Could a charity use its Florida exemption to directly buy materials for a park construction project under a contractor purchasing-agent agreement?

Subject

Construction Contract/Exempt Organization

Plain-English summary

The charitable organization could use its exemption for qualifying direct purchases of materials incorporated into the park. It issued and executed its own purchase orders and exemption certificate, was invoiced directly, paid vendors with its own checks, took title at job-site delivery, and bore risk of loss before installation.

The exemption had limits. Contractor- or subcontractor-fabricated items remained subject to use tax on full fabricated cost, including the charity-purchased inputs. The exemption also did not cover supplies merely consumed during construction, contractor or subcontractor purchases, or their equipment purchases and rentals.

What this means for you

Calling the contractor a purchasing agent was not enough. The transaction documents and performance had to make the exempt organization the actual purchaser and ultimate consumer of physically incorporated materials.

Common questions

Q: Could the charity directly buy incorporated materials tax-free? Yes.

Q: Did that eliminate tax on contractor-fabricated items? No.

Q: Were consumables and contractor equipment covered? No.

Citations and references

• Fla. Stat. §§ 212.02, 212.06, and 212.08(7)(p) — sales, contractors, and charitable exemption
• Fla. Admin. Code r. 12A-1.051 — real-property contractors and fabricated items
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-012

Original ruling text

SUMMARY

QUESTION: Is the Exempt Organization the ultimate consumer
of the materials and supplies incorporated into a real
property improvement pursuant to a construction contract
and, therefore, able to take advantage of its tax
exemption?

ANSWER - Based on Facts Below: It appears that the Exempt
Organization is directly purchasing the materials and
supplies that are incorporated into the real property
improvement, and can take advantage of its tax exemption
for these purchases. However, the exemption cannot be used
to exclude materials and supplies from the Contractor's
calculation of its tax due on the fabricated cost of items
of tangible personal property that will be incorporated
into the project, nor can the exemption be used for
materials and supplies that are consumed in the
construction of the project when those materials are not
physically incorporated into the project, not can the
exemption be used for the Contractors purchases or rentals
of equipment.

Feb 27, 2001

Re: Technical Assistance Advisement 01A-012
Sales and Use Tax - Construction Contract/Exempt
Organization
Sections: 212.02, 212.06, 212.08(7)(p), F.S.
Rule: 12A-1.051, F.A.C.
Petitioner: XXX (herein "Exempt Organization")
FEI: XX

Dear :

This letter is a response to your petition dated January 25,
2001, 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 petition provides the following information:

[Exempt Organization] is a charitable organization that has
qualified for exemption pursuant to Section 501(c)(3) of the
Internal Revenue Code of 1986.... The Exempt Organization has
been issued a Consumer's Certificate of Exemption by the Florida
Department of Revenue....

The Exempt Organization has entered into a contract for the
construction of a [Park] in [Florida County,] which will be used
by the Exempt Organization in furtherance of its charitable
purposes. The contractor who has executed the construction
contract to construct the Park is [Contractor]. A complete copy
of the contract is attached....

The Construction Contract provides for a lump sum payment
of the amount indicated in Article 4 of the Construction
Contract.

Addendum One to the Construction Contract contains a
"Purchasing And Agency Agreement" between the Exempt
Organization as principal and the Contractor as agent
pursuant to paragraph 2(d) of Addendum One (the "Agency
Agreement"). Under the terms of the Agency Agreement, the
Contractor agrees to serve as the Exempt Organization's
purchasing agent for Materials and Supplies and items of
tangible personal property that are included in the lump
sum contract amount for construction of the Park.

Pursuant to the Agency Agreement, the Agency Agreement
applies to all purchases of materials and supplies and
other items of tangible personal property required pursuant
to the Construction Contract (collectively, "Materials and

Supplies")[;] however, the Exempt Organization, at its
discretion, may establish dollar threshold amounts below
which the Agency Agreement will not apply. The Agency
Agreement further details the methods under which the
Materials and Supplies are to be purchased by the Exempt
Organization so that the Exempt Organization is the
ultimate consumer of the Materials and Supplies purchased.
The Agency Agreement is structured this way in order to
enable the Exempt Organization to issue its Consumer's
Certificate of Exemption to the suppliers for the purchase
of such Materials and Supplies.

The Agency Agreement provides that all purchase[s] of
Materials and Supplies pursuant to the Agency Agreement
will be made pursuant to a purchase order form which
indicates the Exempt Organization as the ultimate consumer
of the Materials and Supplies being purchased. The
purchase order form also indicates that the purchase order
is for materials and supplies for the construction of the
Park. The Exempt Organization will provide the Contractor
with purchase order forms which are to be prepared by the
Contractor, as the Exempt Organization's Agent, and
submitted to the Exempt Organization for execution as the
purchaser and the ultimate consumer of such materials and
supplies. A sample copy of the purchase order form is
attached.... The purchase order form clearly indicates the
purchaser is the Exempt Organization for use in the
construction of the Park. The purchase order form further
indicates the Exempt Organization's Consumer's Certificate
of Exemption number. The Exempt Organization's
representative will review and execute the purchase order
forms and deliver them to the Contractor, who shall in turn
submit the purchase order to the vendor of the Materials
and Supplies being purchased.

The Agency Agreement provides that each supplier shall
submit its bill for such Materials and Supplies and items
of tangible personal property to the Contractor for
Approval. When the Contractor has approved payment of the
invoice for the Materials and Supplies delivered pursuant
to the purchase order, the Contractor will submit the

invoice directly to the Exempt Organization for payment.
The Exempt Organization shall then promptly process such
payment by issuing a check from its own funds for the
amount of the invoice payable directly to the supplier. The
Exempt Organization will either then deliver the check
directly to the supplier or deliver the check to the
Contractor for delivery to the supplier.

The Agency Agreement provides for a "Sales Tax Savings
Change Order" to be processed for each invoice from
suppliers paid by the Exempt Organization pursuant to the
Agency Agreement. The Sales Tax Savings Change Order
provides for a reduction of the lump sum contract price
[equal to the cost of the Materials and Supplies plus
applicable tax].

The Contractor and Exempt Organization will sign the Sales
Tax Savings Change Order and the contract price will be
reduced by said amount. The intent of this provision is to
cause the lump sum contract price to be reduced by the
amount paid by the Exempt Organization for all Materials
and Supplies purchased pursuant to the Agency Agreement
plus the amount of State of Florida sales taxes that would
have been paid for such Materials and Supplies had the
Contractor, or any other non-tax exempt entity, been the
ultimate consumer of such items. This provisions further
provides that all savings of State of Florida sales taxes
as a result of such Sales Tax Savings Change Order shall
accrue solely to the benefit of the Exempt Organization,
and that the Contractor shall not benefit whatsoever from
any savings as a result of any Sales Tax Savings Change
Order.

The Agency Agreement provides that the duties of the Contractor,
as agent for the exempt Organization, include the ordering,
inspecting, accepting delivery, storing, handling, distribution,
coordination and quality control for the Materials and Supplies
purchased under the Agency Agreement. However, this paragraph
also clearly provides that title to all such Materials and
Supplies purchased under the Agency Agreement shall be vested in

the Exempt Organization as the ultimate consumer, and that the
Exempt Organization bears the risk of loss and theft on all such
Materials and Supplies until such time as these items are
physically incorporated into the construction project, at which
time the Builders Risk Insurance Policy carried by the
Contractor under the terms of the Construction Contract will
cover the risk of loss in regard to such Materials and Supplies.

REQUESTED ADVISEMENT

You request advice as to whether the Exempt Organization is the
ultimate consumer of the materials and supplies purchased
pursuant to the Agency Agreement and can, therefore, take
advantage of tax exemptions available to it pursuant to its
qualification as a 501(c)(3) organization.

LAW AND DISCUSSION

Non-profit institutions that qualify under section 501(c)(3) of
the Internal Revenue Code may structure construction contracts
in order to take advantage of tax exemptions available to them.
If the organization elects to take advantage of tax exemptions
in a construction contract, certain elements are required in
order to legally effect the exemption. Whether the contractor
acts as the exempt organization's purchasing agent is not
relevant; it is only relevant that the particular elements are
included in the contract, and that those elements are followed,
for the exempt organization to receive its exemption.

Pursuant to section 212.08(7)(p), Florida Statutes, sales tax
does not apply to the purchase, by an organization exempt from
income tax under IRC Section 501(c)(3), of tangible personal
property, including building materials, where payment is made
directly to the vendor by the exempt organization and such
purchases will be used to carry out the exempt organization's
customary nonprofit activities. Further, the exempt
organization is required to present the vendor with a properly
completed exemption certificate at the time of purchase in order
to establish the tax-exempt status of the transaction.

In those instances where the tax exempt entity delegates its

authority to the contractor to make purchases of tangible
personal property in the tax exempt entity's own name, using the
tax exempt entity's purchase orders, and using the tax exempt
entity's line of credit, and provided that the tax exempt entity
is invoiced directly for the purchases, no sales tax is due on
such purchases.

Notwithstanding the previous paragraph, even if the tax exempt
entity has structured a contract as described above, the tax
exempt entity must assume all risk of damage or loss for the
building materials from the time of purchase and prior to their
installation or incorporation into the project in order for the
sale of building materials to be deemed a sale to the tax exempt
entity and, thus, to be tax exempt. Further, 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 of such property is to the tax
exempt entity or instead to a contractor. However, the
assumption of risk of damage or loss is the paramount
consideration. The assumption of risk would include the period
of time that the building materials are physically stored at the
job site prior to their installation or incorporation into the
project. The tax exempt entity will be deemed to have assumed
the risk of damage or loss if the tax exempt entity 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. If the tax exempt entity
does not assume the risk of damage or loss, the contractor will
be construed to be the ultimate or final consumer of the
building materials it uses and will be liable for the applicable
tax.

In order to make a determination that the exempt entity is the
final consumer of the building materials, the construction
contract must include the following provisions:

1) The Exempt Organization must issue the purchase orders;

2) The Exempt Organization must issue exemption certificates;

3) Materials must be delivered to Exempt Organization at the job
site and title of materials must be transferred to Exempt
Organization;

4) Contractor may be responsible for all matters relating to the
receipt of materials;

5) Exempt Organization must be billed directly by the selling
vendor;

6) Payment for the materials must be made directly by the Exempt
Organization;

7) Exempt Organization must bear all risk of loss or damage to
materials from the time of purchase and prior to their
installation into the project.

Based on your letter and documentation, the Exempt Organization
must comply with the following provisions:

1. A Purchase Order Form provided by the Exempt Organization
   shall be prepared by contractor/subcontractors and submitted to
   the Exempt Organization prior to ordering Exempt Organization
   purchased materials. The purchase order form will provide: the
   name and address for the materials supplier; a list of required
   items; the quantity needed; the price of the materials; and
   Consumer Certificate of Exemption number of the Exempt
   Organization.

2. The Exempt Organization will execute and issue standard
   Exempt Organization purchase order forms to the vendors.

3. The Subcontractor shall execute and deliver to the Exempt
   Organization deductive change orders reflecting the full value
   of all materials directly purchased by the Exempt Organization,
   plus all sales tax savings associated with the materials.

4. Contractor will be responsible for all matters relating to
   the receipt of materials purchased by the Exempt Organization,
   including verifying correct quantities, inspection and

acceptance of the goods at the time of delivery. The Contractor
will forward the invoice to the Exempt Organization for payment.

5. Title to the Exempt Organization purchased materials will
   vest in the Exempt Organization at the time the materials are
   delivered to the Exempt Organization owned construction site
   (F.O.B. job site).

6. The selling vendor will submit its invoice for approval to
   the Contractor who will approve the invoice and submit it to the
   Exempt Organization for payment.

7. Payment for the building materials is made directly by the
   Exempt Organization's own check to the selling vendor.

8. The Exempt Organization will bear the risk or loss and theft
   on all materials.

Generally, it appears that the requirements set forth above do
tend to show that the Exempt Organization is directly purchasing
the materials.

However, there are a several points in the Agency Agreement that
need to be addressed.

Addendum One, paragraph (2)(d) of the construction agreement
(the Agency Agreement) attempts to exclude materials and
supplies purchased by the Exempt Organization, to be used by the
contractor or sub-contractor to fabricate or manufacture items
of tangible personal property that will be incorporated into the
project, from the contractor's calculation of fabricated cost
subject to sales tax (this appears in the fifth paragraph of
(2)(d)). Even though the Exempt Organization purchases the
building materials, when the contractor or subcontractors
fabricate such materials into other items of tangible personal
property for incorporation into the project, the contractor or
subcontractors are subject to Rule 12A-1.051(10), Florida
Administrative. Code. Under this rule, the contractor or
subcontractors, not the Exempt Organization, are the ultimate
consumers of the articles of tangible personal property they
manufacture or fabricate to perform the contract. 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), Florida Administrative Code, including the
cost of the materials and supplies, regardless whether they are
purchased by Exempt Organization.

The first paragraph of the Agency Agreement indicates that the
suppliers of materials and supplies must submit their invoices
to the Contractor for approval. The suppliers should not
indicate on the invoice that the Contractor is the party to be
billed. It is a necessary part of the exemption process that
the suppliers invoice the Exempt Organization directly for the
materials and supplies; invoicing the contractor will negate the
exemption.

The second paragraph of the Agency Agreement indicates that,
among other things, the Contractor shall order the materials and
supplies for use in the contract. This seems to conflict with
an earlier provision in the first paragraph, which indicates
that purchases will be made via the Exempt Organization's
purchase orders. It is necessary that the Exempt Organization
order, via its own purchase order forms, the materials and
supplies, for those materials and supplies to be exempt.

Additionally, the Agency Agreement attempts to expand the
exemption beyond the scope of the exemption. The first
paragraph refers to "all materials, supplies and other tangible
personal property needed for the performance of this Contract by
Contractor...." The second paragraph refers to supplies that
are "consumed in connection with, or physically incorporated
into" the project. Please be advised that this exemption is
limited to only those materials and supplies that are physically
incorporated into, or installed into, the project (excluding the
materials and supplies that are fabricated or manufactured into
other items of tangible personal property by the contractor or
subcontractor, as discussed previously). This tax exemption
does not apply to equipment rentals to Contractor or
subcontractors that provide construction services for the
Project, nor does it apply to items that are consumed in
connection with work on the project when those items are not
installed upon or incorporated into the project, even though the

economic burden of the tax, by contract or otherwise, may
ultimately be borne by the Exempt Organization.

Additionally, please be aware that this tax exemption does not
apply to purchases made by contractors or subcontractors
providing construction services for the project.

CONCLUSION

The Exempt Organization may use its Consumer's Certificate of
Exemption to purchase materials and supplies to be incorporated
into or installed upon the real property improvement project if
the procedures outlined above are followed, and the concerns
detailed above are addressed.

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 #43785