Could a public authority buy bridge-and-roadway materials tax-free through direct purchases?

Plain-English summary

The authority's direct purchases of qualifying bridge-and-roadway materials could be exempt. The submitted contract section required the authority to issue its own purchase orders and exemption documentation, receive invoices, pay vendors directly, take title and liability at job-site delivery, and bear the insured risk of loss.

The exemption did not cover items a contractor or subcontractor manufactured or fabricated for the project; those parties owed use tax on full fabricated cost. The Department also cautioned that it had not received the complete contract and assumed no other provision displaced the direct-purchase terms.

What this means for you

Government construction materials qualify only when the government entity is the purchaser in substance and form. Review the full contract for terms that shift payment, title, liability, or risk back to the contractor.

Common questions

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

Q: Were contractor-fabricated items exempt? No. The contractor or subcontractor owed use tax on full fabricated cost.

Q: Did the Department review the entire contract? No. Its answer assumed other contract provisions did not override the submitted section.

Citations and references

• Fla. Stat. § 212.08(6) — governmental purchases
• Fla. Admin. Code rr. 12A-1.038(4) and 12A-1.094 — direct purchases and public works
• Fla. Admin. Code r. 12A-1.051(10) — fabricated-cost use tax
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-048

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of a bridge
and roadway meet the legal requirements for Authority to
purchase the materials tax exempt?

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

1. The Authority issues its own purchase orders directly to
   the vendors.

2. The purchase orders include the Authority's Consumer's
   Certificate of Exemption number and the Authority will
   supply a copy of the Consumer's Certificate of Exemption to
   the vendor.

3. The vendors invoice the Authority directly.

4. The Authority issues its checks to the vendors directly.

5. The Authority takes title to the materials from the
   vendor and assumes liability for the materials when they
   are delivered to the job site.

6. The Authority assumes risk of loss for the materials
   upon delivery, which his clearly established by the
   requirement in the controlling documents that the Authority
   reimburse the contractor for premiums paid for insurance
   against loss or damage and the Authority 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 Authority rather than the contractor is
   in substance as well as form the purchaser of the
   materials.

Nov 14, 2002

Re: Technical Assistance Advisement 02A-048
Sales and Use Tax - Public Works Contract
Section: 212.08(6), F.S.
Rules: 12A-1.038(4), 12A-1.094, F.A.C.
Petitioner: XXX (herein "Authority")
FEI: XX

Dear :

This letter is a response to your petition dated October 15,
2002, 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

The petition provides that Authority has awarded a construction
contract for a bridge and roadway project. Among other things,
the contract between Authority and the Contractor includes
Contract Document Section 9-12, entitled "Direct Purchase of
Materials." The purpose of this section is to allow Authority to
take advantage of sales tax savings by purchasing certain
materials used in the performance of the contract.

Under Section 9-12.1 of the Contract Document, Authority
reserves the right to directly purchase certain materials,
supplies, goods and personalty, or to require Contractor to
assign subcontracts or other agreements with material suppliers
to Authority. Any materials purchased by Authority pursuant to
such agreements are referred to as "Authority-Furnished
Materials" (hereafter, "Materials"). Section 9-12.1 states that
the section governs terms and conditions relating to "AuthorityFurnished Materials," and takes precedence over other terms and

conditions of the Contract Documents where inconsistencies or
conflicts exist.

Section 9-12.1.1 requires Contractor to provide Authority a list
of vendors, prices of materials to be supplied by such vendors,
and descriptions and estimated quantities of the materials.

Section 9-12.1.2 provides the criteria under which the Authority
will make direct purchases of materials under the section.

Section 9-12.1.3 includes a statement that Contractor is to
prepare an Authority-issued purchase order in accordance with
the requisition for Authority to use for direct purchase.
(Purchases made on Contractor's purchase order forms are not tax
exempt.) The vendor is expected to fill Authority's order at
the price quoted to Contractor less any sales tax quoted. Each
purchase order is to contain Authority's consumer's certificate
of exemption number.

According to Section 9-12.1.5 of the Contract Document,
Contractor is fully responsible for all matters relating to the
procurement of Authority-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 9-12.1.6 of the Contract Document,
Contractor is to visually inspect the materials when they arrive
at the job site or approved off-site storage location, verify
that all necessary documentation accompanies the delivery and
conforms with the purchase order, and forward the invoice to
Authority for payment.

Section 9-12.1.7 of the Contract Document 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
Authority for any failure to carry out this obligation.

Section 9-12.1.8 of the Contract Document requires Contractor to

maintain records of the use of the materials and report same to
Authority.

According to Section 9-12.1.9 of the Contract Document, the
Contractor is required to manage and enforce warranties on the
materials.

Section 9-12.1.10 of the Contract Document provides that
Authority retains legal and equitable title to the materials
while such materials are in Contractor's possession. The
Contract Documents describes this transfer of possession of the
Authority-Furnished Materials as a bailment until such time as
those materials are returned to Authority by being incorporated
into the project.

According to Section 9-12.1.11 of the Contract Document,
Authority purchases insurance on the materials against loss or
damage, thereby retaining risk of loss of the materials.

According to Section 9-12.1.12 of the Contract Document,
Authority is not liable for delays in the Project attributable
to delivery delays or defective materials.

According to Section 9-12.1.13 of the Contract Document,
Contractor reviews invoices for materials delivered to the
construction site on a weekly basis and advises Authority
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 9-12.1.14 of the Contract Document,
Contractor must provide to Authority 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, Authority pays the vendor directly by check.

To summarize:

1. The Authority 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 prepare for approval an AuthorityIssued Purchase Order Form for all materials which
   Authority chooses to directly purchase.

4. Although Authority will take title to materials
   purchased pursuant to Section 9-12 of Contract Document
   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 Authority through
   incorporation into the Project.

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

6. Authority will carry insurance sufficient to cover
   Authority purchased materials.

REQUESTED ADVISEMENT

You request advice whether the terms of the subject contract are
sufficient to allow the Authority 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-1.038(4), F.A.C., entitled "Sales Made Directly to
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, F.A.C.

DISCUSSION & ANALYSIS

Rule 12A-1.038(4)(b), F.A.C., states that in order for a sale to
a state or local governmental entity to be tax exempt,
"[p]ayment for tax exempt purchases... must be made directly to
the selling 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

Section 9-12 satisfies the foregoing requirements for exemption
of transactions as sales to a governmental entity. Authority
will make direct purchases of various construction materials.
Authority will issue purchase orders for direct purchases.
After receiving the approved invoices from Contractor, Authority
will pay the vendors directly. Authority will hold 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 Authority is the purchaser, all
purchases of materials and equipment to be incorporated into the
public work that are made in accordance with the Section 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.

A complete set of contract documents was not provided. This

response assumes that no other section of the contract documents
voids or overrides the terms of the direct purchase of materials
requirements.

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 #52299
Enclosure