Could government and qualifying nonprofit owners directly buy project materials tax-free?

Subject

Government Construction Contracts

Plain-English summary

The proposed direct-purchase procedures allowed governmental and qualifying nonprofit owners to buy construction materials tax-free. The exempt entity had to issue its own purchase orders with its exemption number, receive direct invoices, pay vendors directly, take title and liability at delivery, and bear the risk of loss through insurance before the materials became real property.

Government purchasers also had to give each vendor a properly completed exemption certificate. For nonprofit owners, the ruling emphasized that direct payment by the exempt entity was required. Contractors and subcontractors remained taxable ultimate consumers of materials they manufactured or fabricated themselves.

What this means for you

The exemption followed the real purchaser, not merely the construction contract's label. The owner's payment, title, and insured risk had to match the direct-purchase paperwork.

Common questions

Q: Did the procedures work for governmental owners? Yes.

Q: Could qualifying nonprofit owners follow the same direct-purchase approach? Yes, including direct payment and appropriate exemption documentation.

Q: Were contractor-fabricated materials exempt? No.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Stat. § 212.08(7)(o) — qualifying nonprofit purchases
• Fla. Admin. Code r. 12A-1.001(3), (9) — exempt-entity purchases and direct payment
• 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-083

Original ruling text

SUMMARY

QUESTION: Do the procedures set out in a construction
company's procedures for purchase of materials for various
public works projects and projects for nonprofit entities
that qualify for exemption from sales and use taxes meet
legal requirements for these entities to purchase the
materials tax exempt?

ANSWER - Based on Facts Below: As long as the controlling
documents provide: (1) the entity issues its own purchase
orders directly to the vendors; (2) the purchase orders
include the entity's consumer's certificate of exemption
number; (3) the vendors invoice the entity directly; (4)
the entity issues its checks to the vendors directly; (5)
the entity takes title to the materials from the vendor and
assumes liability for the materials when they are delivered
to the job site; (6) the entity assumes risk of loss for
the materials upon delivery which is clearly established by
the requirement in the controlling documents that the
entity reimburse the contractor for the premiums for
purchase of insurance against loss or damage and the entity
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 entity rather than the contractor is in
substance as well as form the purchaser of the materials,
the procedures meet legal requirements for the entity to
purchase the materials tax exempt.

Dec 21, 2000

Re: Technical Assistance Advisement (00A-083)
XXX ("Taxpayer")
Sales and Use Tax - Government Construction Contracts
Sections 212.08(6), 212.08(7)(o), F.S.
Rules 12A-1.001(3), 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 July 7, 2000, subsequently withdrawn and replaced
by your letter of October 2, 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 of July 7, 2000 states that you represent XXX
(hereafter "the Taxpayer"). The taxpayer is a construction
company that frequently enters into contracts to act as a prime
contractor or construction manager on projects for governmental
entities and for nonprofit entities that qualify for exemption
from sales and use taxes.

The taxpayer has developed Sales Tax Exempt Purchasing
Procedures for Public Projects (the "Governmental Procedures")
which are supplied with your letter as Exhibit A, and Sales Tax
Exempt Purchasing Procedures for Nonprofit Entities (the
"Nonprofit Procedures"), supplied with your letter as Exhibit B.
The taxpayer intends to incorporate the Procedures into all
future contracts with nonprofit entities or government entities,
and they are intended to permit these entities to qualify for
sales tax savings by purchasing construction materials for their
projects directly from suppliers.

You state further that, rather than requiring each governmental
entity or nonprofit entity with which the taxpayer contracts to
obtain a technical assistance advisement from the Department,
you are requesting a technical assistance advisement to be
issued to the taxpayer on the Governmental Procedures and the
Nonprofit Procedures. You seek to avoid the necessity of
requiring the government entities and the nonprofit entities to
obtain separate technical assistance advisements project-byproject for procedures identical in all material ways to those
that would have already been considered by the Department.

The Governmental Procedures set out in Exhibit "A" are as
follows:

The governmental entity may elect to purchase materials and
equipment included in a contractor's bid directly from the
supplier. Such items are referred to as "Owner/Public
Entity-Purchased Materials[.]" Any Owner/Public EntityPurchased Materials will be governed by [the Governmental
Procedures].

Subcontractors will select the suppliers from whom
materials will be purchased and will submit a list of
materials and suppliers with their bids for consideration
as Owner/Public Entity-Purchased Materials. The cost of the
materials and applicable sales tax will be included in the
bids. If a governmental entity elects to purchase any
materials directly, the subcontract amount will be reduced
by the cost of, and sales tax related to, those materials.

Subcontractors shall furnish [Taxpayer] with a list of all
Owner/Public Entity-Purchased Materials. [Taxpayer] will
then prepare a detailed worksheet of all Owner/Public
Entity-Purchased Materials (the "Worksheet"). The Worksheet
will include the name, address and phone number of the
governmental entity and will make no reference to
[Taxpayer].

If the governmental entity prepares its own purchase
orders, [Taxpayer] will furnish the Worksheet to the
governmental entity for its approval. If the Worksheet is
approved, the governmental entity will issue its own
purchase order with a copy of the Worksheet attached
directly to the supplier.

If the governmental entity requests [Taxpayer] to prepare
the purchase order, [Taxpayer] will prepare the purchase
order using purchase order forms of the governmental
entity. [Taxpayer] will then submit the purchase order,
with a copy of the Worksheet attached, to the governmental
entity for its approval. If approved, the governmental
entity will issue the purchase order with a copy of the
Worksheet [attached] to the supplier.

The purchase order must contain or be accompanied by the
governmental entity's consumer's certificate of exemption
and must include the governmental entity's exemption
number, issue date, and expiration date. The purchase order
will also generally provide for delivery to be F.O.B. job
site

The governmental entity will hold full title to all
Owner/Public Entity-Purchased Materials upon delivery to
the job site.

Although the governmental entity will take title to the
Owner/Public Entity-Purchased Materials upon delivery,
subcontractors will be obligated to inspect, accept
delivery of, and store the materials pending incorporation
into the project and will remain liable for their
negligence in meeting any of these obligations.

After verifying that delivery is in accordance with the
delivery receipts, the subcontractors will forward the
delivery receipts to [Taxpayer]. After [Taxpayer] has
verified that the delivery receipts are in accordance with
the invoices and purchase order, [Taxpayer] will deliver
the approved invoices to the governmental entity. The
governmental entity will process the invoices and issue
payment directly to the suppliers.

The governmental entity is required to purchase and
maintain builder's risk insurance sufficient to cover the
value of any Owner/Public Entity-Purchased Materials from
the time the governmental entity takes title through the
time the materials are incorporated into the project.

In case of a conflict with any other contractual provision
with a governmental entity, the Procedures shall control.

The Nonprofit Procedures set out in Exhibit "B" are as follows:

The nonprofit entity that qualifies for exemption from
sales and use taxes (a "Nonprofit Entity") may elect to
purchase materials and equipment included in a contractor's

bid directly from the supplier. Such items are referred to
as "Owner/Nonprofit Entity-Purchased Materials[.]" Any
Owner/Nonprofit Entity-Purchased Materials will be governed
by these procedures (the "Procedures").

Subcontractors will select the suppliers from whom
materials will be purchased and will submit a list of
materials and suppliers with their bids for consideration
as Owner/Nonprofit Entity-Purchased Materials. The cost of
the materials and applicable sales tax will be included in
the bids. If a Nonprofit Entity elects to purchase any
materials directly, the subcontract amount will be reduced
by the cost of, and sales tax related to, those materials.

Subcontractors shall furnish [Taxpayer] with a list of all
Owner/Nonprofit Entity-Purchased Materials. [Taxpayer] will
then prepare a detailed worksheet of all Owner/Nonprofit
Entity-Purchased Materials (the "Worksheet"). The Worksheet
will include the name, address and phone number of the
Nonprofit Entity and will make no reference to [Taxpayer].

If the Nonprofit Entity prepares its own purchase orders,
[Taxpayer] will furnish the Worksheet to the Nonprofit
Entity for its approval. If the Worksheet is approved, the
Nonprofit Entity will issue its own purchase order with a
copy of the Worksheet attached directly to the supplier.

If the Nonprofit Entity requests [Taxpayer] to prepare the
purchase order, [Taxpayer] will prepare the purchase order
using purchase order forms of the Nonprofit Entity.
[Taxpayer] will then submit the purchase order, with a copy
of the Worksheet attached, to the Nonprofit Entity for its
approval. If approved, the Nonprofit Entity will issue the
purchase order with a copy of the Worksheet [attached] to
the supplier.

The purchase order must contain or be accompanied by the
nonprofit entity's consumer's certificate of exemption and
must include the Nonprofit Entity's exemption number, issue
date, and expiration date. The purchase order will also
provide for delivery to be F.O.B. job site.

The Nonprofit Entity will hold full title to all
Owner/Nonprofit Entity-Purchased Materials upon delivery.

Although the Nonprofit Entity will take title to the
Owner/Nonprofit Entity-Purchased Materials upon delivery to
the job site, subcontractors will be obligated to inspect,
accept delivery of, and store the materials pending
incorporation into the project and will remain liable for
their negligence in meeting any of these obligations.

After verifying that delivery is in accordance with the
delivery receipts, the subcontractors will forward the
delivery receipts to [Taxpayer]. After [Taxpayer] has
verified that the delivery receipts are in accordance with
the invoices and purchase order, [Taxpayer] will deliver
the approved invoices to the Nonprofit Entity. The
Nonprofit Entity will process the invoices and issue
payment directly to the suppliers.

The Nonprofit Entity is required to purchase and maintain
builder's risk insurance sufficient to cover the value of
any Owner/Nonprofit Entity-Purchased Materials from the
time the Nonprofit Entity takes title through the time the
materials are incorporated into the project.

In case of conflict with any other contractual provision
with a Nonprofit Entity, the Procedures shall control.

Requested Advisements

You request the following advisements:

Do the Governmental Procedures qualify for tax exempt
purchases, as provided in Section 212.08(6), Florida
Statutes (1999) ("F.S."), and Rule 12A-1.094, Florida
Administrative Code ("F.A.C.")?

Do the Nonprofit Procedures qualify for tax exempt
purchases, as provided in section 212.08(7), F.S., and Rule
12A-1.001(3), F.A.C.?

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....

Section 212.08(7)(o), F.S. (1999), provides:

1. There are exempt from the tax imposed by this chapter
   transactions involving:

a. Sales or leases directly to churches or sales or leases
of tangible personal property by churches;

b. Sales or leases to nonprofit religious, nonprofit
charitable, nonprofit scientific, or nonprofit educational
institutions when used in carrying on their customary
nonprofit religious, nonprofit charitable, nonprofit
scientific, or nonprofit educational activities, including
church cemeteries; and

c. Sales or leases to qualified veterans' organizations and
their auxiliaries when used in carrying on their customary
veterans' organization activities....(FN 1)

Section 212.08(7), F.S., also provides where relevant:

Exemptions provided to any entity by this subsection shall
not inure to any transaction otherwise taxable under this
chapter when payment is made by a representative or
employee of such entity by any means, including, but not
limited to, cash, check, or credit card even when that
representative or employee is subsequently reimbursed by
such entity.

Rule 12A-1.001(3)(a), F.A.C., provides:

A sale or lease directly to or sales or leases of tangible
personal property by churches, or a sale or lease directly
to nonprofit religious, nonprofit educational, nonprofit
charitable institutions, and veterans' organizations, for
use in the course of their customary nonprofit religious,
nonprofit educational, nonprofit charitable activities, and
for use by veterans' organizations, including church
cemeteries, are exempt from the tax imposed by Chapter 212,
F.S. Also exempt are scientific organizations and
organizations providing special educational and social
benefits to minors; State Theater Contract Organizations;
Florida Retired Educators Association; and certain
nonprofit corporations qualified as homes for the aged or
licensed as a nursing home or hospice. However, such

institutions or organizations desiring to qualify for the
exemption must obtain from the Department of Revenue a
consumer's certificate of exemption, and payment must be
made directly to the dealer by the exempt entity. See
subparagraph (9)(d)2. of this rule for a suggested document
to be provided the dealer by an employee who has been
authorized to make purchases on behalf of a nonprofit
organization when payments are made directly to the dealer
by the exempt entity. This exemption shall not inure to
any transaction otherwise taxable when payment is made by
an exempt entity's employee by any means, including but not
limited to, cash, check, or credit card, when that employee
is subsequently reimbursed by the exempt entity. See Rules
12A-1.038 and 12A-1.039, 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, "[p]ayment
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 Governmental Procedures appear to satisfy the foregoing
requirements for exemption of transactions as sales to a
governmental entity. Governmental entities will make direct
purchases of various construction materials. The taxpayer will
prepare requisitions for direct purchases for the governmental
entities' approval. The governmental entities will prepare
detailed Purchase Orders including their exemption documentation

and forward them to the vendor. After receiving the approved
invoices from the taxpayer, the governmental entities will pay
the vendors directly. The governmental entities will retain
legal, and equitable, title to all materials they purchase, and
they will be responsible for the cost of insurance on those
materials under the Governmental Procedures.

Based upon the conclusion that the governmental entity is the
purchaser, all purchases of materials that are made in
accordance with the Governmental Procedures will be exempt from
sales tax. 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.

Any contractor or subcontractor that manufactures or fabricates
materials as specified in Rule 12A-1.094(5), F.A.C., is deemed
to be the ultimate consumer 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.

While there are no directions by statute or rule for nonprofit
entities to secure their tax exemption for materials purchased
for real property improvement contracts, following the same
procedures for direct purchases that governmental entities
follow will result in their documenting their purchases
appropriately. Section 212.08(7), F.S., recognizes direct pay by
a non-profit is required, just as it is for governmental
entities. The statute states:

Exemptions provided to any entity by this subsection shall
not inure to any transaction otherwise taxable under this
chapter when payment is made by a representative or
employee of such entity by any means, including, but not
limited to, cash, check, or credit card even when that
representative or employee is subsequently reimbursed by
such entity.

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 #: 41884; revised as 42720

FOOTNOTE 1. On January 1, 2001, certain changes will become
effective to Section 212.08(7)(o), F.S. See enclosed Post
Legislative Review of Ch. 2000-228, Laws of Fla. s. 1.