Could a Florida county buy airport access-road materials tax-free while its design-build contractor handled procurement tasks?

Subject

Public Works Contract

Plain-English summary

The county could purchase materials for the airport access-road project without sales tax if it—not the contractor—was the true purchaser. The contractor could prepare requisitions and draft purchase orders, inspect deliveries, manage warranties, and store the materials, but county approval and ownership had to remain real.

The county had to issue approved purchase orders bearing its exemption number, provide the exemption certificate, receive vendor invoices, pay vendors directly, take title and liability at delivery, and bear the full risk of loss before installation. The ruling relied only on the contract section submitted and excluded materials the contractor manufactured or fabricated itself.

What this means for you

Public funding and a government project's name are not enough. Florida looks to who actually orders, pays for, owns, and insures the materials before they become part of the real property.

Common questions

Q: Could the contractor prepare purchasing paperwork? Yes, if the county executed and approved its own purchase orders.

Q: Who had to pay the vendors? The county directly.

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

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.039, and 12A-1.094(2), (3), and (5) — direct government purchases and public works
• Fla. Admin. Code r. 12A-1.051(10) — contractor-manufactured or fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-003

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of an airport
access road meet the legal requirements for the County to
purchase the materials tax exempt?

ANSWER - Based on Facts Below: The procedures meet the
legal requirement for the County to purchase the materials
tax exempt as long as the controlling documents provide:

1. The County issues its own purchase orders 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 reimburse the
   contractor for premiums paid for insurance against loss or
   damage and the County is named as the insured party to
   receive proceeds in case of loss of the items purchased tax
   exempt.

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.

Jan 08, 2001

Re: Technical Assistance Advisement 01A-003
Sales and Use Tax - Public Works Contract
Sections: 212.08(6), F.S.
Rule: 12A-1.001(9), 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
FEI: XX

Dear :

This letter is a response to your petition dated December 5,
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

Your letter provides that on February 22, 2000, County entered
into a Construction Agreement with XXX (hereinafter
"Contractor") for design/build services for Task 2 XXX
("Airport"). An amendment to the Construction Agreement has been
drafted, and it is expected to be approved by the Board of
County Commissioners on January 9, 2001. Among other things,
the amendment includes Section 48.25, entitled "County Furnished
Materials." The purpose of this Section is to allow County to
take advantage of sales tax savings by purchasing certain
materials used in the performance of the contract. Your letter
also provides that County owns the land and passenger terminal
buildings of the airport, and the Florida Department of
Transportation owns portions of the access roads.

A copy of the complete Construction Agreement was not included
with your request for technical assistance advisement. Only a
copy of Section 48.25 was included. Therefore, this response is
based only upon the language of that section.

Under Section 48.25 of the Construction Agreement, 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 48.25 states the Construction Agreement
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 48.25.1 requires Contractor to provide County a list of
vendors, prices of materials to be supplied by such vendors and
descriptions and estimated quantities of the materials.

Section 48.25.2 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 48.25.4 includes a statement that Contractor is to
prepare a County-issued purchase order in accordance with the
requisition for County to use for direct purchase. (Purchases
made on Contractor's purchase order forms are not tax exempt.)
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 48.25.4 is a little unclear, because it seems to provide
that Contractor will prepare a County-issued purchase order,
then once it (Contractor) receives the purchase order, it will
implement the purchasing of the materials in accordance with the
terms of the purchase order. It is assumed, for purposes of

this response, that a step in the paperwork process was
inadvertently omitted from this section of the contract, and
that the omitted step is some sort of approval of the purchase
order by a county administrator. The contract should be amended
to clearly reflect this county approval process.

This section also provides that the purchase order will include
reimbursement to the vendor of shipping costs and insurance, as
well as the costs of providing a performance bond from the
vendor to County, if applicable, presumably all paid for by
County. The section further provides that, in conjunction with
the execution of a purchase order, the Contractor shall issue a
deductive change order to the County for the cost of countyfurnished materials, plus sales tax.

According to Section 48.25.6 of Construction Agreement,
Contractor is fully responsible for all matters relating to the
procurement of county-furnished materials, including but not
limited to, 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 48.25.7 of Construction Agreement,
Contractor is to visually inspect the materials when they arrive
at the job site, verify that all necessary documentation
accompanies the delivery and conforms with the purchase order,
and forward the invoice to County for payment.

Section 48.25.8 of Construction Agreement 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 48.25.9 of Construction Agreement requires Contractor to
maintain records of the use of the materials and report same to
County.

According to Section 48.25.10 of Construction Agreement, the
Contractor is required to manage and enforce warranties on the

materials.

Section 48.25.11 of Construction Agreement provides that County
retains legal and equitable title to the materials while such
materials are in Contractor's possession. The Construction
Agreement describes this transfer of possession of the countyfurnished materials as a bailment until such time as those
materials are returned to County by being incorporated into the
project.

According to Section 48.25.12 of Construction Agreement, County
purchases insurance on the materials against loss or damage,
thereby retaining risk of loss of the materials.

According to Section 48.25.13 of Construction Agreement, County
is not liable for delays in the Project attributable to delivery
delays or defective materials.

According to Section 48.25.14 of Construction Agreement,
Contractor reviews invoices for materials delivered to the
construction site on a weekly basis and advises County whether
it concurs with 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 48.25.15 of Construction Agreement,
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 Contract Administrator 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.

REQUESTED ADVISEMENT

You request advice as to whether the terms of the subject
contract are sufficient to allow the county to purchase
construction materials exempt from tax.

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

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.

CONCLUSION

The Construction Agreement 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, County-issued purchase orders for direct purchases.
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
Construction Agreement 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.

Since only Section 48.25 of the contract was provided for
review, this conclusion is based on language and information
contained in it, and presumes that no other sections of the
contract compromise the provisions of Section 48.25.

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 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 #43316