Could a city make tax-exempt direct material purchases for renovation of its country club while private parties developed and managed the project?

Plain-English summary

Florida said the city's direct material purchases could be exempt if the final contract documents preserved the city as purchaser in both substance and form. The project involved renovation of a city-owned country club with private development, management, and construction participants.

The city had to issue purchase orders and exemption documentation, receive direct invoices, pay vendors, take title and liability on delivery, and maintain builder's-risk insurance. Eligible purchases were limited to materials incorporated into the public work.

The Department had not received every contract document, so its answer assumed no other provision defeated the direct-purchase terms. Contractor-manufactured or fabricated items remained subject to the contractor's use-tax rules.

What this means for you

Layered public-private arrangements can still support government direct purchases, but the entire contract set and actual administration must consistently establish the public owner as purchaser.

Common questions

Q: Did private project participants eliminate the exemption?
A: No, if the city remained the actual purchaser under the controlling documents and procedures.

Q: Did the Department review every contract?
A: No. It expressly relied on assumptions about missing documents.

Q: Were fabricated items covered?
A: No. Contractors remained taxable consumers of items they fabricated.

Citations and references

• Fla. Stat. § 212.08 — governmental sales-tax exemption
• Fla. Admin. Code rr. 12A-1.038, 12A-1.051, and 12A-1.094 — certificates, contractors, and public works
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-033

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the renovation of a country
club meet the legal requirements for the City to purchase
the materials tax exempt?

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

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 and the School Board will
   supply a copy of the Consumer's Certificate of Exemption to
   the vendor.
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 his clearly established by the requirement
   in the controlling documents that the City reimburse the
   contractor for premiums paid for insurance against loss or
   damage and the City 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 City rather than the contractor is in
   substance as well as form the purchaser of the materials.

Jul 11, 2003

Re: Technical Assistance Advisement 03A-033
Sales and Use Tax - Public Works Contract
Section: 212.08, F.S.

Rules: 12A-1.038, 12A-1.051, 12A-1.094, F.A.C.
Petitioner: XXX (herein "Taxpayer")
FEI: XX

Dear :

This letter is a response to your petition dated June 11, 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

The petition sets forth the following facts:

... The project is funded and owned by the City... (the
"governmental entity"). The governmental entity has
entered into contracts with [Team] to develop for and lease
from the governmental entity a [project].

[Taxpayer] is a construction company that is negotiating a
contract with the Team to act as the construction manager
for the project. In conjunction with the governmental
entity and the Team, [Taxpayer] has developed a Tax Savings
Purchasing Procedures (the "Procedures") intended to permit
the governmental entity to enjoy sales tax savings by
allowing the governmental entity to purchase construction
materials for incorporation into the project directly from
suppliers. These Procedures are to be incorporated into
[Taxpayer's] construction contract.

The proposed procedures contain the following provisions:

1. The governmental entity may elect to purchase certain
   materials directly from the supplier. Such items are referred
   to as "City... purchased construction materials." The
   governmental entity will take title to these materials directly

from the supplier.

2. A deductive change order will be issued for any materials
   directly purchased by the governmental entity, reducing the
   contract by the cost of the materials and related sales tax.

3. Taxpayer or its subcontractors will prepare and submit to the
   governmental entity on the entity's form a "Request to
   Requisition" with the supplier's proposal attached. Forms will
   be submitted to the governmental entity on a weekly basis.

4. The governmental entity will prepare a purchase order based
   on the Request to Requisition submitted by the Taxpayer or
   subcontractor, and will submit the original purchase order to
   the supplier. Taxpayer's petition states that the governmental
   entity will include a copy of its Consumer's Certificate of
   Exemption with the purchase order, or that the purchase order
   will contain the pertinent information from the certificate on
   its face. This specific requirement is not stated in the
   procedures; the procedures should be amended to reflect such
   requirement.

5. Taxpayer is responsible for inspecting, accepting delivery
   of, and storing the government entity purchased materials
   pending incorporation into the project and it will be liable for
   its negligence in meeting those obligations.

6. Upon receipt of government entity purchased materials,
   Taxpayer or subcontractor will confirm that the delivery receipt
   sent by the supplier matches the government entity's purchase
   order and that the amount received is accurate. Taxpayer will
   verify correct quantities, verify documentation, coordinate and
   expedite delivery, unload, store, secure, insure proper working
   order of all items acquired through the tax savings purchasing
   procedures, and obtain and verify warranties. Taxpayer will
   submit the delivery receipt, invoice from vendor and a copy of
   the government entity's Received Receipt form to the government
   entity for payment. The government entity will make payment
   directly to the supplier for the government entity purchased
   materials. It is not clear in the tax savings purchasing
   procedures, but it must be clarified, that the supplier's

invoice must be issued directly to the government entity.

7. The government entity will maintain builder's risk insurance
   sufficient to cover the value of government entity purchased
   materials used in the project.

REQUESTED ADVISEMENT

Advice is requested whether the tax savings purchasing
procedures 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), Florida Administrative Code, 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), 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) 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

The tax savings purchasing procedures will meet the foregoing
requirements for exemption of transactions as sales to a
governmental entity, as long as the points noted in the Facts
section of this advisement are incorporated(FN #1). The
government entity will make direct purchases of various
construction materials. The government entity will issue
purchase orders for direct purchases. After receiving the
approved invoices from Taxpayer, the government entity will pay
the vendors directly. The government entity will hold title to

all materials it purchases, and it will be responsible for
maintaining builder's risk insurance on those materials.

Based upon the conclusion that the government entity is the
purchaser, all purchases of materials to be incorporated into
the public work that are made in accordance with the tax savings
purchasing procedures will be exempt from sales tax. However,
in order for any eligible purchase to be exempt, 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,
Florida Administrative Code, 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), 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 cost of the
manufactured or fabricated articles, as detailed in Rule 12A1.051(10), Florida Administrative Code.

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 also assumes that the contracts will
provide that the project is to be built using City funds and
that City will own the project.

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 #55641
Enclosure

FOOTNOTE #1 - The government entity's consumer's certificate of
exemption must be provided with its purchase orders, or the
pertinent information from the certificate must be incorporated
on the face of the purchase order. Also, the supplier must
directly invoice the government entity for the materials it is
intending to purchase.