Could a Florida school board buy roofing materials tax-exempt under direct-purchase procedures while a construction manager performed the project?

Plain-English summary

Florida approved the school board's procedures for tax-exempt direct purchases of materials used to replace a high-school roof. Although a construction manager coordinated the project and initially paid enumerated costs subject to reimbursement and a guaranteed maximum price, the amended purchasing documents made the school board the actual purchaser of designated materials before installation.

Seven features supported direct government purchasing

The Department's summary required that:

1. The school board issue its own purchase orders directly to vendors.
2. Purchase orders contain its consumer's certificate of exemption number and vendors receive a certificate copy.
3. Vendors invoice the school board directly.
4. The school board pay vendors directly.
5. The board take title and liability when materials are delivered to the job site.
6. The board bear risk of loss, reimburse builder's-risk insurance premiums, and be named to receive insurance proceeds.
7. No other contract term undermine the conclusion that the board was purchaser in substance and form.

The construction manager and contractors could identify supplies, select suppliers for bids, prepare requisitions, and forward approved invoices. Those administrative roles did not make them the purchaser under the complete procedures.

Risk of loss was especially important

Rule 12A-1.094 treated government assumption of risk before materials became real property as a paramount factor. Here, the board bore the economic cost of builder's-risk coverage and was a named insured party, supporting its ownership during storage and installation staging.

Materials bought under the procedures were exempt, provided each vendor received a properly completed exemption certificate at purchase.

The ruling expressly excluded articles manufactured or fabricated by a contractor. For those items, the contractor remained the ultimate consumer and owed use tax on full cost under the cited rules.

What this means for you

School boards and public agencies

Direct-purchase programs need more than an exemption certificate. Purchase orders, invoices, checks, title, insurance, and the overall contract must consistently identify the agency as purchaser.

Construction managers

You may coordinate requisitions and delivery without owning the goods. Avoid paying vendors, taking title, or bearing risks assigned to the public owner if the direct-purchase exemption is intended.

Vendors

Invoice and receive payment from the public agency, and keep its purchase order and exemption certificate in your records.

Common questions

Q: Could the construction manager choose suppliers?
A: Yes. Supplier selection and requisition preparation did not defeat the board's direct purchase.

Q: Who had to pay the vendor?
A: The school board directly.

Q: Who bore risk before incorporation into the roof?
A: The school board, supported by reimbursed builder's-risk coverage and named-insured status.

Q: Did the ruling exempt contractor-fabricated materials?
A: No. Those remained taxable to the contractor as ultimate consumer.

Citations and references

• Fla. Stat. § 212.08(6) — direct government-purchase exemption and contractor exclusion
• Fla. Admin. Code r. 12A-1.038(4) — exemption certificates and direct government payment
• Fla. Admin. Code r. 12A-1.094(2)-(5) — public-works materials and purchaser-identification factors
• Fla. Admin. Code r. 12A-1.051(10) — contractor-manufactured or fabricated articles

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-049

Original ruling text

SUMMERY
QUESTION: Do the procedures for the purchase of materials set out in the contract for the construction of public
works meet the legal requirements for the School Board to purchase the materials tax exempt?
ANSWER - Based on Facts Below: The procedures meet the legal requirement for the School Board to purchase the
materials tax exempt as long as the controlling documents provide:

1. The School Board issues its own purchase orders directly to the vendors.
2. The purchase orders include the School Board’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 School Board directly.
4. The School Board issues its checks to the vendors directly.
5. The School Board takes title to the materials from the vendor and assumes liability for the materials when they are
   delivered to the job site.
6. The School Board assumes risk of loss for the materials upon delivery, which his clearly established by the
   requirement in the controlling documents that the School Board reimburse the contractor for premiums paid for
   insurance against loss or damage and the School Board 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 School Board rather than the
   contractor is in substance as well as form the purchaser of the materials.

August 19, 2004

Re: Technical Assistance Advisement 04A-049
Public Works Contract
Section: 212.08, F.S.
Rules: 12A-1.038, 12A-1.051, 12A-1.094, F.A.C.
Petitioner: XXX (herein "School Board")
FEI: XX
Dear :
This letter is a response to your petition dated July 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
On June 29, 2004, the School Board and XXX. ("Construction Manager"), entered into a Standard Form Contract
between Owner and Construction Manager (the "Agreement"), pursuant to which Construction Manager was engaged
to replace the roof at a high school (the "Project"). Under the Agreement, Construction Manager is required to pay
enumerated costs of the Project, including the cost of materials and builder's risk insurance on those materials. School
Board is required to reimburse Construction Manager for the enumerated costs, plus pay certain fees. The Agreement
provides for a guaranteed maximum price ("GMP") that caps the cost of the Project to School Board.
School Board is entitled to make purchases without paying Florida sales and use tax under a consumer's certificate of
exemption. To take advantage of the School Board's exemption, an Amendment was made to the Agreement, which
provides for incorporation of Exhibits A and B into the Agreement. Exhibit A to the Agreement is entitled "Sales Tax
Exemption Guidelines," ("Guidelines") and sets forth the general outline of the program. Exhibit B, "[School Board]
Procedures" (the "Procedures"), provides more detailed procedures for implementation. The Procedures provide as
follows:

1. The School Board 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 for purposes of making up their bids and
   will submit a list of supplies and suppliers with their bids.
3. Construction Manager or Contractor shall furnish detailed Purchase Order Requisition Forms ("Requisitions") for all
   School Board purchased materials.
4. Upon receipt of a Requisition, School Board shall review the Requisition and, if approved, issue its own purchase
   order directly to the supplier, with delivery to be made to the Project location on an F.O.B. job site basis.
5. Although School Board will take title to materials purchased pursuant to the Procedures upon delivery to the job
   site, the Construction Manager and contractor will have contractual obligations to inspect, accept delivery of, and store
   the materials pending incorporation into the project. The contractor's possession of the materials will constitute a
   bailment. The contractor, as bailee, will have the duty to safeguard, store and protect the materials while in its
   possession until returned to School Board through incorporation into the Project.
6. After verifying that delivery is in accordance with the purchase order, the contractor will forward approved invoices
   to Construction Manager; School Board will process the invoices and issue payment directly to the supplier.
7. The amount of builder's risk insurance to be carried under the Contract by the Construction Manager will be
   sufficient to cover School Board purchased materials. School Board is to be named as an additional insured on the

builder's risk insurance.
The Guidelines and the Procedures are similar in most respects. It is not necessary to address those instances in
which the Guidelines differ from the Procedures for purposes of this advisement, because the Amendment provides
that the Procedures prevail over the Guidelines in case of conflict or inconsistency.
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....
(Emphasis Supplied)
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 of Revenue. 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 contracts....
(2) The purchase or manufacture of supplies or materials by a public works contractor, when such supplies or
materials are purchased for the purpose of going into or becoming part of public works, whether the purchase or
manufacture occurs inside or outside Florida, is taxable to the public works contractor if the public works contractor
also installs such supplies or materials, since the public works contractor is the ultimate consumer of such supplies or
materials. Public works contractors that purchase or manufacture such supplies and materials in Florida are liable for
sales tax or use tax on such purchases and manufacturing costs. A public works contractor that purchases supplies or
materials that may be sold as tangible personal property or may be incorporated into a public works project may
purchase such supplies or materials without tax by issuing a copy of the contractor's Annual Resale Certificate and
accrue and remit tax upon withdrawing such supplies or materials from inventory to go into or become a part of public
works. Public works contractors that purchase or manufacture such materials outside the State of Florida are liable for
use tax, subject to credit for any sales or use tax lawfully imposed and paid in the state of purchase or manufacture.

(3) The purchase or manufacture of tangible personal property for resale to a governmental entity is exempt from tax,
provided this exemption shall not include sales of tangible personal property made to, or the manufacture of tangible
personal property by, public works contractors when such tangible personal property goes into or becomes a part of
public works.
(4)(a) The exemption in Section 212.08(6), F.S., is a general exemption for sales made directly to the government. A
determination whether a particular transaction is properly characterized as an exempt sale to a governmental entity or
a taxable sale to or use by 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 a taxable sale to or use by a contractor or an
exempt direct sale to a governmental entity based on all of the facts and circumstances surrounding the transaction as
a whole.
(b) The following criteria that govern the status of the tangible personal property prior to its affixation to real property
will be considered in determining whether a governmental entity rather than a contractor is the purchaser of materials:

1. Direct Purchase Order. The governmental entity must issue its purchase order directly to the vendor supplying the
   materials the contractor will use and provide the vendor with a copy of the governmental entity’s Florida Consumer’s
   [Certificate] of Exemption.
2. Direct Invoice. The vendor's invoice must be issued to the governmental entity, rather than to the contractor.
3. Direct Payment. The governmental entity must make payment directly to the vendor from public funds.
4. Passage of Title. The governmental entity must take title to the tangible personal property from the vendor at the
   time of purchase or delivery by the vendor.
5. Assumption of the Risk of Loss. Assumption of the risk of damage or loss by the governmental entity at the time of
   purchase is a paramount consideration. A governmental entity will be deemed to have assumed the risk of loss if the
   governmental entity bears the economic burden of obtaining insurance covering damage or loss or directly enjoys the
   economic benefit of the proceeds of such insurance.
   (c) Sales 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 direct
   sales to the government.
   (5) Contractors that manufacture materials for incorporation into public works shall be liable for tax in the manner
   provided in subsection (10) of Rule 12A-1.051, F.A.C.... (Emphasis Supplied)
   Discussion, Analysis and Conclusion
   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), F.A.C., 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 12A1.094, Florida Administrative Code.
Rule 12A-1.094(4), Florida Administrative Code, which sets forth the criteria that govern the status of the tangible
personal property prior to its affixation to real property, will be considered in determining whether a governmental
entity rather than a contractor is the purchaser of materials. These criteria include direct purchase order, direct
invoice, direct payment, passage of title, and assumption of risk of loss. 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.
   The Procedures appear to satisfy the foregoing requirements for exemption of transactions as sales to a
   governmental entity. School Board will make direct purchases of various construction materials. After receiving
   requisition forms from the contractors, School Board will prepare purchase orders for direct purchases. After receiving
   the approved invoices from Construction Manager, School Board will pay the vendors directly. School Board will retain
   legal, and equitable, title to all materials it purchases, will be responsible for the cost of builder's risk insurance on
   those materials as a reimbursable cost under the Agreements, and will be a named insured party on the builder's risk
   policy.

Based upon the conclusion that School Board is the purchaser, all purchases of materials that are made in
accordance with the Procedures will be exempt from sales tax. However, it is necessary that a properly completed
exemption certificate be extended at the time of purchase to each of the vendors.
Please note that this response does not apply to a contractor that manufactures or fabricates its own materials, as
specified in Rule 12A-1.094(5), 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 full cost of the
manufactured or fabricated articles, as detailed in Rule 12A-1.051(10), F.A.C.
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
Control #60920