Could a Florida county buy airport-construction materials tax exempt while its contractor handled requisitions and delivery?

Plain-English summary

Florida approved the county's direct purchases of airport-construction materials as tax exempt, provided the county was the real purchaser in substance and followed the submitted procedures. The contractor could help select vendors, prepare requisitions, inspect deliveries, and safeguard materials, but it could not make the purchases in its own name.

The county had to use its own purchase orders bearing its consumer's certificate of exemption number, have vendors invoice it directly, pay vendors directly, take legal and equitable title and liability when materials reached the job site, and insure the materials against loss or damage. The Department treated risk of loss as a paramount factor.

The ruling applied to purchases made under the contract attachment on or after December 7, 1999. It did not cover materials the contractor or subcontractors manufactured or fabricated themselves; the ruling described them as the taxable ultimate consumers of those items.

What this means for you

For a public-works exemption, government funding or title language alone was not enough. The government entity had to act as the purchaser through its orders, exemption documentation, direct payment, title, liability, and insurance.

Common questions

Q: Could the contractor prepare the paperwork? Yes, but the ruling assumed it prepared and used the county's purchase-order form. A purchase on the contractor's form was not exempt.

Q: Who had to receive the vendor invoice and issue payment? The county.

Q: When did the county take title and risk? At delivery to the job site, before the materials were incorporated into the project.

Q: Did the ruling cover contractor-manufactured materials? No.

Q: Was an exemption certificate required? Yes. A properly completed certificate had to be given to each vendor at purchase.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-unit sales-tax exemption
• Fla. Admin. Code r. 12A-1.001(9) — government purchase documentation
• Fla. Admin. Code r. 12A-1.094 — public-works materials and purchaser factors
• Fla. Admin. Code rr. 12A-1.039 and 12A-1.051(5) — exemption certificates and contractor-fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-009

Original ruling text

SUMMARY

QUESTION: Do the procedures for purchase of materials set
out in the county's contract for airport passenger terminal
construction meet legal requirements for the county to
purchase the materials tax exempt?

ANSWER - Based on Facts Below As long as the controlling
documents provide: (1) the county issues its own purchase
orders, not the contractor's, directly to the vendors; (2)
the purchase orders include the county's consumer's
certificate of exemption number and the county will supply
a copy of the consumer's certificate of exemption to the
vendor; (3) the vendors invoice the county directly; (4)
the county issues its checks to the vendors directly; (5)
the county takes title to the materials from the vendor and
assumes liability for the materials when they are delivered
to the job site; (6) the county assumes risk of loss for
the materials upon delivery which is clearly established by
the requirement in the controlling documents that the
county purchase insurance against loss or damage; and (7)
the remaining terms of the documents do not prevent the
conclusion that the county rather than the contractor is in
substance as well as form the purchaser of the materials,
the procedures meet legal requirements for the county to
purchase the materials tax exempt.

Mar 03, 2000

Re: Technical Assistance Advisement (00A-009)
XXX ("County") Your file: XX
Sales and Use Tax -- County Contracts to Renovate Airport
Terminals
Section 212.08(6), F.S.
Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated February 1, 2000. You asked for a technical
assistance advisement confirming that the procedures proposed in
your letter would provide for tax-exempt purchases.

Facts

Your letter states that, on XX, 1998 XXX County (hereafter
"County") and XXX (hereafter "Contractor") entered into a
Construction Agreement, hereafter ("Agreement") pursuant to
which Contractor was engaged to construct a New North Passenger
Terminal - Terminal and Concourse "C" at XXX in XXX, Florida
(the "Project). A copy of the complete Construction Agreement
was not enclosed with your request for technical assistance
advisement. Enclosed was a copy of "Attachment 3, Supplementary
Conditions: County Furnished Materials" (hereafter,
"Attachment"), added to Agreement by amendment on December 7,
1999. The opinion expressed in this letter applies only to
those purchases made on or after December 7, 1999.

Under the Section 1.1 of the Attachment, County reserves the
right to require Contractor to assign subcontracts or other
agreements with material suppliers to County. Any materials
purchased by County pursuant to such agreements are referred to
as "County Furnished Materials" (hereafter, "Materials").
Section 1.1 states the Attachment governs terms and conditions
relating to "County Furnished Materials," and takes precedence
over other terms and conditions of the Contract Documents where
inconsistencies or conflicts exist.

Section 1.2 requires Contractor to provide County a list of
vendors with prices of materials to be supplied with
descriptions and estimated quantities.

Section 1.3 provides that, on request of County, Contractor
shall prepare a requisition in a form acceptable to County,
reflecting items that County may elect to purchase directly.
The requisition form must include complete information to
identify and contact the vendor; the complete description of the
item to be ordered; the quantity needed as estimated by
Contractor; quoted price together with associated sales tax and

shipping insurance cost; performance bond cost; delivery dates
established by Contractor; and detail concerning bonds and
letters of credit provided by vendor, if applicable.

Section 1.5. includes a statement that waiver of the County
Procurement Code was approved by the County Board of
Commissioners on Tuesday, November 7, 1989. It states further
that Contractor is to prepare a purchase order in accordance
with the requisition for County to use for direct purchase. The
vendor is expected to fill County's order at the price quoted to
Contractor less any sales tax quoted. Each purchase order is to
contain County's consumer's certificate of exemption number.

Section 1.5 presents some confusion, because it states that
Contractor, having prepared the purchasing requisition form
according to Section 1.3, next receives the purchasing
requisition forms that it prepared, then prepares a purchase
order "in accordance with County requirements for approval and
prompt entry by Aviation Department or its agents" for each item
that County chooses to purchase. Apart from the confusion about
the route that the paperwork follows, it is not clear whether
Contractor uses its own purchase order form or uses County's
purchase order form. It is assumed for the purposes of
affirming that County is in compliance with the law for the
purposes of securing its tax exemption, that Contractor prepares
County's purchase order form, not its own. Any purchase made on
Contractor's purchase order form is not tax exempt.

The purchase order provides for reimbursement to the vendor of
shipping costs and insurance, as well as the costs of providing
a performance bond from the vendor to County, presumably all
paid for by County.

According to Section 1.8 of Attachment, Contractor is
responsible for overseeing that the correct materials in the
correct amounts are received timely with appropriate warranties,
and for inspecting and accepting the goods; and for unloading,
handling, and storing the materials until installed.

According to Section 1.9 of Attachment, Contractor is to
visually inspect the materials when they arrive at the jobsite,

verify that all necessary documentation accompanies the delivery
and conforms with the purchase order, and forward the invoice to
County for payment.

Section 1.10 of Attachment requires Contractor to verify that
the materials conform to plans and specifications and to
determine before installation that such materials are not
defective. This section also makes Contractor liable to County
for any failure to carry out this obligation.

Section 1.11 of Attachment requires Contractor to maintain
records of the use of the materials and report same to County.

According to Section 1.12 of Attachment, the Contractor is
required to manage and enforce warranties on the materials.

Section 1.13 of Attachment provides that County retains legal
and equitable title to the materials while such materials are in
Contractor's possession.

According to Section 1.14 of Attachment, transfer of the
materials into Contractor's possession constitutes a bailment
from County to Contractor until such time as those materials are
returned to County by being incorporated into the project.

According to Section 1.15 of Attachment, County purchases
insurance on the materials against loss or damage, thereby
retaining risk of loss of the materials.

According to Section 1.16 of Attachment, County is not liable
for delays in the Project attributable to delivery delays or
defective materials.

According to Section 1.17 of Attachment, Contractor reviews
invoices for materials delivered to the construction site on a
monthly basis and advises County whether it concurs or objects
to the payment of the invoices based on its own records of
actual deliveries and of defects detected in the materials.

According to Section 1.18 of Attachment, Contractor must provide
to County by the 15th of the month following delivery,

requisition for payment of the associated invoices. The
requisition must include copies of the purchase orders and
relevant documentation. Upon receipt of this requisition,
County pays the vendor directly by check.

To summarize:

1. The County may elect to purchase materials and equipment
   included in a contractor's bid directly from the supplier.

2. Contractor will select the suppliers from whom materials
   will be purchased.

3. Contractor shall furnish County with detailed Purchase
   Order Requisition Forms for all materials.

4. Upon request of County, Contractor shall prepare a
   requisition, then prepare County's purchase order for
   review by County's Aviation Department or agent, and, if
   such order is approved, issue the purchase order directly
   to the supplier, with delivery of materials to be made to
   the Project location.

5. Although County will take title to materials purchased
   pursuant to the Attachment upon delivery to the job site,
   the Contractor will have contractual obligations to
   inspect, accept delivery of, and store the materials
   pending incorporation into the project. Contractor's
   possession of the materials will constitute a bailment.
   Contractor, as bailee, will have the duty to safeguard,
   store and protect the materials while in its possession
   until returned to County through incorporation into the
   Project.

6. After verifying that delivery is in accordance with the
   purchase order, Contractor will forward approved invoices
   to County with appropriate documentation and County will
   process the invoices and issue payment directly to the
   supplier.

7. County will carry insurance sufficient to cover County

purchased materials.

Law

Sales to governmental units are exempt from sales tax pursuant
to section 212.08(6), F.S., which provides:

There are also exempt from the tax imposed by this chapter
sales made to the United States Government, a state, or any
county, municipality, or political subdivision of a state
when payment is made directly to the dealer by the
governmental entity.... This exemption does 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 personal property goes into or becomes a part of
public works owned by such government or political
subdivision ....

Rule 12A-1.001(9), F.A.C., entitled "Governmental Units,"
contains guidelines for claiming and documenting the exemption.
Governmental entities must obtain a consumer's certificate of
exemption from the Department. Vendors are required to obtain
for their records proper documentation of the exempt status of
the sale.

By its terms, section 212.08(6), F.S., exempts only direct
purchases by governmental entities. The exemption does not
apply when a contractor, employed by a governmental entity,
purchases tangible personal property which is to be incorporated
into public works owned by the entity. Administrative
guidelines governing the taxability of materials purchased for
public works contracts, such as those involved in the instant
situation, are contained in Rule 12A-1.094, F.A.C., which
provides:

(1) This rule shall govern the taxability of transactions
in which contractors manufacture or purchase supplies and
materials for use in public works,....

(2) The purchase or manufacture of supplies or materials by

the contractor for incorporation into a public works
project is taxable to the contractor since he is the
ultimate consumer....

(3)(a) The purchase or manufacture of tangible personal
property for resale to a governmental body is exempt from
tax provided this exemption shall not include sales of
tangible personal property made to contractors employed
either directly or as agents of the United States
Government, a state, or any county, municipality, or
political subdivision of a state when such tangible
personal property goes into or becomes a part of public
works financed or owned by such governmental bodies or
political subdivisions.

(b) With regard to contracts with government entities, the
exemption in subsection (3)(a) is appropriate only where
the levy would otherwise fall on the government itself, or
on an agency or instrumentality so closely connected with
that government that the two cannot realistically be viewed
as separate entities, at least insofar as the activity
being taxed is concerned. A finding of exempt status,
however, requires something more than the implication of
traditional agency notions, so that to resist a state's
taxing power, a private taxpayer must actually stand in the
government's shoes as a principal, rather than as a
contractor employed either directly or as the government's
agent. A contractor will not be deemed to actually stand
in the government's shoes if the contractor has a
substantial independent role in making purchases.
Accordingly, the fact that title passes directly to the
government and payment is made with government funds, in
and of itself, cannot characterize the transaction as an
exempt purchase if the purchasing entity, in its role as a
purchaser, is sufficiently distinct from the government.

(4) The exemption in subsection (3)(a) is a general
exemption for sales made to the government.... A
determination of whether a particular transaction is
properly characterized as an exempt sale to a government
entity or a taxable sale to a contractor shall be based on

the substance of the transaction, rather than the form in
which the transaction is cast. The Executive Director...
will determine whether the substance of a particular
transaction is governed by subsection (2)(a) or is a sale
to a governmental body as provided by subsection (3) of
this rule based on all of the facts and circumstances
surrounding the transaction as a whole. The Executive
Director... will give special consideration to factors
which govern the status of the tangible personal property
prior to its affixation to real property. Such factors
include provisions which govern bidding, indemnification,
inspection, acceptance, delivery, payment, storage, and
assumption of the risk of damage or loss for the tangible
personal property prior to its affixation to real property.
Assumption of the risk of damage or loss is a paramount
consideration. A party may be deemed to have assumed the
risk of loss if the party either: bears the economic burden
of posting a bond or obtaining insurance covering damage or
loss; or enjoys the economic benefit of the proceeds of
such bond or insurance. Other factors that may be
considered by the Executive Director... include whether:
the contractor is authorized to make purchases in its own
name; the contractor is jointly or severally liable to the
vendor for payment: purchases are not subject to prior
approval by the government; vendors are not informed that
the government is the only party with an independent
interest in the purchase; and whether the contractors are
formally denominated as purchasing agents for the
government. Sales made pursuant to so called "cost-plus",
"fixed-fee", "lump sum", and "guaranteed price" contracts
are taxable sales to the contractor unless it can be
demonstrated to the satisfaction of the Executive
Director... that such sales are, in substance, tax exempt
sales to the government.

(5) Contractors who manufacture materials for incorporation
into public works shall be liable for tax in the manner
provided in Rule 12A-1.051(5) or (6), F.A.C....

Discussion, Analysis and Conclusion

Rule 12A-1.001(9), F.A.C., states that in order for a sale to a
state or local governmental entity to be tax exempt, "payment
must be made directly to the dealer by... the political
subdivision of a state...." Rule 12A-1.094(2) and (3), F.A.C.,
state that the purchase of materials for public works contracts
is taxable to the contractor as the ultimate consumer where the
contractor is deemed to be the purchaser. If the purchaser of
the materials is the governmental entity, however, the
transaction is exempt. For there to be an exempt transaction,
the governmental entity must directly purchase, hold title to
and assume the risk of loss of the tangible personal property
prior to its incorporation into realty, and satisfy various
factors contained in Rule 12A-1.094, F.A.C.

Under Rule 12A-1.094, F.A.C., the Department will also give
special consideration to several factors (bidding,
indemnification, inspection, acceptance, delivery, payment, and
storage) which govern the status of tangible personal property
prior to its affixation to real property when determining
whether the sale is to the tax exempt entity or to a contractor.
However, the assumption of risk of damage or loss during the
time that the building materials are physically stored at the
job site prior to their installation or incorporation into the
project is a paramount consideration. The governmental entity
must assume all risk of loss or damage for the tangible personal
property during that period. To establish that it has assumed
that risk, the governmental entity should purchase, or be the
insured party under, insurance on the building materials.

To summarize, the conditions that must be met to satisfy the
requirements of Rule 12A-1.094, F.A.C., and establish that the
governmental entity rather than the contractor is the purchaser
of materials, include:

1. The governmental entity must execute the purchase orders
   for the tangible personal property involved in the
   contract, which must include the governmental entity's
   consumer's certificate of exemption number. The contractor
   may present the governmental entity's purchase orders to
   the vendors of the tangible personal property;

2. The governmental entity must acquire title to and assume
liability for the tangible personal property at the point
in time when it is delivered to the job site up until the
time it is incorporated as real property;

3. Vendors must directly invoice the governmental entity
   for supplies;

4. The governmental entity must directly pay the vendors
   for the tangible personal property; and

5. The governmental entity must assume all risk of loss or
   damage for the tangible personal property involved in the
   contract, as indicated by the entity's acquisition of, or
   inclusion as the insured party under, insurance on the
   building materials.

The Attachment appears to satisfy the foregoing requirements for
exemption of transactions as sales to a governmental entity.
County will make direct purchases of various construction
materials. After receiving requisition forms from the
contractors, Contractor will prepare, for County approval,
purchase orders for direct purchases. It is assumed that
County's purchase orders are used for this purpose, not
Contractor's. After receiving the approved invoices from
Contractor, County will pay the vendors directly. County will
retain legal, and equitable, title to all materials it
purchases, and it will be responsible for the cost of insurance
on those materials under the Agreement.

Based upon the conclusion that County is the purchaser, all
purchases of materials that are made in accordance with the
Attachment on or after December 7, 1999, will be exempt from
sales tax. However, it is necessary that a properly completed
exemption certificate be extended at the time of purchase to
each of the vendors. A suggested format for an exemption
certificate is provided in Rule 12A-1.039, F.A.C., a copy of
which is enclosed.

Please note that this response does not apply to a contractor
that manufactures or fabricates its own materials as specified

in Rule 12A-1.094(5), F.A.C. Under the rule, the contractor and
subcontractors, not the government entity, are deemed to be the
ultimate consumers of the articles of tangible personal property
they manufacture or fabricate to perform their contracts. As
such, the contractor and subcontractors are subject to use tax
on the full cost of the manufactured or fabricated articles as
detailed in Rule 12A-1.051(5), F.A.C.

This response constitutes a Technical Assistance Advisement
under section 213.22, F.S., 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, F.S. Our
response is predicated on 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 than
expressed in this response.

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

Sincerely,

Karen Kugell
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4834

KK/
Enclosure.: Rule 12A-1.039, F.A.C.

Control #: 40249(TADR); 17153 (ED)
cc: Jim Zingale