12-002690 Target Corporation vs. Department Of Revenue Status: Closed Recommended Order on Friday, December 7, 2012.

Summary: Use tax on element of contract constituting improvement of real property should be refunded where mixed contract allocated price among elements.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

TARGET CORPORATION , )

)

Petitioner, )

)

vs. ) Case No. 1 2 - 2690

)

DEPARTMENT OF REVENUE , )

)

Respondent. )

)

RECOMMENDED ORDER

Upon joint request, this matter was submitted for

Recommended Order upon a Joint Stipulation of Facts and

Exhibits, in lieu of hearing, to F. Scott Boyd, an

a dministrative l aw j udge assigned by the Division of

Administrative Hearings .

APPEARANCES

For Petitioner: Scott A. Browdy , Qualified Representative

Ryan Law Firm, LLP

22 West Washington , Suite 1500

Chicago, Illinois 60602

For Respondent: John Mika, Esquire

Office of the Attorney General

The Capitol, Plaza Level 01

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE

The issue to be decided is whether Petitioner was making

improvements to real property or purchasing tangible personal

property when it entered into a contract for the furnishing and

installation of the Swisslog System in its Lake City facility.

PRELIMINARY STATEMENT

The Florida Department of Revenue conducted an audit of

Target CorporationÓs sales and use tax compliance for the period

December 1, 2004 , through November 3 0 , 2007 . A Notice of

Proposed Assessment was issued on December 6, 2010. After

Petitioner filed a Petition for Redetermination on January 14,

2011, Notice of Decision was issued on or about January 6, 2012 .

A Petition under chapter 12 0 to challenge a D enial of

R efund was filed on February 28 , 2012. The Petition was

referred to the Division of Administrative Hearings on March 28,

2012. An Order Closing File and Relinquishing Jurisdiction was

entered on May 22, 2012, for the purpose of furthering informal

discovery and settlement discussions , based upon the partiesÓ

joint request. A Joint Motion t o Reopen File was filed on

June 22, 2012. The file was re - opened with the same case

number , and was set for hearing on November 14, 2012. P ursuant

to joint request, the parties were permitted to file a joint

stipulation of facts and separate proposed recommended orders in

lieu of hearing, the parties agreeing upon all facts except for

certain ultimate facts to be derived from stipulated facts .

The parties timely filed Proposed Recommended Orders on

October 15, 2012. An Order Granting Joint Motion to Supplement

Record and File Replies to Proposed Recommended Orders was

granted on October 15, 2012. The parties filed replies to each

otherÓs Proposed Recommended Order on October 25, 2012. The

Proposed Recommended Orders and Replies were considered in the

preparation of this Recommended Order.

FINDINGS OF FACT

1. Respondent conducted an audit of PetitionerÓs sales and

use tax compliance for the period December 1, 2004 , through

November 3 0 , 2007 (the ÐRefund PeriodÑ).

2. Petitioner presented refund schedules to Respondent

requesting a refund of $2,179,484.84 in sales and use tax

accrued and remitted on the design and construction of a

perish able - food storage and handling system.

3. Respondent issued a Notice of Proposed Assessment

den ying the requested refund on December 6, 2010 .

4. Petitioner timely filed a Petition for Redetermination

on January 14, 2011, which ultimately resulted in a Notice of

Decision upholding RespondentÓs December 6, 2010 , denial of

PetitionerÓs requested refund.

5. Petitioner timely fil ed a Formal Protest on

February 28, 2012 , challenging the Notice of Decision. The

Protest was referred to the Division of Admini strative Hearings

to conduct a s ection 120.57 hearing.

6. Petitioner is a national retailer of discounted, high -

quality general merchandise and grocery products.

7. Petitioner owns and operates over 120 stores in

Florida.

8. Over the past ten years, Petitioner has been increasing

the number and quality of grocery offerings in its stores.

Petiti oner constructed new perishable - food distribution centers

to support its grocery operations.

9. Petitioner has built a 420,000 s quare - foot Dedicated

Perishabl e - Food Distribution Center ("Distribution Center") in

Lake City, Florida.

10. The Distribution Center supplies PetitionerÓs grocery

operations in the Southeastern United States.

11. Petitioner entered into two separate contracts with

two different cont ractors relating to the construction and

equipping of the Distribution Center.

12. One contract, between Petitioner and Ryan Corporation,

for approximately $60 million, was for construction of a

building (the ÐBuildingÑ). The second contract, between Target

Corporation and Swiss - Log, for approximately $40 million, wa s

for the material handling and distribution system inside the

Building (the ÐSwisslog SystemÑ) .

13. The Swisslog System functions as an automated system

for storing, inventorying, and distributing approximately 8,000

different items of perishable food products. The two

contractors and Petitioner worked together on the planning and

design of the Building to accommodate the Swisslog System.

14. The Building has 34 receiving docks and 38 shipping

docks. The docks are connected by conveyors that run throughout

the Building. The Building was designed to take into

consideration the conveyors, lifts, cranes, and ÐC addy P icks Ñ of

the Swisslog System. The Swisslog System is physically attached

to the Building, intended to be a permanent addition, and

required for the facility to serve its intended purpose.

15. The Distribution Center has five major storage areas.

They are:

a. 83,000 sq. ft. freezer chamber

b. 73,000 sq. ft. cooler chamber

c. 57,000 sq. ft. dry produce area

d. 8,500 sq. ft. meat area

e. 8,600 sq. ft. wet produce area .

16. The contract with Swisslog was for the design,

purchase, and installation of the entire integrated mate rial

handling and distribution system . The system includ ed

conveyors, cranes , de - pallet equipment, C addy P icks, shelving,

and the software and hardware to operate the warehouse

management and distribution system's equipment and machinery to

move food from the receiving docks to the designated storage

areas and then to the appropriate shipping docks.

17. The Distribution Center's general contractor hired

several sub - contractors and suppliers to erect the Building and

install the Swisslog System. The vast majority of the Swisslog

System and its racking is attached to the floor or walls of the

Building, or moves along tracks in the floor, or hang s from I -

beams in the ceiling. The Building, including the cold and

frozen temperature chambers, was designed an d constructed to the

specifications of the Swisslog System. During construction, the

walls of the B uilding were not enclosed until the framework for

the Swisslog System was complete.

18. The freezer section of the Swisslog System is over 68

feet tall an d 261 feet long. This section contains two floors

and 25,040 merchandise Ðslots.Ñ The cooler secti on is 53 feet

tall and 261 feet long. The cooler section contains two floors

and 12,720 merchandise slots.

19. The building that envelops the Swisslog System

contains approximately 1,800 tons of structural steel.

20. The Swisslog SystemÓs racking component includes 3,000

tons of steel.

21. The Swisslog System has its own set of fixtures,

including lighting fixt ures and components, a fire protection

sprinkler system consisting of piping and sprinkler heads, and

an electrical system.

22. To accommodate the Swisslog System, the Building

foundation contains increased steel reinforcement and footing

depths necessar y to support the Swisslog SystemÓs weight and

design loads. In addition, the foundation contains 24Ñ deep

pits in certain areas to support the weight and design height

the Swisslog SystemÓs pallet jack inducts.

23. Petitioner paid use tax on the entire contract price

for the Swisslog System contract.

24. Petitioner records the Swisslog System as tangible

personal property on its ad valorem returns filed with Lake

County, Florida.

25. For federal tax purposes, Petitioner depreciates the

Swisslog Syste m as (***) year property, under the Modified

Accelerated Cost Recovery System.

26. Attached and incorporated in to the Joint Stipulation

of Facts was a brochure produced by Accalon , which further

describe s the Swisslog System. The brochure is a fair and

accurate representation of the Swisslog System installed at the

Distribution Center.

27. The following is a general description of how the

distribution system works, and the method of its attachment and

incorporation into the Building:

Order Receiving

a. Employees, driving forklifts, unload pallets from the

semi tractor trailers at the receiving docks.

b. The pallets are then label - scanned into the Work

Management System (WMS) and the pallet moves to a pallet de -

layering station. The WMS processes data and issues

instructions, so that most of the steps necessary to move

merchandise within the Swisslog System are automated.

c. If the pallets require de - layering , the pallets are de -

layered and the cases from the pallet are loaded onto a split

tray a nd travel by conveyor to the SRM aisle and pick up

station.

d. Freezer load units are transferred in to the freezer

chamber on conveyors that drive the loads through and cause the

automated air - door on the refrigerated chambers to open.

e. Once in the freezer or cooler chambers, one of the 16

automated cranes will pick up the pallets from the conveyors.

f. These cranes, several stories tall and traveling on

railroad - like tracks mounted to the floor, will travel down the

aisles behind the racks to the appropriate storage rack

locations, where the crane will lift the pallet and slide the

pallet into the storage rack.

g. Like the crane , the 75 - foot tall storage racks are

physically bolted to the building's floor or walls.

h. The pallet - size conveyors are bolted to the floor or

walls of the facility.

i. Pallets are stored in specific locations using WMS

logic.

Order Picking

j. The WMS receives orders from the store and groups the

orders, allocates, and releases batches of orders for efficient

pickup.

k. During all ocation, the WMS separates full - pallet picks

from partial picks .

l. The WMS virtually gui des pallets from individual store

orders based on cubic volume of the quantity of cases selected.

m. The WMS maps the picking loca tions for the C addy P icks

and allocates orders for the C addy P icks.

n. There are 70 C addy P icks in the aisles in front of the

racks. Each C addy P ick may carry up to 2,800 pounds of

merchandise.

o. The C addy P icks hang from ceiling I - beams and travel

d own the aisles to pick containers and boxes from pallets on the

racks and load onto outgoing pallets.

p. An employee is required to follow the C addy P ick as it

travels down the aisles and manually pick the containers and

boxes and load onto the outgoing pallets.

q. This picking process will continue until the outgoing

order of mixed products is fulfilled.

r. These pallets are then transferred via conveyors and

lifts (mechanical elevators) to ground level where the pallets

are wrapped in shrink wrap on the conveyor.

s. The pallet s are then conveyed to a double - shuttle car

interface station where the pallet is transferred to the double

shuttle, also mounted to the floor.

t. This car can carry two pallets simultaneously and

transfer them to allocated conveyor shipping lanes.

u. Employees driving forklifts pick up the pallets from

the conveyor shipping lanes and load them into the s emi - tractor

trailers parked in the shipping docks.

v. The entire process (excepting where human interaction

is required ) is performed by the WMS, and automated computer and

software system.

w. The system reads bar code labels on the pallets and

determines where incoming inventory should be stored, manages

store re - supply orders, determines product pulls to optimize

time resources and pallet configuration, and determines which

shipping dock the p allet of inventory being pulled should be

routed to.

28 . Mr. Scott Browdy had the necessary qualifications to

responsibly represent PetitionerÓs interests in a manner which

would not impair the fairness of the proceeding or the

correctness of the action to be taken.

29 . The parties filed a package of electronic documents

that was agreed to be a true copy of the December 7, 2006,

contract between Petitioner and Swisslog L o gistics,

Incorporated.

30. The term ÐSystemÑ was described in the contract as

Ðall Plant to be provided and the installation services or other

work to be done by the Contractor or any permitted

Subcontractors under the Contract, which shall include delivery,

installation, testing and commissioning of an order fulfillment

system with all required software, hardware, racking,

mezzanines, conveyors, cran e s, C ad d y Pick s as specified in the

Specifications.Ñ

31. The contract did not specifically describe and itemize

each item of tangible personal property to be provided.

However, i n th e ÐI nvestment Summary , Ñ which was originally a

December 5, 2006, proposal from Swisslog to Petitioner , that was

part of the package of electronic documents that was agreed to

be a Ðtrue copyÑ of the December 7, 2006, contract, the various

elements of the contr act were priced. R acking was priced at

$11,658,000 .00 , the warehouse management system was priced at

$ 2,441,000 .00 , and project and implementation services were

priced at $2,691,000 . 00. The stacker cranes, pallet conveyors,

and Caddy Picks for the cooler and freezer were priced at a

total of $22,656,000. 00. The prices for all of these elements

totaled $39,446,000 .00 , which was the price of the final

contract when executed.

3 2 . The contract did not charge Petitioner for items of

tangible personal propert y as they were delivered, but charge d

th e lump sum amount of $39,446,000 .00 for all services, tangible

personal property, and improvements to real estate . It provide d

for various percentages of this total contract price to be paid

at certain milestone eve nts leading toward the completion of the

contract .

33 . The Swisslog contract was a mixed contract provid ing

for sale of tangible personal property such as perishable food

transport and handling equipment ; improvements to real property

such as permanent storage racks ; electrical, computer control ,

and plumbing components which were not described sufficiently in

the contract to classify ; and project and implementation

services, which were not associated in the contract with either

improvements to real prop erty or sale of tangible personal

property.

34. The contract clearly allocated the contract price

among the se various elements of the contract. It indicated th at

$11,658,000 .00 was allocated for t he permanent storage racks .

T his allocation was bona fid e and reasonable in terms of the ir

great size and the large amount of steel used in their

construction.

3 5 . T he permanent storage racks installed as part of the

Swisslog S ystem were not industrial machinery or equipment but

were instead improvement s to re al property .

36. Petitioner failed to prove which, if any, of the

remaining elements of the contract were improvements to real

property. It was unclear if any of the electrical, computer, or

plumbing components were integrated into the BuildingÓs systems ,

or which services related to the improvement to real property .

C ONCLUSIONS OF LAW

37 . The Division of Administrative Hearings has

jurisdiction over the subject matter and the parties in this

case pursuant to se ctions 72.011(1), 120.569 , 120.57(1), and

120.80(14), Florida Statutes (201 2 ).

38 . Section 120.80(14)(b) 3.b. provides that the

requirement of section 72.011(2) that an action contesting

denial of refund may not be filed in circuit court more than 60

days after a final decision is equally applic able to

administrative proceedings and is Ð jurisdictional . Ñ

3 9. Section 72.011(2)(b)1. r equires the Department of

Revenue to adopt a rule establishing the date on which a denial

of refund becomes final.

40 . Florida Administrative Code Rule 12 - 6.003(3)(b)

provides that if the taxpayer does not file a petition for

reconsideration, the Notice of Decision regarding a denial of

refund becomes final on the date it is issued. The Notice of

Decision here was issued on January 6, 2012. Petitioner t imely

filed its Formal Protest in R esponse to Notice of Decision on

March 2, 2012.

41 . The request of Petitioner in the Notice of Appearance

filed on May 14, 2012, that Mr. Scott Browdy be authorized to

represent Petitioner in this matter is approved. Mr. Browdy is

a qualified representative.

42 . Pursuant to section 120.80(14) (b) 2., RespondentÓs

burden of proof in a taxpayer contest proceeding is limited to a

showing (1) that an assessment was made against the taxpayer;

and (2) the factual and legal grounds for making th at

assessment. Once Respondent has met this initial burden of

proof, the burden then shifts to Petitioner to demonstrate by a

preponderance of evidence that the denial of refund was

incorrect. IPC Sports v. Dep't of Rev. , 829 So. 2d 330, 332

(Fla. 3rd DCA 2002). See also Dep Ó t of Rev . v. Nu - Life Health

and Fitness Ct r . , 623 So. 2d 747, 751 - 52 (Fla. 1st DCA 1992 ).

43 . A ny ambiguities or doubts in the interpretation of the

statute are to be resolved in favor of the taxpayer , however .

Taxes may be collected only within the clear definite boundaries

recited by the statute. Maas Bros., Inc. v. Dickinson , 195 So.

2d 193 (Fla. 1967); Dep't of Rev. v. Ray Constr. , 667 So. 2d

859, 865 (Fla. 1st DCA 1996) .

44 . Section 212.05, Florida Statutes, has provided in

pertinent part throughout the Refund Period: 1/

I t 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 re tail in this state, including

the business of making mail order sales, 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.

(1) For the exercise of such privilege, a

tax is levied on each taxable transaction or

incident, which tax is due and payable as

follows:

* * *

(b) At the rate of 6 percent of the cost

price of each item or article of tangible

personal property when the same is not sold

but is used, consumed, distributed, or

stored for use or consumption in this state

. . . .

45 . Under section 212.06(13), the activities of altering

or improving real property is considered an Ði mprovement to real

property . Ñ An improvement to real property is not a sale of

tangible personal property subject to use tax.

46 . The issue here is whether the contract for the

f urnishing and installation of the Swisslog System in the Lake

City facility was an improvement to real property , and so not

subject to use tax, or a purchase of tangible personal property

taxable under the above statute . The question of whether

property is personal property or a fixture is a question of fact

for determination by the trier of fact. Sears v. Bay Bank &

Trust Co. , 537 So. 2d 1041, 1042 (Fla. 1st DCA 1989).

47 . PetitionerÓs argument that the Swisslog S ystem

constitutes an improvement to rea l property seems well supported

by common law cases involving the transfer of property. In

1929 , Justice Ellis of the Florida Supreme Court cited to

English land law, itself citing still more ancient authority :

Ð A ccording to Lord Chancellor Hardwicke, Òin the old cases they

go a great way upon the annexation to the freehold, and so long

ago as Henry the Seventh's time the courts of law construed even

a copper and furnace to be part of the freehold.ÓÑ Comm. Fin .

Co. v. Brooksville Hotel Co. , 98 Fla. 410 (F la. 1929) (citing 8

Am. and Eng. Ency. Law, p. 42, note ). Justice Ellis went on to

describe three criteria which the courts have generally applied:

actual annexation to the realty or something appurtenant

thereto; second, appropriateness to the use or pur pose of that

part of the realty with which it is connected ; and third, the

intention of the party making the annexation that it shall be a

permanent accession to the freehold. Brooksville Hotel at 415.

48 . S imilar criteria have been utilized in tort cases

involving product liability . The issue aris es because Florida

courts impos e p rinciples of strict liability with respect to

ÐproductsÑ as personal property but not when structural

improvements to real property are involved. A case cited by

Petitioner, Plaza v. Fisher Development, Inc. , 971 So. 2d 918

(Fla. 3d DCA 2007), is one of these. In that case, the court ,

after an extensive review of cases from Florida, other states,

and several Federal Circuits, conclude d that the co nveyor at

issue was a structural improvement to real property. The court

noted specificall y that the conveyor system was installed when

the store was first constructed, that its purpose was to move

merchandise from one part of the property to another , and that

the system was affixed to the building. Petitioner correctly

notes that all of these factors also are present in the instant

case.

4 9. Tax law is statutory , however . To the extent a

statute uses terms such as Ðimprovement to real propertyÑ and

Ðfi xtureÑ without elaboration, the se traditional common law

definitions would be very persuasive because the Legislature is

presumed to be aware of such constructions . However , if the

statute deviates from common interpretations, the statutory

language must control. Baskerville - Donovan Eng'rs v. P ensacola

Exec. House Condo. Ass'n , 581 So. 2d 1301, 1303 (Fla.

1991) (courts may presume L egislature has specif ied any

innovation to common law ) .

50 . The language of the tax statute therefore guides the

inquiry here. Throughout the Refund Period, section 212.06(14)

provided in relevant part :

For the purpose of determining whether a

person is improving real property, the term:

(a) "Real property" mean s the land and

improvements thereto and fixtures and is

synonymous with the terms "realty" and "real

estate."

(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: . . . 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.

51 . The statute thus invokes traditional definitions to an

extent, but specifically modifies these definitions by providing

that Ðin dustrial machinery and equipmentÑ is not to be

considered a s a fixture to real estate, regardless of whether it

is attached to r eal property in a permanent manner.

52 . Petitioner argues that even if the Swisslog System is

found not to be a fixture because it is industrial machinery or

equipment, it might otherwise be an improvement to real estate.

This contention is rejected. Legislative m odif ication of the

common law definition of Ð fixture Ñ by the exclu sion of

industrial machinery and equipment evinces a clear intent that

such tangible personal property not be considered an improvement

to real property for purposes of the Tax Code . The statute

cannot reasonably be construed contrary to this intent to find

that industrial machinery and equipment , though not a fixture ,

is nevertheless still an improvement to real property. Such an

interpretation would be absurd and undermine th e very purpose of

the statutory modification. Fla. Dep't of High. Saf. & Motor

Veh. v. Hernandez , 74 So. 3d 1070, 1079 (Fla. 2011)(statutes not

to be interpreted so as to yield absurd result). If the

Swisslog S ystem is Ðindustrial machinery or equipmentÑ then, it

is not an improvement to real estate under the statute.

53 . The Department of Revenue has been granted rulemaking

authority in section 212.1 7 ( 6 ) , which provides, ÐThe department

has authority to adopt rules pursuant to ss. 120.536(1) and

120.54 to enforce the provisions of this chapter . Ñ

54 . Pursuant to this authority DOR has adopted a rule

entitled Ð Sales to or by Contractors Who Repair, Alter, Improve

and Construct Real Property. Ñ Rule 12A - 1.051(2) (e) provides in

relevant part:

1. ÐMachinery or equipmentÑ means and

includes property that:

a. Is intended to be used in manufacturing,

producing, compounding, processing,

fabricating, packaging, moving, or otherwise

handling personal property for sale or other

commercial use, in the performance of

commercial services, or for other purposes

not rel ated to a building or other fixed

real property improvement; and

b. May, on account of its nature, be

attached to the real property but which does

not lose its identity as a particular piece

of machinery or equipment.

2. ÐMachinery or equipmentÑ genera lly does

not include junction boxes, switches,

conduits, wiring, valves, pipes, and tubing

incorporated into the electrical, cabling,

plumbing, or other structural systems of

fixed works, buildings, or other structures,

whether or not such items are used s olely or

partially in connection with the operation

of machinery and equipment.

3. ÐMachinery or equipmentÑ serves a

particular commercial activity that is

carried on at a location rather than serving

general uses of land or a structure.

Examples of mac hinery or equipment include

conveyor systems, printing presses, drill

presses, or lathes. Examples of items that

are not machinery or equipment because they

are integrated into the structure or realty

and retain their usefulness no matter what

activity is carried on at the site include

heating and air conditioning system

components or water heaters. Any property

that would be classified as machinery or

equipment under Section 212.08(5), F.S., or

any other provision of Chapter 212, F.S., is

considered to b e machinery or equipment for

purposes of this rule. In the case of

property used in the production of

electrical or steam energy, any item that

would qualify as exempt machinery or

equipment under Section 212.08(5)(c), F.S.,

is considered to be machinery or equipment

for purposes of this rule.

55 . In reviewing the statutory definition, it should be

initially noted that there was no suggestion that the Swisslog

System could be classified as the machinery or equipment that is

described in s ection 212.08(5) , which relates to machinery or

equipment used to increase productive output, in production of

electrical or steam energy, or under federal procurement

contract.

56 . It was stipulated that t he Swisslog System functions

as an automated system for storing , inventorying, and

distributing perishable food products. S everal different

elements are identified in the contract. Racking was to be

erected in the storage areas ; s tacker cranes, conveyors, Caddy

Picks , and other equipment to move the food was to be

c onstructed ; a Warehouse Management System was to be installed

to automate control of the operations ; and project and

implementation services were to be provided. E ach of these

elements of the contract will be considered in light of the

applicable statute and rule.

Storage Racking

57 . The Distribution Center has five large storage areas ,

including areas for wet produce, dry produce, a meat area, and

cooler and freezer chambers. The Swisslog S ystem includes 3,000

tons of steel racking with merchandise Ðsl otsÑ for food storage

in these areas. The 75 - foot tall storage racks are physically

bolted to the B uilding's floor and walls . T he Building

foundation contains increased steel reinforcement and footing

depths necessary to support the Swisslog SystemÓs wei ght and

design loads. It was stipulated that t he Swisslog System is

physically attached to the Building, intended to be a permanent

addition, and is required for the facility to serve its intended

purpose. If this permanently attached steel racking does not

come under the statutory exclusion of machinery and equipment,

it is clearly a fixture and is an improvement to real property.

Cf. Plaza v. Fisher Dev ., Inc. , 971 So. 2d 918 (Fla. 3d DCA

2007)(conveyor system installed as initial construction to move

merchandise around building and permanently affixed was

improvement to real property in liability case).

58 . The rule definition of Ðmachinery and equipmentÑ

includes any equipment Ð intended to be used in manufacturing,

producing, compounding, processing, fabricating, packaging,

moving, or otherwise handling personal property for sale or

other commercial use .Ñ This description does not by its terms

include mere storage structures , which do not move, handle, or

otherwise perform any action on property for sale . Permanent

storage racks are not industrial machinery or equipment within

the plain language of the statute or the rule definition .

E xtension of the rule language beyond the clear definite

boundaries of the statute to also encompass storage areas,

s helving, or racks which serv e the general uses of land or a

building is not warranted. A taxing statute should always be

construed in the light most favorable to the taxpayer . Mikos v.

Ringling Bros. - Barnum & Bailey Combined Shows , 497 So. 2d 630,

632 (F la. 1986). Any doubt should be resolved in the taxpayerÓs

favor . Fla. Hi - Lift v. DepÓt of Rev. , 571 So. 2d 1364, 1368

(Fla. 1st DCA 1990).

5 9. This interpretation is consistent with RespondentÓs

treatment of similar permanent ly - fixed storage structures as

improvement s to real property serving the general uses of land

or a building , and not as industrial machinery or equipment .

T.A.A. 8A - 029 Sales and Use Tax Î Refrigeration Equipment , 2008

Fla. Tax LEXIS 51, 3 - 4 (Fla. Tax 2008) ( Ðrefrigeration equipmen t

when installed will become a part of realtyÑ); T.A.A. 1 A - 060

Food Service Equipment Installation , 2 001 Fla. Tax LEXIS 104,

24 - 25 (Fla. Tax 2001) (stainless steel wall shelves to be

permanently attached in lounge were real property improvements,

although p redominate nature of mixed contact was sale of

tangible personal property ) ; T.A.A. 97A - 037 R eal Property v .

Tangible Personal Property, 1997 Fla. Tax LEXIS 67 , 3 (Fla. Tax

1997)(underground fuel storage tanks and pumps connected to them

are improvements to real property).

60 . Conversely, i f the storage racks had not been

permanently fixed to the real property, they would remain

tangible personal property. Pamperin v. Interlake Cos. , 634 So.

2d 1137, 1140 (Fla. 1st DCA 1994)(storage rack system that could

be disassembled and resold was not a permanent fixture ) .

Warehouse M anagement S ystem

61 . The Swisslog System is an integrated material handling

and distribution system. It includes a W arehouse M anagement

System that tracks wh ich food products are store d in what

locations and issue s instructions to automatically move these

products . It c ontrols the movement of food products f rom the

receiving docks to the designated storage areas , and

subsequently , the movement of selected food products from the

storage areas to appropriate shipping docks.

62 . Under rule 12A - 1.051(2)(e) 2., quoted above, s witches,

wiring, valves, pipes, and tubing incorporated into the

structural systems of a building do not constitute Ðmachinery

and equipmentÑ under the statute , whether or not such items are

used solely or partially in connection with the operation of

machinery and equipment. H owever, Petitioner presented no

evidence to indicate the extent to which computer control

components or electrical com ponents were in fact incorporated or

integrated into the structural systems of the B uilding . In

light of PetitionerÓs failure to meet its burden, t he Warehouse

Management System element would therefore have to be considered

as tangible personal property.

Project and Implementation Services

63 . The contract also included various project and

implementation services. Section 212.06(1)(a) provides that

sales and us e tax is levied at the rate of six percent of the

sales price. The term Ðsales priceÑ is def ined in section

212.02(16) to include the amount paid for tangible personal

property, including any services that are part of the sale.

64 . Installation services related to the performance of a

real property improvement contract are not taxable. Fla. A dmin.

Code R . 12A - 1.016(3)(a). Again, however, no evidence was

presented to indicate the value of services , if any, associated

with improvements to real property. In light of PetitionerÓs

failure to meet its burden, the project and implementation

service s would have to be considered as sociated with the sale of

tangible personal property.

Distribution

65 . The primary function of the Swisslog System is to

automatically distribute perishable food products from receiving

docks to appropriate storage areas and ultimately to shipping

docks . It utilizes a series of conveyors, lifts, cranes, de -

pallet ing equipment , C addy P icks , and shuttle cars to accomplish

this task. The vast majority of th is elaborate distribution

equipment is permanently att ached to the floor , walls , or

ceiling of the b uilding . If this permanently attached

distribution system does not come under the statutory exclusion

for machinery and equipment, it is a fixture and is clearly an

improvement to real property. Plaza v. Fish er Dev ., Inc. , 971

So. 2d 918 (Fla. 3d DCA 2007) (conveyor system installed as

initial construction to move merchandise around building and

permanently affixed was improvement to real property in

liability case).

66 . As noted earlier , t he statute does not limit

industrial machinery or equipment only to actual manufacturing

equipment, and the rule clarifies that equipment to Ð move Ñ or

Ð handle Ñ personal property for sale is also included with in the

definition. Fla. Admin. Code R. 12A - 1.051(2 )(e) 1.a. If

considered separately, the cranes, conveyors, Caddy Picks and

other equipment which move perishable food would , therefore , not

be fixtures, but would be industrial machinery and equipment,

and so tangible personal property.

67 . The various el ements of the Swisslog System were not

contracted for separately, however, but were furnished under a

single contract . T he Swisslog S ystem contract was thus a mixed

contract , containing elements of a real property contract as

well as elements of a sale of tangible personal property. Rule

12A - 1.051(8).

68 . The determination as to the taxability of a mixed

contract is normally based on the predominant nature of the

contract. If the predominant nature of the contract is that of

a real property improvemen t contract, then the entire contract

will be taxed as a real property improvement. Likewise, if the

predominant nature of the contract is that of a sale of tangible

personal property, then the entire contract will be taxed as a

sale of tangible personal p roperty. Fla. Admin. Code R . 12A -

1.051(8) . The Swisslog contract predominantly involves

industrial machinery and equipment, and so is a contract for the

sale of tangible personal property.

6 9. However, rule 12A - 1.051(8)(d) also provides in

relevant part :

(d) If a mixed contract clearly allocates

the contract price among the various

elements of the contract, and such

allocation is bona fide and reasonable in

terms of the costs of materials and nature

of the work to be performed, taxation will

be in accor dance with the allocation.

70 . On i ts face , the Investment Summary appears to be part

of a negotiating proposal from Swisslog, to be considered only

as SwisslogÓs explanation of how it arrived at its proposed

price, not an actual part of the contract. However, it was

submitted as a part of the package of electronic documents that

the parties formally agreed was a Ðtrue copyÑ of the December 7,

2006, contract . This critical agreement of the parties is

accepted. Sapp v. Berman Bros. , 884 So. 2d 1080, 1081 - 1082

(Fla. 1st DCA 2004)(unrefuted stipulation should be followed

unless there is a showing of fraud, overreaching, or

misrepresentation).

71 . The Investment Summary, and hence the contract ,

clearly allocated the contract price among the various elem ents

of the contract. Racking was priced at $11,658,000.00, the

warehouse management system was priced at $2,441,000.00, and

project and implementation services were priced at

$2,691,000.00. The stacker cranes, pallet conveyors, and Caddy

Picks for the c ooler and freezer were priced at a total of

$22,656,000.00. The prices for all of these elements totaled

$39,446,000.00, which was the price of the final contract when

executed.

72 . The $11,658,000.00 contract price allocat ed to the

racking is bona fide and reasonable in terms of the costs of

materials and nature of the work to be performed.

73 . Section 212.06(14), Florida Statutes , set s clear and

definite boundaries subjecting industrial machinery and

equipment to sales and use taxation.

74 . Respondent show ed that it made a n assessment of use

tax against Petitioner for the full sales price of the Swisslog

System because it constituted industrial machinery and equipment

and , therefore , was a sale of tangible personal property , not an

improve ment to real property.

75 . Petitioner proved by a preponderance of evidence that

the Swisslog contract was a mixed contract and that the racking

element was not industrial machinery or equipment, but was an

improvement to real property. The contract clea rly allocated

$11,658,000.00 to the racking element.

76 . Petitioner failed to prove by a preponderance of

evidence that any other elements of the Swisslog System

installed in the Lake City facility constitute d an improvement

to real property or otherwise d id not come within the definition

of tangible personal property subject to taxation.

RECOMMENDATION

Upon consideration of the above findings of fact and

conclusions of law, it is

RECOMMENDED that the Department of Revenue enter a final

order : (1) finding that Target Corporation is entitled to a

refund of use tax on the $11,658,000.00 portion of the sales

price allocated to the design, purchase, and installation of the

racking element of the Swisslog contract ; and (2) otherwise

denying refund .

DO NE AND ENTERED this 7th day of December, 2012 , in

T allahassee, Leon County, Florida.

S

F. SCOTT BOYD

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 7th day of December , 2012 .

ENDNOTE

1 / Citation to statutes and administrative rules, except as

otherwise indicated, are to the versions in effect at the time

of the contract.

COPIES FURNISHED :

Scott A. Browdy, Esquire

Ryan Law Firm, LLP

Suite 1500

22 West Washington

Chicago, Illinois 60602

Clara Kippes

Ryan Law Firm, LLP

Suite 100

13155 Noel Road

Dallas, Texas 75240

Drew Christian McEwen, Esquire

Ryan Law Firm, LLP

Suite 400

111 Congress Avenue

Austin, Texas 00078 - 7014

John Mika, Esquire

Office of the Attorney General

The Capitol, Plaza Lev el 01

Tallahassee, Florida 32399 - 1050

Nancy Terrel, General Counsel

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32399 - 0100

Marsha ll Stranburg, Interim Executive Director

Department of Revenue

Post Office Box 6668

Tallahassee, Florida 32399 - 0100

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.