Could a Florida city use a direct-purchase program to buy public-works materials tax-free?

Subject

Public Works Contract

Plain-English summary

The city's direct purchases of public-works building materials could qualify for the governmental sales-tax exemption. The proposed program made the city the purchaser: it selected direct-purchase items, issued purchase orders in its own name with its exemption certificate, received direct vendor invoices, paid vendors directly, took title on receipt, reduced the construction price by change order, and bought builder's-risk insurance as sole beneficiary.

The conclusion was contingent on the final contract containing those provisions and no conflicting terms. It did not apply when a contractor manufactured or fabricated its own materials; the contractor remained the taxable ultimate consumer in that situation.

What this means for you

Calling a program a direct purchase is not enough. The government must be the purchaser in substance, especially by controlling payment, title, and risk of loss before materials become real property.

Common questions

Q: Could the city buy the construction materials exempt from sales tax? Yes, under the described contract provisions.

Q: Was builder's-risk coverage important? Yes. The city would buy the policy and be sole beneficiary of loss proceeds.

Q: Did the result cover contractor-fabricated materials? No.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code r. 12A-1.038 — exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works contracts
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-080

Original ruling text

SUMMARY

QUESTION: Are the procedures that the city has set in place
for the purchase of materials, allow it to take advantage
of its sales tax exemption?

ANSWER - Based on Facts Below: The legal incidence of the
sales tax would be directly upon the City for building
materials City desires to purchase where the purchases are
made pursuant to the Sales Tax Recovery provisions of the
construction management agreement. Therefore, such
purchases made pursuant to the construction management
agreement may be made exempt from sales tax under s.
212.08(6), F.S., as long as no other provisions in a
contract would serve to override any of the sales tax
recovery provisions. This response is not applicable to any
contractor that manufactures or fabricates its own
materials as specified in Rule 12A-1.094(5), F.A.C. Under
this rule, such contractor, and not the governmental
entity, is deemed to be the ultimate consumer of any
articles of tangible personal property the contractor
manufactures or fabricates in order to perform the
construction contract.

Dec 06, 2000

Re: Technical Assistance Advisement 00A-080
Sales and Use Tax; Public Works Contract
Sections: 212.08(6), F.S. Rule: 12A-1.038, 12A-1.094,
F.A.C.
Petitioner: XX (herein "City")
FEI: XX

Dear :

This letter is a response to your petition dated September 26,
2000, 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, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

FACTS

The City has recently passed a $XX referendum for various Public
Works projects. The City has not entered into any construction
agreements at this time. The City proposes that all bid
documents for these projects will include "Article 5" and
"Exhibit B," with the intent that the City will be able to
qualify for exemption pursuant to Section 212.08(6), Florida
Statutes.

Article 5 provides:

The CONTRACTOR agrees to comply with the Sales Tax Recovery
Program as stated in Exhibit B. The cost of material,
purchased by the City, and sales tax will be deducted from
this contract by Change Order. The value of the sales tax
savings is not to be used in calculating the Lump Sum
Price. The CONTRACTOR's Fee will not be reduced by the cost
of the materials purchased by the City for Sales Tax
Recovery.

Exhibit B provides:

Sales Tax Recovery

This project is not exempt from State or Local Sales and
Use Tax. All materials and equipment incorporated and used
in the construction of the work and becoming a permanent
part of the project are subject to State and Local Sales
and Use Tax.

It shall be the bidder's sole responsibility to incorporate
into the bid proposal any and all of the applicable taxes.

The City is exempt from payment of State and Local Sales

and Use Tax on building materials and equipment purchased
directly by the City. The City shall have the option of
purchasing all or any portion of the materials and
equipment included in each Contract Agreement directly from
the manufacturer or supplier in accordance with the
following procedure:

The Contractor will provide to the City, a list of the
major equipment and materials included in the project,
along with the Contractor's cost of same from vendors
and/or suppliers.

The City shall review this list and determine which items
of equipment and materials, if any, the City will purchase
directly.

Upon determination by the City that an item will be
purchased directly by the City, such item shall be procured
as follows:

(a) The purchase shall be in the City's name with ownership
of the item upon receipt vested in the City; and

(b) The purchase shall be exclusively by a City Purchase
Order or other document directly issued and funded by the
City; and

(c) Notwithstanding, the Owner's payment for selected
items, as provided for above, the Contractor assumes full
responsibility for any change in price and liability
associated with selecting and ordering the proper quantity
and type of materials and equipment for scheduling the
appropriate delivery date, selection of the appropriate
Vendor or supplier, the correctness of the Purchase Order
and receipt report and the storage, delivery, and
protection of the equipment and/or material; and

(d) At the time the purchase order is written, a deductive
change order to this contract will be written for the
amount of the purchase order plus sales tax; and

(e) Vendor/Supplier shall invoice the City directly for
payment which shall be made directly by the City to the
Vendor/Supplier; and

(f) The City's Purchase Order or other document shall
clearly state the purchase is exempt from Sales Tax
pursuant to the City's Sales and Use Tax Exemption
Certificate; and

(g) The Contractor will provide a Builder's Risk policy
with the City named as 'additional insured'; and

(h) Acknowledgment of receipt of the item and approval for
payment shall be documented by an official of the city or
an authorized agent of the City; and

(i) All amounts purchased by the City for sales tax savings
will be credited toward the Contractor achieving his MBE
goals, as if no sales tax recovery was used; and

(j) The Sales Tax Recovery Program will not alter the
Contractor's requirement to provide payment and performance
bonds for 100% of the contract award, or warranty, per
Section 20.37. (Emphasis in Original)

Your letter provides that a City purchased builder's risk
insurance policy will be required.

REQUESTED ADVISEMENT

You request advice as to whether the procedures the City has set
in place for the purchase of materials will allow the City to
take advantage of its sales tax exemption.

STATUTORY AND REGULATORY AUTHORITY

Section 212.08(6), F.S., provides in part:

EXEMPTIONS; POLITICAL SUBDIVISIONS.-- 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 shall not inure to any transaction
otherwise taxable under this chapter when payment is made
by a government employee by any means, including, but not
limited to, cash, check, or credit card when that employee
is subsequently reimbursed 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. A determination 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 department
shall adopt rules that give special consideration to
factors that govern the status of the tangible personal
property before its affixation to real property. In
developing these rules, assumption of the risk of damage or
loss is of paramount consideration in the determination....

Rule 12A-1.038, F.A.C., provides in part:

(1) ... The exempt status of the transaction must be
established by the dealer. Unless the dealer shall have
taken from the purchaser... a certificate signed by an
authorized representative of the organization bearing the
number of the organization's consumer's exemption
certificate, the effective date of the certificate, and the
expiration date of the certificate, the sale shall be
deemed to be a taxable sale at retail....

Rule 12A-1.094, F.A.C., provides in part:

(1) This rule shall govern the taxability of transactions
in which contractors manufacture or purchase supplies and
materials for use in public works, as that term is referred
to in Section 212.08(6), F.S....

(a) "Contractor" is one who is engaged in the repair,
alteration, improvement or construction of real property.
Contractors include, but are not limited to, persons
engaged in building, electrical, plumbing, heating,
painting, decorating, ventilating, paperhanging, sheet
metal, roofing, bridge, road, waterworks, landscape, pier
or billboard work. This definition includes subcontractors.

(b) "Public works" are defined as construction 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. The term "public
works" is not restricted to the repair, alteration,
improvement, or construction of real property and fixed
works where the sale of tangible personal property is made
to or by contractors involved in public works contracts.
Such contracts shall include, but not be limited to,
building, electrical, plumbing, heating, painting,
decorating, ventilating, paperhanging, sheet metal,
roofing, bridge, road, waterworks, landscape, pier or
billboard contracts.

(c) "Real property" within the meaning of this rule
includes all fixtures and improvements to real property.
The status of a project as an improvement or a fixture to
real property is determined by the objective and presumed
intent of the parties, based on the nature and use of the
project and the degree of affixation to realty. Mobile
homes and other mobile buildings are deemed fixtures if
they (1) bear RP license tags, or (2) have the mobile
features (such as wheels and/or axles) removed, and are
placed on blocks or footings and permanently secured with
anchors, tie-down straps or similar devices.

(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. The exception
in subsection [(2)] is a specific exception for sales to
contractors. 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 or the Executive Director's designee in the
responsible program will determine whether the substance of
a particular transaction is governed by subsection [(2)] 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 or the Executive Director's designee in
the responsible program 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 or the
Executive Director's designee in the responsible program
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 "costplus", "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 or the Executive Director's designee in the
responsible program 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[(10)], F.A.C....

DETERMINATION

The proposed construction management agreement between City and

Contractor will provide that:

1. City shall have the option of purchasing all or any
   portion of the materials and equipment included in each
   contract agreement directly from the manufacturer or
   supplier;

2. Contractor will supply a list of equipment and materials
   and their cost to City;

3. City will review the list and determine which items of
   equipment and materials, if any, the City will purchase
   directly;

4. City will issue a purchase order directly to
   manufacturer or supplier (vendor) which purchase will be in
   the name of the City;

5. City's purchase order will clearly state the purchase is
   exempt from sales tax pursuant to the City's sales and use
   tax exemption certificate;

6. Acknowledgement of receipt of the item and approval for
   payment will be documented by an official of the City or an
   authorized agent of the City;

7. The vendor will invoice the City directly for payment,
   and payment will be made directly by City to vendor;

8. Title to equipment and materials will vest in City upon
   receipt;

9. The cost, including sales tax, of the materials that
   City directly purchases under the Sales Tax Recovery
   Program will be deducted by change order from the price of
   the contract between City and Contractor; and

10. City will purchased builder's risk insurance for the
    projects, which policy will be endorsed to provide that
    City is sole beneficiary of the proceeds in the event of a
    loss.

Based on the foregoing, it is determined that the legal
incidence of the sales tax would be directly upon the City for
building materials City desires to purchase where the purchases
are made pursuant to the Sales Tax Recovery provisions of the
construction management agreement. Therefore, such purchases
made pursuant to the construction management agreement may be
made exempt from sales tax under s. 212.08(6), F.S., as long as
no other provisions in a contract would serve to override any of
the sales tax recovery provisions.

This determination is contingent on the City entering a contract
that contains the above provisions, and on the understanding
that no other provisions of the contract would serve to alter
such provisions.

Please note that this response is not applicable to any
contractor that manufactures or fabricates its own materials as
specified in Rule 12A-1.094(5), F.A.C. Under this rule, such
contractor, and not the governmental entity, is deemed to be the
ultimate consumer of any articles of tangible personal property
the contractor manufactures or fabricates in order to perform
the construction contract.

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 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,
F.S., and are subject to disclosure to the public under the
conditions of s. 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,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/414-9838

Control #42578