Could a government directly buy elevators or escalators tax-exempt from a manufacturer's affiliate while a related LLC performed the public-works contract?

Plain-English summary

Florida said the proposed structure could support tax-exempt government direct purchases if the purchase procedures were part of the public-works contract and the related operating entity was genuine.

The out-of-state manufacturer proposed forming a single-member Florida LLC that would contract with government entities, perform the work, and lease or contract for the manufacturer's employees. A government could elect to buy listed elevators, escalators, materials, and equipment directly from the manufacturer.

Related-party substance mattered

The contract had to contain the direct-purchase requirements, including government purchase orders and exemption documentation, direct payment, title on delivery, and builder's-risk coverage. The LLC had to be a legitimate entity, and its employee lease or other contract with the manufacturer had to be bona fide and priced at arm's-length fair-market value.

If those requirements were absent or not followed, the LLC could face tax liability. The Department said the result would be the same if the taxpayer formed a corporation instead of an LLC.

What this means for you

A related affiliate does not by itself create a government exemption. The government must be the actual purchaser, and the affiliate's organization, contracts, employee arrangements, and conduct must have real substance.

Common questions

Q: Did title and government payment alone establish exemption?
A: No. Florida looked to the substance of the whole transaction and contract.

Q: Did the direct-purchase procedures have to appear in the government contract?
A: Yes.

Q: Could the related LLC lease employees from the manufacturer?
A: Yes, if the arrangement was bona fide and at arm's-length fair-market value.

Q: Would using a corporation change the answer?
A: No, with all other facts unchanged.

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption
• Fla. Admin. Code r. 12A-1.038 — exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works contract purchases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-035

Original ruling text

SUMMARY

QUESTION 1: Does the proposed contractual agreement between
LLC and the governmental entity providing for the

governmental entity to purchase all materials and equipment
directly from Taxpayer qualify such purchases as tax exempt
consistent with Section 212.08(6), Florida Statutes, and

Rule 12A-1.094, Florida Administrative Code?

ANSWER 1 - Based on Facts Below: If the requirements for

the governmental entity to directly purchase materials from
Taxpayer are set forth in the contract between LLC and the
governmental entity, then they can qualify for the

exemption for purchases by a governmental entity. LLC must
be a legitimate entity, and its contract or lease of

employees from Taxpayer must be a bona fide contract or

lease entered into at arms length/fair market value.

QUESTION 2: Would LLC have any sales and use tax obligation

related to the government entity purchase from Taxpayer?

ANSWER 2 - Based on Facts Below: LLC could have tax

liability issues if the direct purchase requirements
outlined herein are not contained in its contract with the
governmental entity, or if the requirements are not

followed.

QUESTION 3: Would the taxability determination be different
if Taxpayer set up a Corporation rather than a Single
Member Limited Liability Company, with all other facts

remaining the same?

ANSWER 3 - Based on Facts Below: The determination reached

in this advisement would not be different if Taxpayer set

up a corporation rather than a limited liability company.

Jul 14, 2003

Re: Technical Assistance Advisement 03A-035
Sales and Use Tax - Public Works Contract
Sections: 212.08, F.S.

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

Dear:

This letter is a response to your petition dated May 15, 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 pertinent information:

[Taxpayer] is a manufacturer of vertical transportation
equipment (elevators and escalators) with manufacturing
facilities located outside Florida. In the past,

[Taxpayer] has entered into public works contracts to act
as a subcontractor on projects for governmental entities in
Florida. Under the terms of the prior contracts,
[Taxpayer], as subcontractor, was required by statute to
accrue and remit use tax on all materials and equipment
manufactured or used to fulfill its contract. Because of
the accrual of use tax[, Taxpayer] has been at a
competitive disadvantage when competing against companies
who are able to take advantage of the exemption for direct

purchases made by governmental entities.

In order to compete effectively[, Taxpayer] intends to set
up a Single Member Limited Liability Company [hereinafter,
"LLC", for the purpose of doing business in Florida.

[LLC] would bid for and enter into contracts directly with

the government entities for public works projects. It
would also register for sales and use tax purposes in
Florida and [it] would file the required sales and use tax
returns remitting any taxes due. Under the terms of
contracts between [LLC] and the governmental entity, the
governmental entity may elect to purchase materials and
equipment included in the bid received from [LLC] directly
from [Taxpayer] as the supplier ("Supplier"), thus
permitting the government entities to utilize their exempt
status. The work will be performed by [LLC]; however,
[LLC] will either lease or contract the employees from
[Taxpayer]. [LLC] will select [Taxpayer] from whom
materials and equipment will be purchased and [LLC] will
submit a list of materials and equipment with their bids
for consideration. The cost of materials and equipment as
well as any applicable sales tax will be included in the
bids. If a governmental entity elects to purchase any
materials and equipment directly from [Taxpayer], the
subcontract amount will be reduced by the cost of [the
materials and equipment], and sales tax related to, those

items.

Under the terms of the contract, [LLC] will furnish a list

of the materials and equipment that are required to
complete the contract to the governmental entity in the

form of a worksheet. The worksheet will include the name,
address and phone number of the governmental entity and
will make no reference to [LLC]. The worksheet is designed
to be used as an attachment to the governmental entity's
purchase order, which will be issued directly to

[Taxpayer], after approval.

If the governmental entity requests, [LLC] will prepare the
purchase order using purchase order forms of the
governmental entity. [LLC] will then submit the purchase
order, with a copy of the worksheet attached, to the
governmental entity for approval. If approved, the
governmental entity will issue the purchase order with a

copy of the worksheet to [Taxpayer].

The purchase order must contain or be accompanied by the

governmental entity's consumer's certificate of exemption
and must include the governmental entity's exemption
number, issue date and expiration date. The purchase order
will also generally provide for delivery to be F.O.B. job

site. The governmental entity will hold full title to all

materials and equipment on delivery to the job site.

Although the governmental entity will take title to the
materials and equipment upon delivery, [LLC] will be
obligated to inspect, accept delivery of, and store the
materials pending incorporation into the project and will
remain liable for their negligence in meeting any of these

obligations.

After verifying that delivery is in accordance with the
delivery receipts, [Taxpayer] will forward the delivery
receipts to [LLC]. After [LLC] has verified that the
delivery receipts are in accordance with the invoices and
purchase order, [LLC] will deliver the approved invoices to
the governmental entity. The governmental entity will
process the invoices and issue payment directly to

[Taxpayer].

The governmental entity is required to purchase and
maintain builder's risk insurance sufficient to cover the
value of the materials and equipment from the time the
governmental entity takes title through the time the

materials are incorporated into the project.

REQUESTED ADVISEMENT

Taxpayer's request poses the following questions:

Does the scenario described herein where the contractual
agreement between [LLC] and the governmental entity[]
provides for the governmental entity to purchase all
materials and equipment directly from [Taxpayer] qualify
such purchases as tax exempt consistent with Section
212.08(6), Florida Statutes[], and Rule 12A-1.094, Florida

Administrative Code|]?

Would [LLC] have any sales and use tax obligation related

to the government entity purchase from [Taxpayer]?

Would the taxability determination be different if
[Taxpayer] set up a Corporation rather than a [Single
Member Limited Liability Company], with all other facts

remaining the same?

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 asa

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.

Taxpayer's petition describes various procedures that will be
followed for the governmental entity's purchase of materials
from Taxpayer and LLC's responsibility related to the job. It

is not clear from Taxpayer's petition that the procedures are
incorporated as part of the contract between the governmental
entity and LLC. It is imperative that the procedures be

incorporated as part of the contract.

LLC must be a legitimate entity, and its contract or lease of
employees from Taxpayer must be a bona fide contract or lease

entered into at arm's length/fair market value.

CONCLUSION

If the requirements for the governmental entity to directly
purchase materials from Taxpayer are set forth in the contract
between LLC and the governmental entity, then they can qualify

for the exemption for purchases by a governmental entity. LLC

must be a legitimate entity, and its contract or lease of
employees from Taxpayer must be a bona fide contract or lease

entered into at arm's length/fair market value.

LLC could have tax liability issues if the direct purchase
requirements outlined herein are not contained in its contract
with the governmental entity, or if the requirements are not

followed.

The determination reached in this advisement would not be
different if Taxpayer set up a corporation rather than a limited

liability company.

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 #55350