jetways and baggage conveyor systems are deemed real property. (I) In order for the jetways and baggage conveyors to be deemed real property, the owner of these items must also be the owner of the land to which they are attached, and must have had the intention that such property become a permanent accession to the realty from the moment of installation. The items shall not be considered real property if the owner, when Technical Assistance Advisement Page 5

the owner is not the airport, retains title to the items after the purchase/installation indebtedness has been paid in full. (II) Any operator of an airport, such as an , which is the lessee of the land on which the airport has its situs is, for the purpose of this sub-subparagraph, deemed the owner of such land. . . . (Emphasis Supplied)

The language in Rule 12A-1.070(1)(a)6., Florida Administrative Code, is indicative of the Department of Revenue’s position that baggage conveyor systems are classed as improvements to real property, and that they do not remain tangible personal property after installation when the two prong test set forth in the rule is met. The owner of the conveyor system must also be the owner of the land to which it is attached, and the owner has the intention that the conveyor system be permanently attached from the moment of installation. In the instant case, XXX XXX owns both the land and the conveyor system, and it is asserted that it is XXX XXX intention that the conveyor system be permanently attached from the moment of installation.

Rule 12A-1.094, Florida Administrative Code, discusses public works contracts, and it states in pertinent part as follows:

(1)(b) "Governmental entity" includes any agency or branch of the United States government, a state, or any county, municipality, or political subdivision of a state. The term includes authorities created by statute to operate public facilities using public funds, such as public port authorities or public-use airport authorities. (c) "Public works" are defined as projects for public use or enjoyment, financed and owned by the government, in which private persons undertake the obligation to do a specific piece of work that involves installing tangible personal property in such a manner that it becomes a part of a public facility. For purposes of this rule, a public facility includes any land, improvement to land, building, structure, or other fixed site and related infrastructure thereon owned or operated by a governmental entity where governmental or public activities are conducted. The term "public works" is not restricted to the repair, alteration, improvement, or construction of real property and fixed works, although such projects are included within the term. ***

(2) The purchase or manufacture of supplies or materials by a public works contractor, when such supplies or materials are purchased for the purpose of going into or becoming part of public works, whether the purchase or manufacture occurs inside or outside Florida, is taxable to the public works contractor if the public works contractor also installs such supplies or materials, since the public works contractor is the ultimate consumer of such supplies or materials. Public works contractors that purchase or manufacture such supplies and materials in Florida are liable for sales tax or use tax on such purchases and manufacturing costs. A public works contractor that purchases supplies or materials that may be sold as tangible personal property or may be incorporated into a public works project may purchase such supplies or materials without tax by issuing a copy of the contractor's Annual Resale Certificate and accrue and remit tax upon withdrawing such Technical Assistance Advisement Page 6

supplies or materials from inventory to go into or become a part of public works. Public works contractors that purchase or manufacture such materials outside the State of Florida are liable for use tax, subject to credit for any sales or use tax lawfully imposed and paid in the state of purchase or manufacture.

***

(5) Contractors that manufacture materials for incorporation into public works shall be liable for tax in the manner provided in subsection (10) of Rule 12A-1.051, F.A.C.

Since Taxpayer is making an improvement to real property pursuant to a public works contract, and Taxpayer is fabricating the materials used in the contract (the baggage conveyor system), Taxpayer owes Florida use tax on its cost price or the fabricated cost of the materials used in the performance of the contract.

CONCLUSION

The baggage conveyor system is classed as an improvement to real property, since XXX XXX owns the land and the conveyor system, and it is XXX XXX intention that the baggage conveyor system be permanently attached. This response does not apply to the other equipment included in the baggage handling system, such as the closed circuit television system, scanners and coders.

Taxpayer owes Florida use tax on its cost price or the fabricated cost of the materials used in the performance of the contract.

This response constitutes a Technical Assistance Advisement under Section 213.22, Florida Statutes, which is binding on the department only under the facts and circumstances described in the request for this advice, as specified in Section 213.22, Florida Statutes. Our response is predicated upon 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 from that which is expressed in this response.

You are further advised that this response, your request and related backup documents are public records under Chapter 119, Florida Statutes, and are subject to disclosure to the public under the conditions of s. 213.22, Florida Statutes. 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.

Technical Assistance Advisement Page 7

Sincerely,

Sara D. Faulkenberry Tax Law Specialist Technical Assistance and Dispute Resolution

SDF/lp

Control #33525