Could a county buy materials tax-exempt for a building-addition project through a contractor-administered direct-purchase program?

Plain-English summary

Florida said the county could make tax-exempt direct purchases for the building addition only after fixing the contract's risk-of-loss clause. The submitted exhibit placed pre-installation risk on the contractor, which conflicted with the rule requiring the government purchaser to bear that risk.

Substance and form had to show a county purchase

The county had to issue its own purchase orders using its exemption number, receive direct invoices, pay vendors directly, take title and liability when materials reached the job site, and insure the materials or be the insured party. Remaining contract terms could not undermine the county's status as the real purchaser.

The program also had to cover only materials and equipment incorporated into the public work. Consumed materials that did not become part of the project did not qualify.

What this means for you

Government construction projects need coordinated purchase orders, invoices, checks, title, delivery, insurance, and contract language. A direct-purchase label is insufficient if the contractor still bears pre-installation risk.

Common questions

Q: Did the submitted contract already qualify?
A: Not as written. Section 1.7 had to be amended so the county assumed risk of loss.

Q: Who had to pay the vendors?
A: The county directly.

Q: Could consumable supplies be bought exempt through the program?
A: No. The ruling limited it to materials incorporated into the public work.

Q: Did the ruling cover contractor-fabricated materials?
A: No. It expressly excluded that situation and noted the contractor's use-tax treatment.

Citations and references

• Fla. Stat. § 212.08 — governmental sales-tax exemption
• Fla. Admin. Code r. 12A-1.094 — public-works contracts and direct purchases
• Fla. Admin. Code rr. 12A-1.038 and 12A-1.051(10) — exemption certificate and fabrication provisions discussed
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-040

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of a building
addition project meet the legal requirements for the County
to purchase the materials tax exempt?

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

1. The County issues its own purchase orders directly to
   the vendors.
2. The purchase orders include the County's Consumer's
   Certificate of Exemption number and the County will supply
   a copy of the Consumer's Certificate of Exemption to the
   vendor.
3. The vendors invoice the County directly.
4. The County issues its checks to the vendors directly.
5. The County takes title to the materials from the
   vendor and assumes liability for the materials when they
   are delivered to the job site.
6. The County assumes risk of loss for the materials upon
   delivery, which is clearly established by the requirement
   in the controlling documents that the County is named as
   the insured party to receive proceeds in case of loss of
   the items purchased tax exempt, or that County purchases
   its own builder's risk insurance.
7. The remaining terms of the documents do not prevent
   the conclusion that the County rather than the contractor
   is in substance as well as form the purchaser of the
   materials.

Jul 28, 2003

Re: Technical Assistance Advisement 03A-040
Sales and Use Tax - Public Works Contract
Sections: 212.08, F.S.

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

Dear :

This letter is a response to your petition dated June 10, 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

County has awarded a lump sum contract, on March 6, 2003, to
Contractor for the construction of a building expansion project.
According to County's petition:

The proposed work is to include, but is not limited to: (1)
constructing a two (2) story addition to the east side of
the existing... Building and a second story addition to the
west side; (2) renovating portions of the existing
building; and (3) salvaging and reinstalling portions of
the building, including existing precast concrete panels.
The work includes mechanical, plumbing, electrical,
telecommunications, and site work. The project is to be
completed in three phases as described in the construction
documents.

County's petition includes a copy of Exhibit G, Direct Material
Purchase/County Furnished Materials. Relevant provisions of
Exhibit G are as follows:

Under Section 1.1, "County reserves the right to require
Contractor to assign some or all of its subcontracts or other
agreements with material suppliers directly to County...." This
section also states that the terms of Exhibit G take precedence
over other conditions and terms of the contract documents in the

event that any inconsistencies or conflicts exist.

According to Section 1.2, materials suppliers will be selected
by Contractor. Contractor will included the price for all
construction materials, including sales tax and other taxes
normally due on such materials and equipment, in the lump sum
price of its bid. Any items purchased directly by County will
be administered using deductive Change Orders.

Section 1.3 requires Contractor to provide "a list of all
intended suppliers, vendors, and material men for consideration
as County-Purchased Materials.... The Contractor shall submit
price quotes from the vendors, as well as a description of the
materials to be supplied, estimated quantities and prices."

Under Section 1.4, if requested by County, Contractor will
prepare a Purchase Requisition Request Form. The requisition
form must include complete information to identify and contact
the vendor, as well as complete information regarding the items
to be purchased. The Contractor will deliver the purchase
requisition to the County, and the County will issue the
purchase order directly to the vendor of the items to be
purchased.

According to Section 1.5, County will prepare a Purchase Order
for all materials County chooses to directly purchase. It is
not clear from the language of the section that the Purchase
Order orders materials directly from the supplier, since County
delivers the Purchase Orders to Contractor.

According to Section 1.6, Contractor will issue to County
deductive change orders reflecting the full value of all CountyFurnished materials, plus associated sales tax and other savings
to Contractor in the cost of Payment and Performance Bonds
associated with the materials.

Under Section 1.7, Contractor is fully responsible for all
matters relating to the procurement of county-furnished
materials, including but not limited to, "assuring the correct
quantities, placing the order in a timely manner, and assuring
coordination of purchases, providing and obtaining all

warranties and guarantees required by the Contract Documents,
inspection and acceptance of goods at the time of delivery, risk
of loss, and damage or any other loss following acceptance of
the items[,]" coordinating "delivery schedules, sequence of
delivery, loading orientation, and other arrangements normally
required by Contractor for the particular materials furnished."
Contractor is also responsible for unloading, handling and
storing the materials prior to installation.

As noted, Section 1.7 charges Contractor with risk of loss and
damage or any other loss following acceptance of the materials.
This provision is inconsistent with the requirements of Rule
12A-1.094(4), Florida Administrative Code, which requires the
governmental entity to assume risk of loss of its purchases, and
with Section 1.14 of Exhibit G, which states that County will
purchase and maintain insurance to guard against loss of its
materials.

Section 1.8 requires Contractor to visually inspect the
materials when they arrive at the job site, verify that all
necessary documentation accompanies the delivery and conforms
with the purchase order, and forward the invoice to County for
payment.

Section 1.12 states that "County shall retain legal and
equitable title to any and all County-Furnished Materials" even
though the materials are in the possession of Contractor.
According to Section 1.13, the transfer of the materials by
County to Contractor will constitute a bailment.

As noted, Section 1.14 requires County to "purchase and maintain
insurance sufficient to protect against any loss of or damage to
County-[F]urnished Materials" from the time County takes title
to the materials until such materials are "incorporated into the
Project or consumed in the process of completing the Project."

Rule 12A-1.094, Florida Administrative Code, limits direct
purchase of materials to materials that are actually affixed to
the public work. Materials that are consumed in the process of
the completing the public work, but that do not actually become
incorporated into the public work are excluded from the

exemption.

According to Section 1.17, upon receipt of the appropriate
documentation, County will prepare and issue a check in payment
of materials purchased directly to the supplier of the
materials.

To summarize:

1. The County will purchase materials and equipment
   included in a Contractor's bid directly from the supplier,
   as directed by the Contractor.

2. Contractor will select the suppliers from whom materials
   will be purchased.

3. Contractor shall furnish County with detailed Purchase
   Requisition Request Forms for all materials.

4. County will prepare and issue a purchase order directly
   to the supplier(FN 1), with delivery of materials to be
   made to the Project location.

5. Although County will take title to materials purchased
   pursuant to Exhibit G 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
   County through incorporation into the Project.

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

7. County will carry insurance sufficient to cover County
   Furnished Materials.

REQUESTED ADVISEMENT

Advice is requested whether the procedures set forth in Exhibit
G are sufficient for County to take advantage of its tax exempt
status to purchase materials incorporated into the Project
exempt from tax.

LAW

Sales to governmental units are exempt from sales tax pursuant
to section 212.08(6), Florida Statutes, 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), Florida Administrative Code, 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), 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 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, Florida Administrative Code, 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, as that term is referred
to in Section 212.08(6), F.S....

(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. The exception
in subsection (2)(a) is a specific exception for sales to
contractors. 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 or the Executive Director's designee in the
responsible program 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 or the Executive Director's designee in
the responsible program 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 or the
Executive Director's designee in the responsible program
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 "costplus", "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 or the Executive Director's designee in the
responsible program 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. (Emphasis Supplied)

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.

In Exhibit G, Section 1.7, risk of loss of the materials prior
to their incorporation into the public work appears to be the
responsibility of Contractor. This is in clear conflict with
the provisions of Rule 12A-1.094, Florida Administrative Code.

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.

CONCLUSION

Exhibit G would satisfy the foregoing requirements for exemption
of transactions as sales to a governmental entity, if certain
changes are made. Section 1.7 must be amended to reflect that
County assumes risk of loss of building materials prior to their

incorporation into the project. The direct purchase program
must be limited only to those materials that are incorporated
into the public work; materials that are consumed in the
process, but do not become incorporated into the public work
will not qualify. Assuming that these changes are made, Exhibit
G otherwise appears to meet the criteria required for County to
utilize its tax exempt status in the purchase of building
materials for incorporation into the public work. County will
make direct purchases of various construction materials. After
receiving requisition forms from the Contractor, County will
prepare and issue purchase orders for direct purchases. After
receiving the approved invoices from Contractor, County will pay
the vendors directly. County 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 County is the purchaser, all
purchases of materials and equipment to be incorporated into the
public work that are made in accordance with Exhibit G will be
exempt from sales tax (if the suggested changes are made).
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, 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 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, Florida Statutes, 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,

Florida Statutes. 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,
Florida Statutes, and are subject to disclosure to the public
under the conditions of s. 213.22, Florida Statutes.
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 #55732

FOOTNOTE 1. Clarification in Section 1.5 will be required