Could a Florida school board directly buy school-construction materials without sales tax?

Subject

School Board Contracts to Construct Schools

Plain-English summary

The school board's direct purchases of construction materials were exempt when made under the proposed procedures. The board had to issue its own purchase orders with its consumer's certificate of exemption number, receive direct vendor invoices, pay vendors directly, acquire title and liability on job-site delivery, and bear the risk of loss through the builder's-risk arrangement as a named insured.

The remaining contract terms also had to support the board—not the construction manager—as the purchaser in substance and form. A properly completed exemption certificate was required for each vendor. The ruling did not cover materials manufactured or fabricated by contractors or subcontractors, who would owe use tax on their full cost.

What this means for you

Government ownership on paper is only part of the test. Direct payment and actual risk of loss were central to treating the school board as the purchaser before the materials were incorporated into the school.

Common questions

Q: Did the procedures qualify the board's material purchases for exemption? Yes.

Q: Did each vendor need exemption documentation? Yes.

Q: Were contractor-fabricated items included? No; the contractor or subcontractor remained the taxable consumer.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code r. 12A-1.001(9) — direct payment by government
• Fla. Admin. Code r. 12A-1.094 — public-works contracts
• Fla. Admin. Code r. 12A-1.039 — government exemption certificate
• Fla. Admin. Code r. 12A-1.051(10) — contractor-fabricated property
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-081

Original ruling text

SUMMARY

QUESTION: Do the procedures for purchase of materials set
out in the school board's contract for the construction of
a school meet legal requirements for the school board to
purchase the materials tax exempt?

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

Dec 06, 2000

Re: Technical Assistance Advisement 00A-081
XXX ("School Board")
Sales and Use Tax -- School Board Contracts to Construct
Schools
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 September 20, 2000 and your follow-up letter of
October 18, 2000, wherein you supplied a revised page 6 with a
new paragraph 21 of Addend[um] 1. You asked for a technical
assistance advisement confirming that the procedures proposed in
your letter would provide for tax-exempt purchases.

Facts

On February 8, 2000, the School Board and XXX ("Construction
Manager") entered into an Agreement between Owner and
Construction Manager (the "Agreement"), pursuant to which
Construction Manager was engaged to construct a high school (the
"Project"). Under the Agreement, Construction Manager is
required to pay enumerated costs of the Project, including the
cost of materials and builder's risk insurance on those
materials. School Board is required to reimburse Construction
Manager for the enumerated costs plus pay certain fees. The
Agreement provides for a guaranteed maximum price ("GMP") that
caps the cost of the Project to School Board.

School Board is entitled to make purchases without paying
Florida sales and use tax under a consumer's certificate of
exemption. To take advantage of the School Board's exemption,
the Agreement has created "Addenda [sic] Number 1 to a Contract
between the District School Board -- and [Construction Manager]
Dated _____ School Board Direct Purchases" ("Addend[um] 1") that
sets forth detailed procedures for implementation of the
purchase program.

Article 2, Subsection 2.1.1, of the Agreement provides that the
Agreement, General Conditions, Drawings and Specifications, and
Construction Manager's performance and payment bonds for the
Project, constitute the entire and exclusive agreement between
the Owner and Construction Manager with Reference to the
Project, superseding any prior discussions, negotiations, bid
documents, etc. It further provides that the Agreement may be
amended only by written instrument signed by the Owner and
Construction Manager. Under these provisions, Addend[um] 1,

properly dated and executed, qualifies as an amendment.

Article 9 of the Agreement, Subsection 9.2.2, defines "the cost
of work," in part, as follows:

The cost of all materials, supplies and equipment
incorporated in the Work or stored on site, including cost
of transportation and storage thereof. At the Owner's sole
discretion, the Owner may make payment for materials,
supplies and/or equipment stored off-site.

Article 12 of the Agreement, Subsection 12.2, states:

The owner may elect to purchase insurance under an Owner
Provided Insurance Program, in which case the Construction
manager will not be required to provide insurance, but will
provide coordination with the Owner and the Owner's
insurance broker, as required. --

Article 12 of the Agreement, Subsection 12.3, states:

For insurance coverage provided by the Owner in accordance
with 12.2, the Owner shall provide insurance in effect from
the issuance of the Notice to Proceed with the Work until
Final Completion of the Work, and the Construction Manager
shall ensure that each Trade Contractor and Sub-contractor
are insured under the Owner's insurance programs, in
accordance with this Article.

Addend[um] 1 provides in summary as follows:

1. The School Board may elect to purchase materials and
   equipment included in a subcontractor's bid directly from
   the supplier. Such purchases are to be governed by these
   procedures. A form purchase order including the School
   Board's Certificate of Exemption Number is attached to
   Addend[um] 1.

2. Subcontractors will select the suppliers from whom
   materials will be purchased for purposes of making up their
   bids and have included supplies, prices and suppliers in

their bids. Owner purchases will be administered by
deductive change order.

3. Subcontractors shall furnish Construction Manager with a
   list of intended suppliers, vendors and materials,
   including estimated quantities and prices.

4. Upon request of the Construction Manager, the
   Subcontractor prepares a standard Purchase Order
   Requisition Form ("Requisition") for School Board purchased
   materials. The Requisition shall include:

Name, address, telephone number and contact person for
Manufacturer/Supplier;

Manufacturer or brand model or specification number of the
item;

The quantity and unit of measure needed as estimated by
subcontractor;

The price quoted by the Manufacturer/Supplier for the
materials or equipment identified;

Any sales tax associated with the price quote;

Delivery dates as established by Subcontractor.

Subcontractor shall include references to any terms and
conditions which have been negotiated with the vendors:
i.e. payment terms, warranties, retainage, etc.

5. Upon receipt of a Requisition, School Board shall review
   the Requisition and, if approved, issue its own purchase
   order directly to the supplier, with delivery to be made to
   the Project location F.O.B. job site.

6. Although School Board will take title to materials
   purchased pursuant to the Procedures upon delivery to the
   job site, the Subcontractor will have contractual
   obligations to inspect, accept delivery of, and store the

materials pending incorporation into the project.

7. After verifying that delivery is in accordance with the
   purchase order, the Contractor will forward approved
   invoices to Construction Manager; School Board will process
   the invoices and issue payment directly to the supplier.

8. The Subcontractor's possession of the materials will
   constitute a bailment. The subcontractor, as bailee, will
   have the duty to safeguard, store and protect the materials
   while in its possession until returned to School Board
   through incorporation into the Project.

9. The Subcontractor is responsible for obtaining,
   managing, and enforcing all warranties and repairs.

10. The amount of builder's risk insurance to be carried
    under the Contract by the Construction Manager will be
    sufficient to cover School Board purchased materials.
    School Board is to be named as an additional insured on the
    builder's risk insurance.(FN 1)

11. In the event that conflicts arise between Addend[um] 1
    and the contract documents, Addend[um] 1 controls. See
    paragraph 21 of Addend[um] 1.

The School Board and Construction Manager have not yet executed
Addend[um] 1. to the Agreement

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(10), 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 Procedures appear to satisfy the foregoing requirements for
exemption of transactions as sales to a governmental entity.
School Board will make direct purchases of various construction
materials. After receiving requisition forms from the
contractors, School Board will prepare purchase orders for
direct purchases. After receiving the approved invoices from
Construction Manager, School Board will pay the vendors
directly. School Board will retain legal, and equitable, title
to all materials it purchases, will be responsible for the cost
of builder's risk insurance on those materials as a reimbursable
cost under the Agreement, and will be a named insured party on
the builder's risk policy.

Based upon the conclusion that School Board is the purchaser,
all purchases of materials that are made in accordance with the
Procedures 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(10), 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 and your request
would have been public records under Chapter 119, F.S., which
are subject to disclosure to the public under the conditions of
section 213.22, F.S. However, one of your letters of April 2,
1999, requests that your name, address, and any other details
which might lead to identification of the taxpayer be deleted by
the Department before disclosure.

Sincerely,

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

KK/
Enclosure.: Rule 12A-1.039, F.A.C.
Control #: 42565

FOOTNOTE 1. By telephone on November 16, 2000, you advised that
text will be added here stating that the School Board will
reimburse the Construction Manager for the cost of insurance on
owner purchased materials and supplies.