Did a county's direct-purchase procedures qualify seaport capital-improvement materials for Florida's government sales-tax exemption?

Plain-English summary

The county's direct purchases for the seaport capital-improvement project qualified for exemption. The county prepared and issued purchase orders with its exemption documentation, received approved invoices, and paid third-party vendors directly.

The county retained title, accepted liability at delivery, assumed the risk of loss, and carried insurance on county-purchased materials. Those facts made the county the purchaser before the materials were incorporated into terminal improvements.

Each vendor still needed a properly completed exemption certificate. The ruling did not cover materials manufactured or fabricated by the contractor or subcontractors; they remained the taxable consumers of those articles.

What this means for you

Public ownership of a project is not enough. The written procedures and actual flow of purchasing, payment, title, liability, risk, and insurance must establish the government entity as buyer.

Common questions

Q: Did the seaport procedures qualify? Yes.

Q: Who paid the vendors? The county directly.

Q: Who held title and risk at delivery? The county.

Q: Were contractor-fabricated materials covered? No.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code r. 12A-1.038(4) — government exemption documentation and direct payment
• Fla. Admin. Code r. 12A-1.094 — public-works contracts
• Fla. Admin. Code r. 12A-1.051(10) — contractor-fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-003

Original ruling text

SUMMARY

QUESTION: Do the procedures for purchase of materials set
out in the county's contract for seaport capital
improvement construction meet legal requirements for the
county to purchase the materials tax exempt?

ANSWER - Based on Facts Below: As long as the controlling
documents provide: (1) the county issues its own purchase
orders, not the contractor's, 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; (7) the county is insured
against loss or damage to the county-purchased materials;
and (8) 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, the procedures meet legal requirements for the
county to purchase the materials tax exempt.

Tax Exempt Materials for Capital Improvement Construction
Project

Jan 04, 2002

Re: Technical Assistance Advisement 02A-003
XXX ("County")
Sales and Use Tax
XXX ("the Project")
Section 212.08(6), F.S.
Rules 12A-1.038(4), 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated September 14, 2001. You asked for a technical
assistance advisement confirming that the procedures proposed in
your letter would provide for tax-exempt purchases.

Facts

Your letter states that you are proposing direct purchase
procedures to permit the County to purchase, exempt from sales
and use tax, supplies, goods, equipment, appliances, and other
materials from third-party suppliers and not from contractors
providing construction services for the Project.

You have provided with your letter the following:

1. Master Development Agreement (hereinafter "Agreement") by
   and among the County and XXX (hereinafter "Contractor"),
   XXX (hereinafter "User,"), and XXX (hereinafter
   "Operator"), in which Contractor has agreed to act as
   contractor.

2. Exhibit D, Sales Tax Exempt Purchasing Procedures for
   Public Projects.

Section 2.5 B. of the Agreement provides that Contractor, as
tenant of the County, is authorized to enter into one or more
contracts with contractors to construct the Project,
construction of improvements to the Terminals.

Section 2.7 of the Agreement provides that the County represents
to Contractor that it has funding commitments sufficient to
cover the entire cost of the Project.

Section 2.9 of the Agreement, Direct Purchases for Purposes of
State Sales Tax, Subsection A, County's Right to Purchase
Directly, sets out the County's right to directly purchase
"certain materials, supplies, goods, and personalty to be used
in the construction of the Project."

Section 2.9 of the Agreement, Direct Purchases for Purposes of

State Sales Tax, Subsection C, Procedures, obligates Contractor
to require the Builder and each of its subcontractors to follow
the Sales Tax Direct Purchase Procedure set out in Exhibit D to
carry out direct purchases by the County.

Section 2.9 of the Agreement, Direct Purchases for Purposes of
State Sales Tax, Subsection D, Indemnification, obligates
Contractor to require the Builder and each subcontractor "to
defend, indemnify and hold harmless [Contractor, User,
Operator], the County," et al. "against any and all claims,
costs, losses, damages, expenses,... liens, demands, and causes
of action of every kind or character, including without
limitation, the amount of any judgement, penalty, interest
charge and fee, arising out of, relating to, or in connection
with the County's direct purchases of materials, supplies,
goods, or personalty under this Agreement."

Section 13 of the Agreement, Commitment on Indemnity and
Insurance, Subsection E, Insurance Coverage Required, Subsubsection (iv), Builders Risk Insurance, provides for "All
risk" coverage in the name of the County, the Builder, and
Contractor.

Section 13 of the Agreement, Commitment on Indemnity and
Insurance, Subsection H, Insurance Deductibles, states that
Contractor will be responsible for any and all insurance
deductibles to be reimbursed as Project Costs by the County when
and as paid or incurred by Contractor.

Exhibit D to the Agreement, Sales Tax Exempt Purchasing
Procedures for Public Projects provides as follows:

Paragraph 1 states that the Subcontractor has included sales tax
in its bid. The County reserves the right to make tax exempt
direct purchases of equipment and materials included in the bid.
These materials will be governed by these Procedures.

Paragraph 2 requires the Subcontractor to select vendors.
Subcontractor has included in his bid prices of materials plus
applicable tax to be supplied with descriptions and estimated
quantities. Purchases will be handled as deductive change

orders.

Paragraph 3 requires the Subcontractor to provide the
Construction Manager with a list of suppliers, with a
description of the materials to be supplied, estimated
quantities and prices.

Paragraph 4 provides that, on request of the Construction
Manager, Subcontractor 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 Subcontractor; quoted price together with
associated sales tax; and delivery dates, payment terms, and
warranties established by Subcontractor. The purchase order
shall require the shipper to provide insurance and shall contain
the County's name, address, and sales tax exemption certificate
number.

According to Paragraph 8, Subcontractor is responsible for
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. Subcontractor is to
inspect the materials when they arrive at the jobsite; verify
that all necessary documentation accompanies the delivery and
conforms with the purchase order; and indemnify the County from
damages arising from its negligence in damaging the materials or
any of its actions that result in non-payment for goods to
supplies.

Paragraph 9 provides that the Subcontractor and Construction
manager shall visually inspect materials to verify that the
materials conform to plans and specifications and to determine
before installation that such materials are not defective, then
forward the invoice to County for payment.

Paragraph 10 provides that the Subcontractor ensures that the
materials conform to the specifications, whether the materials
are patently defective, and whether the materials are identical

to what was ordered. The Subcontractor promptly notifies the
County of defective or non-conforming materials. The
Subcontractor is liable for damage to the materials resulting
from the Subcontractor's failure to remedy non-conformities or
resulting from the Subcontractor's incorporation of the
materials into the project.

According to Paragraph 12, the Subcontractor is required to
manage and enforce warranties on the materials.

According to Paragraph 13, the County retains title to the
materials while such materials are in the Subcontractor's
possession.

According to Paragraph 14, transfer of the materials into
Subcontractor's possession constitutes a bailment from County to
Subcontractor until such time as those materials are returned to
County by being incorporated into the project. Bailee has the
duty to safeguard, store, and protect the materials.

According to Paragraph 15, County purchases and maintains
insurance on the materials against loss or damage.

According to Paragraph 16, Subcontractor reviews invoices for
materials delivered to the construction site on a monthly basis
and advises County whether it concurs 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 Paragraph 17, Subcontractor provides the County
with a list of goods accepted, with invoices and documentation
as required by the County. Upon verification, the County pays
the invoices by check delivered directly to the vendor.

According to Paragraph 18, at the end of the Project, any refund
for surplus materials returned to suppliers plus applicable
sales savings amount shall be credited with an additive Change
Order to the Subcontractor's agreement with the Construction
Manager. Salvage materials shall be the property of the County.

To summarize:

1. The County may elect to purchase materials and equipment
included in a Subcontractor's bid directly from the
supplier.

2. Subcontractor will select the suppliers from whom
   materials will be purchased.

3. Subcontractor shall furnish County with detailed
   Purchase Order Requisition Forms for all materials.

4. County shall prepare County's purchase order, and 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 Exhibit D 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. Subcontractor's possession
   of the materials will constitute a bailment. Subcontractor,
   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, Subcontractor 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.

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-1.038(4), F.A.C., 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, F.A.C....

Discussion, Analysis and Conclusion

Section 212.08(6), F.S., requires 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 governmental entity.
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 Agreement and Exhibit D appear 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, County will prepare purchase orders
for direct purchases. After receiving the approved invoices
from Contractor, County will pay the vendors directly. County
will retain 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
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-1.038, 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, 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/
Control # 46776