Did a state university's proposed direct-purchase program qualify construction materials for Florida's government sales-tax exemption?

Plain-English summary

The university's direct-purchase program could make construction-material purchases tax exempt. The university had to issue its own purchase orders with its exemption number, receive invoices, and pay vendors directly rather than merely reimbursing its construction manager.

It also had to take title and liability at job-site delivery, assume the pre-installation risk of loss, and be insured against damage to the university-purchased materials. The rest of the controlling documents could not undermine the conclusion that the university was the purchaser in substance as well as form.

The Department required a completed exemption certificate for each vendor. Contractor- or subcontractor-manufactured items were not covered by the direct-purchase result; the fabricator remained the consumer for those materials.

What this means for you

A public university's exemption depends on direct ownership and transaction control before incorporation into real property. A paper designation without direct ordering, payment, title, and risk is insufficient.

Common questions

Q: Did the proposed program qualify? Yes, if the controlling documents and actual purchases met the stated conditions.

Q: Who had to pay vendors? The university directly.

Q: Who bore risk of loss before installation? The university, supported by insurance.

Q: Were contractor-fabricated items included? 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. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-011

Original ruling text

SUMMARY

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

ANSWER - Based on Facts Below: As long as the controlling
documents provide: (1) the university issues its own
purchase orders, not the contractor's, directly to the
vendors; (2) the purchase orders include the university's
consumer's certificate of exemption number and the
university will supply a copy of the consumer's certificate
of exemption to the vendor; (3) the vendors invoice the
university directly; (4) the university issues its checks
to the vendors directly; (5) the university takes title to
the materials from the vendor and assumes liability for the
materials when they are delivered to the job site; (6) the
university assumes risk of loss for the materials upon
delivery; (7) the university is insured against loss or
damage to the university-purchased materials; and (8) the
remaining terms of the documents do not prevent the
conclusion that the university rather than the contractor
is in substance as well as form the purchaser of the
materials, the procedures meet legal requirements for the
university to purchase the materials tax exempt.

Feb 28, 2002

Re: Technical Assistance Advisement 02A-011
XXX (hereinafter "University")
Sales and Use Tax -- University Contract for Construction
of University Facilities Project ("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 24, 2001. You asked for a technical
assistance advisement confirming that the procedures proposed in
your letter would provide for tax-exempt purchases.

Facts

You have provided with your letter the following:

Exhibit A, Agreement Between Owner and Construction
Manager, University's standard construction management
agreement (hereinafter "Agreement").

Exhibit B, Amendment _____ to the Agreement Between Owner
and Construction manager, University's direct purchase
program (hereinafter "Program").

Subsequently, you provided copy of your Purchase Order form that
displays your Florida Tax Exempt Certificate Number.

Your letter provides the following facts. The University is a
state agency engaged in the construction, remodeling, and
renovation of facilities on the University's campus and engages
construction management firms to manage these activities. All
funding for such projects is provided by the University. Under
the Agreement, the University is required to pay enumerated
costs, including the cost of materials, sales and use taxes on
the materials, and builder's risk insurance covering the
materials. Pursuant to the Agreement, the University reimburses
the construction management firm for such costs and certain
additional fees.

You state that the University is entitled to make purchases of
tangible personal property without paying Florida sales and use
tax under a consumer's certificate of exemption. The University
may desire to purchase construction materials directly from the
suppliers of subcontractors in order to achieve sales tax
savings.

Exhibit A, the Agreement, makes no mention of the Direct
Purchase Program. Section 9.3.3 of the General Conditions of the

Contract for Construction, referred to in Section 2.2.1 of the
Agreement provides that the Contractor warrants that title to
the work covered by an Application for payment passes to the
Owner no later than the time of payment. The Owner is named as
an additional insured as to the operations of the Contractor in
Section 11.1 of the General Conditions. However, Section 11.3 of
the Supplement to the Project Manual, also referred to as
Exhibit A, the Agreement, deals with property insurance does not
require that the Owner be named as an additional insured. Under
Section 12.2.5 of the General Conditions, the Contractor bears
the cost of correction of construction destroyed or damaged
through the Contractor's correction of non-conforming work.

Exhibit B, the Program, provides where relevant:

1. Direct Purchase Program. Owner may elect to purchase
   materials and equipment included in any
   Subcontractor's bid for a portion of the Work directly
   from the supplier of such materials or equipment in
   order to achieve sales tax savings.... At the time
   Construction Manager provides Owner with the bid
   tabulation analysis as required by this Agreement
   (which bids shall include the cost of all
   potential.... [m]aterials and sales taxes applicable
   thereto), Construction Manager shall submit to Owner a
   list, prepared by applicable Subcontractors, of
   materials and equipment appropriate for consideration
   by Owner as... [m]aterials. If Owner elects to
   purchase any... [m]aterials, it shall so notify
   Construction Manager and Construction Manager shall
   thereafter... furnish to Owner... a purchase order
   reflecting the approved... [m]aterials.... Upon
   Owner's receipt of the purchase order and supporting
   materials, Owner will review the same and, if
   approved, issue a purchase order directly to the
   supplier of the applicable... [m]aterials, with
   delivery F.O.B. Project site. Upon delivery of the...
   [m]aterials to the Project site, Construction Manager
   shall ensure that the... [m]aterials are as requested
   in Owner's purchase order and if so, Owner will take
   title to the... [m]aterials and Construction Manager

shall forward the approved invoices and associated
back up documentation to Owner. Owner will process
these invoices and issue payment directly to the
applicable supplier. Construction Manager shall obtain
builder's risk insurance on... [m]aterials naming
Owner as the insured or an additional insured,
provided Owner shall reimburse Construction Manager
for the cost of such insurance as provided by the
Agreement.

3. Conflict. In the event of a conflict between the terms
   of this Amendment and the Agreement, the terms of this
   Amendment shall control.

The Exhibit A, the Agreement, does not set out or refer to or
incorporate by reference, any of the terms of Exhibit B, the
Program. The terms of the Agreement that may be considered
relevant do not negate the Program. Once the Program is
executed, it is an amendment to the Agreement. It provides that,
in the event of a conflict between the terms of the Amendment
setting out the Program and the Agreement, the terms of the
Amendment control.

The Program provides:

1. The University 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 University with a detailed
   Purchase Order for all materials to be purchased tax
   exempt.

4. University shall prepare and issue the Purchase Order
   bearing its Florida Tax Exempt Certificate Number directly
   to the supplier, with delivery of materials to be made to
   the Project location.

5. Although University will take title to materials
purchased pursuant to the Program 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 will
have the duty to safeguard, store, and protect the
materials while in its possession until returned to
University through incorporation into the Project.

6. After verifying that delivery is in accordance with the
   purchase order, Subcontractor will forward approved
   invoices to University with appropriate documentation, and
   University will process the invoices and issue payment
   directly to the supplier.

7. The Construction Manager will carry insurance sufficient
   to cover University purchased materials, and naming the
   University as the insured or as an additional insured.

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 that 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 Program appear to satisfy the foregoing
requirements for exemption of transactions as sales to a
governmental entity. University will make direct purchases of
various construction materials. After receiving Purchase Orders
from the contractors, University will prepare them for direct
purchases. After receiving the approved invoices from
Construction Manager, University will pay the vendors directly.
University 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 University is the purchaser, all
purchases of materials that are made in accordance with the
Program will be exempt from sales tax. However, it is necessary
that the Amendment that presents the Program be properly
executed and made part of the Agreement and 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/
Enclosure: Rule 12A-1.038, F.A.C.
Control #: 46927