Could a Florida public authority buy materials tax-exempt for a roadway, bridge-removal, landscaping, and rail-yard reconstruction project?

Plain-English summary

Florida concluded that a public authority could directly purchase selected materials tax-exempt for the Meridian Gateway Construction Project. The project continued an expressway reversible-lanes project and included Meridian Street construction, landscaping and hardscaping, removal of a State Road 60 bridge, and reconstruction of a rail yard.

The authority's Section 9-12 procedures gave it the right to make direct purchases. The contractor supplied information and coordinated delivery, handling, and storage, while deductive change orders removed the material price and associated sales tax from the contractor's price.

The authority had to be purchaser in substance

The exemption depended on:

1. Authority purchase orders issued directly to vendors with its exemption number.
2. Vendor invoices sent directly to the authority.
3. Direct authority payment to vendors.
4. Authority title and liability beginning at delivery and continuing until incorporation.
5. Authority assumption of risk through insurance.
6. No conflicting contract term that made the contractor the actual purchaser.

Each vendor also needed a properly completed exemption certificate at the time of purchase.

Off-site fabrication had an added condition

Authority-owned materials could be taken to the contractor's temporary off-site fabrication site. Their exemption depended on the builder's-risk policy covering the authority-owned goods at that location.

When that coverage existed, the contractor excluded the cost of authority-owned inputs from the fabrication cost used to calculate its own use tax. Articles that the contractor or subcontractors manufactured or fabricated themselves remained taxable to them as ultimate consumers.

The Department did not receive every contract document

The conclusion expressly assumed that no omitted provision voided or overrode Section 9-12. A conflicting term could change purchaser status.

What this means for you

Transportation authorities

Coordinate direct orders, contract-price reductions, title, delivery, insurance, and vendor documentation. A familiar procedure from an earlier project still needs review against the current contract.

Road, bridge, and rail-yard contractors

You may coordinate government-owned materials, but government ownership and insurance must remain clear. Separate authority-owned inputs from contractor-created fabricated articles.

Off-site fabricators

Confirm that builder's-risk coverage follows authority-owned materials to the temporary site before relying on their direct-purchase status.

Common questions

Q: What work did the Meridian Gateway project include?
A: Road construction, landscaping and hardscaping, bridge removal, and rail-yard reconstruction.

Q: Were the authority's direct material purchases exempt?
A: Yes, when made under Section 9-12 and all stated conditions.

Q: Could authority-owned goods be fabricated off-site?
A: Yes, if builder's-risk insurance covered them there.

Q: Did the ruling exempt contractor-made articles?
A: No. The contractor or subcontractor remained liable for use tax on the applicable fabrication cost.

Q: Did the Department review the full contract?
A: No. It assumed omitted terms did not conflict with the direct-purchase provisions.

Citations and references

• Fla. Stat. § 212.08(6) — direct government-purchase exemption and contractor exclusion
• Fla. Admin. Code r. 12A-1.038(4) — exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works purchaser, title, payment, and risk-of-loss factors
• Fla. Admin. Code r. 12A-1.051(10) — contractor-manufactured or fabricated articles
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-015

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.

Mar 08, 2004

Re: Technical Assistance Advisement 04A-015
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

Dear :

This letter is a response to your petition dated January 5,
2004, 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

Your letter states in pertinent part:

Our firm is general counsel to the [Authority] and is
requesting a technical assistance advisement ("TAA") on
their behalf pursuant to Section 12-11.003 of the Florida
Administrative Code.

The Authority requests a determination on whether the
procedures for the direct purchase of certain materials set
forth in the construction contract for its upcoming
Meridian Gateway Construction Project (hereinafter
"Construction Contract") meet the legal requirements for
the Authority to purchase materials tax exempt pursuant to
Section 12A-1.094 [, F.A.C.].

The Authority has awarded the Construction Contract to XXX
("Contractor") for the construction of a public works
project that is a continuation of the Authority's XXX

Expressway Reversible Lanes Project in XXX County, Florida
("Initial Project"). The project involves the construction
of Meridian Street, related landscaping and hardscaping,
removal of the State Road 60 bridge above the limits of the
project, and the reconstruction of a rail yard ("the
Project").

We made a similar request for a TAA on October 15, 2002 for
the Authority's 78th Street to I-75 Roadway project
("Previous Project") for which the DOR issued TAA 02A-048
on November 14, 2002. Our direct purchase procedure for
the current project is the same as the one presented in our
2002 request letter. The sections of the Construction
Contract that address direct purchases are attached for
your review.

The direct purchase language provided in the Construction
Contract gives the Authority the option to directly
purchase certain materials for incorporation into the
construction of the Project. The direct purchase
procedures were prepared with the intent of reducing the
construction costs associated with the Project, in
compliance with Rule 12A-1.094, F.A.C.

Under the direct purchase provisions of the contract, the
Authority has reserved the right to directly purchase
certain construction materials. The Contractor provides
information to the Authority sufficient for the Authority
to issue its own Purchase Order. All payments are issued
directly from the Authority to the vendors. The full
purchase price of the materials, including sales tax, is
deducted from the Contractor's Price through deductive
change orders. An accounting is to be conducted at the end
of the project to insure that the Authority has received
the correct amount of tax savings to which it is entitled
based on the quantities it has purchased directly.

The Contractor serves as agent of the Authority for the
purpose of coordinating the delivery, handling, and storage
of the materials until they are incorporated into the
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 Document 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 in 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), 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 in 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

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 from 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 Section 9-12 will
be exempt from sales tax. With respect to the materials
purchased by the Authority to be further fabricated by
Contractor at its off-site temporary fabrication site, the
exemption is contingent upon Authority's builder's risk policy
providing coverage for Authority owned materials at that site.
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), 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 cost of the manufactured or fabricated articles, as
detailed in Rule 12A-1.051(10), F.A.C. Assuming that
Authority's builder's risk policy provides coverage for
Authority owned materials at Contractor's fabrication site,
Contractor should not include the cost of the Authority owned
materials in the fabrication cost upon which it must accrue use
tax.

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,

Michael T. Cavanaugh
Tax Law Specialist
Technical Assistance and Dispute Resolution
850-922-9411

Control #58870
Enclosure