Could a city buy public-library construction materials tax-free under its direct-purchase procedures?

Plain-English summary

Florida approved the city's proposed tax-exempt direct purchases of construction materials, contingent on full execution of the contract documents. The exemption worked because the city, not the contractor, was the purchaser in both form and substance.

The city would issue its own purchase orders with its exemption number, receive invoices, pay vendors directly, take title and liability when materials reached the job site, and insure the materials as the party entitled to loss proceeds. The contractor could select vendors, prepare requisitions, inspect deliveries, store materials, and install them without becoming the purchaser.

Risk of loss was a paramount factor. The city's insurance and ownership terms supported exemption even though the contractor remained responsible for its own negligence and for safeguarding the materials.

The ruling did not cover materials manufactured by the contractor or subcontractors; those parties remained subject to use tax on the full manufactured cost under the cited rule.

What this means for you

Public owners and contractors should make the purchase trail match the claimed exemption: government purchase order, government exemption certificate, direct government invoice and payment, government title, and government risk of loss before incorporation into the project.

Common questions

Q: Could the contractor choose suppliers?
A: Yes, while the city retained final purchase approval and issued the purchase order.

Q: Was government payment alone enough?
A: No. Florida considered the entire transaction, especially title and risk of loss.

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

Citations and references

• Fla. Stat. § 212.08(6) — direct governmental purchases
• Fla. Admin. Code r. 12A-1.038(4) — exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works materials and purchaser factors
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-016

Original ruling text

SUMMARY

QUESTION: Do the procedures set out in a city's Tax Exempt
Purchasing Procedures for Public Projects for purchase of
materials exempt from sales and use taxes for the
construction of a public library meet legal requirements
for claiming the city's exemption?

ANSWER - Based on Facts Below: Based on Facts Below: Where
(1) the city issues its own purchase orders directly to the
vendors; (2) the purchase orders include the city's
consumer's certificate of exemption number; (3) the vendors
invoice the city directly; (4) the city issues its checks
to the vendors directly; (5) the city takes title to the
materials from the vendor and assumes liability for the
materials when they are delivered to the job site; (6) the
city assumes risk of loss for the materials upon delivery
which is clearly established by the requirement in the
controlling documents that the city is named as the insured
party to receive proceeds in case of loss of the items
purchased tax exempt; and (7) the remaining terms of the
documents do not prevent the conclusion that the city
rather than the contractor is, in substance as well as
form, the purchaser of the materials, the procedures meet
legal requirements for the city to purchase the materials
tax exempt.

Apr 08, 2003

Re: Technical Assistance Advisement 03A-016
Sales and Use Tax - Public Works Contract
Section: 212.08, F.S.
Rule: 12A-1.094, F.A.C.
Petitioner: XXX (herein "City")
FEI: XX

Dear :

This letter is a response to your petition dated February 14,
2003, 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

Taxpayer's petition includes the following documents related to
a public works contract:

1. AIA Document A101, Standard Form of Agreement between
   City and Contractor where the basis of payment is a
   Stipulated Sum, 1987 Edition (hereinafter "Agreement").

2. Exhibit M [to the Agreement] (hereinafter "Exhibit"),
   Direct Materials Acquisition by City.

3. Attachment 1 to Exhibit M, Sales Tax Exempt Purchasing
   Procedures for Public Projects (hereafter "Procedures").

4. Sample Purchase Order.

Article 2 of the Agreement makes the Exhibit and the Procedures
part of the Agreement.

Article 7 of the Agreement, Subsection 7.3, Other provisions,
states:

Wherever the Contract Documents or the Bid Documents
conflict with the [Exhibit] and the [Procedures], the
[Exhibit] and [Procedures] shall prevail.

Article 9 of the Agreement, Enumeration of Contract Documents,
Subsection 9.1.3, identifies the Exhibit and Procedures as
Supplementary Conditions to the Agreement. The Exhibit provides
that:

1. The term "(sub)contractor" shall mean the contractor
and/or a subcontractor, as applicable.

2. Each contractor or subcontractor shall include
   applicable sales tax for all materials, supplies, and
   equipment included in its bid.

3. The City may elect to purchase materials and equipment
   included in a contractor's bid directly from the supplier.
   Any materials so purchased will be called "City purchased
   materials" and be governed by the Procedures. The
   Procedures govern where inconsistencies exist between the
   Procedures and the Agreement.

4. The City will issue its own purchase orders directly to
   the vendor, which will contain the City's exemption
   certificate, issue and expiration date, and name and
   address. (Sub)contractors will select the suppliers from
   whom materials will be purchased, for prices negotiated by
   the (sub)contractors.

5. (Sub)contractors will remain responsible for
   coordination of material purchases, protection, warranties,
   and installation.

6. Upon delivery to the job site, the contractor will have
   contractual obligations to inspect and accept delivery of
   materials pending incorporation into the project, will
   verify the delivery ticket in writing, and will furnish the
   invoice to the City.

7. Notwithstanding the transfer of the City purchased
   materials to the (sub)contractor, the City retains title to
   the materials.

8. The City shall purchase and maintain insurance on the
   materials, equipment, and supplies not yet incorporated
   into the project from the time that the City first takes
   title.

9. The materials suppliers may be required to carry a bond

in the amount of 100% of the purchase price, the cost of
which will be added to the purchase price.

10. If the state assesses any sales tax, penalties and/or
    interest against the contractor or any of the
    subcontractors or materials suppliers relating to the
    direct acquisition of materials and/or equipment by City,
    such taxes or charges will be reimbursed by the City to the
    contractor.

The Procedures provide substantially what the Exhibit provides,
plus what follows, in pertinent part:

2. (Sub)contractors will select the suppliers from whom
   materials will be purchased.

3. Contractor shall provide the City with a list of all
   intended suppliers, vendors, and materialmen, as well as
   materials to be supplied, estimated quantities, and prices.

4. Contractor shall provide the City with a list of all
   intended Subcontractors, who will supply lists of all of
   their intended suppliers, vendors, and materialmen, as well
   as materials to be supplied, estimated quantities, and
   prices.

5. Upon request of the Contractor, the Subcontractor shall
   prepare a standard purchase order requisition form
   acceptable to the City to specifically identify the
   materials that the City, at its sole option, elected to
   purchase. This requisition form shall include:

a. Name, address, telephone number and contact person
for material supplier;

b. Manufacturer or brand, model or specification
number of the item;

c. The quantity needed as estimated by
(sub)contractor;

d. The price quoted by the supplier for the materials
or equipment identified;

e. Any sales tax associated with the price quote;

f. Delivery dates established by (sub)contractor;

g. Copy of written quote from vendor.

7. Upon receipt of a Requisition, City shall review the
   Requisition and, if approved, issue its own purchase order
   and forward it to the Subcontractor for verification prior
   to its issuance to the supplier, with delivery to be made
   to the Project location on an F.O.B. job site basis. The
   purchase order shall provide the City's name, address,
   exemption number, and issuance and expiration date, and
   shall provide for insurance. It shall be accompanied by the
   City's exemption certificate.

10. The Subcontractor is responsible for risk of loss of
    the materials due to its own actions or negligence.

15. Notwithstanding transfer of possession of the materials
    from the City to the (sub)contractor, the City shall retain
    title to the materials.

16. Such transfer of possession shall be deemed a bailment
    until the materials are incorporated into the project.

17. The City shall purchase and maintain insurance on the
    materials.

19. & 20. The subcontractor shall review invoices to be
    certain that the materials delivered are satisfactory and
    meet the specifications of the purchase order and shall
    advise the City of conforming invoices, for which the City
    shall pay directly to the supplier.

20. At the end of the project, credit is given to the City
    for refunds on surplus materials, and salvaged materials

are the property of the City, removed from the Project site
at the direction of the City.

The Sample Purchase Order that you provide conforms with the
requirements of the Exhibit and the Procedures.

The City and its contractors have not yet executed the
Agreement, and the sales tax exemption will not be available
until the Agreement is fully executed, incorporating the two
additional Exhibits into the Agreement. The conclusions set out
in this advisement are contingent on such executions.

To summarize:

1. The City 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. From the Requisition, the City prepares a Purchase Order
   containing necessary exemption information and the
   signature of the City's authorized personnel and issues the
   purchase order directly to the supplier.

4. Although the City will take title to materials purchased
   pursuant to the Procedures 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 will
   have the duty to safeguard, store and protect the materials
   and will be liable to City for the performance of these
   duties while the materials are in its possession until
   returned to City through incorporation into the Project.

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

6. The City will carry insurance sufficient to cover City
purchased materials.

LAW

Sales to governmental units are exempt from sales tax pursuant
to Section 212.08(6), Florida Statutes, which provides in
pertinent part:

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), Florida Administrative Code, 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), Florida Statutes, 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, Florida
Administrative Code, which provides in pertinent part:

(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, CONCLUSION

Rule 12A-1.094(2) and (3), Florida Administrative Code, 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, Florida Administrative
Code.

Under Rule 12A-1.094, Florida Administrative Code, the
Department will also give special consideration to several
factors (bidding, indemnification, inspection, acceptance,
delivery, payment, and storage) that 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, Florida Administrative Code, 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, Exhibit, and Procedures appear to satisfy the
foregoing requirements for exemption of transactions as sales to
a governmental entity. City will make direct purchases of
various construction materials. Contractor will prepare, for
City approval, requisitions for direct purchases. City will
prepare detailed Purchase Orders, including its exemption
documentation, and forward them to the vendor. After receiving
the approved invoices from Contractor, City will pay the vendors
directly. City 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 City is the purchaser, all
purchases of materials that are made in accordance with the
Agreement will be exempt from sales tax. It is necessary that a
properly completed exemption certificate be extended at the time
of purchase to each of the vendors.

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), Florida Administrative Code. 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 12A1.051(10), Florida Administrative Code.

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 #53975