Did a Florida county's airport-construction procedures qualify its material purchases as tax-exempt direct government purchases?

Plain-English summary

The Florida Department of Revenue concluded that the county's public-works purchasing procedures did not yet qualify for the government sales-tax exemption. The contract satisfied four of the five direct-purchase criteria, but it did not clearly require vendors to invoice the county itself.

The county had contracted for an airport expansion and added a "County-Furnished Materials" program intended to save sales tax. The contractor would prepare requisitions and county purchase orders, materials would be delivered to the project, and the county would pay suppliers directly.

Four requirements were satisfied

The Department found that the documents adequately provided for:

1. County-issued purchase orders containing the county's exemption number.
2. Direct county payment to the supplier.
3. County ownership and liability for materials after delivery and before incorporation into the project.
4. County assumption of risk of loss through insurance covering the materials.

The contractor could prepare requisitions, inspect deliveries, store the materials as bailee, and forward approved invoices without necessarily becoming the purchaser.

Direct vendor invoicing was missing

Rule 12A-1.094 also required the vendor's invoice to be issued directly to the governmental entity rather than the contractor. The contract said invoices would conform to purchase orders and later be forwarded to the county, but no provision expressly required vendors to address the invoices to the county.

Because that fifth condition was unclear, the Department would not approve the purchases as exempt direct sales in the documents' current form.

The defect could be fixed prospectively

The ruling said the county could satisfy all five criteria by amending the relevant contract sections to state that vendors would invoice the county directly. That conclusion remained conditional on the rest of the current and future contracts not contradicting the direct-purchase terms.

Contractor-manufactured or fabricated materials were outside the approval. For those items, the contractor or subcontractor remained the ultimate consumer and owed use tax on the full cost under the cited rule.

What this means for you

Counties and other government purchasers

Direct orders and direct checks are not enough. Require each supplier's invoice to name the governmental entity as customer and keep that requirement consistent throughout the contract.

Public-works contractors

Administrative help with requisitions, delivery, storage, and invoice approval can coexist with a government direct purchase. The documents must still show that the government—not the contractor—is the buyer in substance.

Contract and accounting teams

Audit all five elements together: purchase order, invoice, payment, title, and risk of loss. One missing document term can defeat the exemption even when the other four are strong.

Common questions

Q: Which requirement failed?
A: The contract did not expressly require suppliers to invoice the county directly.

Q: Did the county pay vendors directly?
A: Yes. The ruling found direct payment satisfied.

Q: Who owned and insured the materials?
A: The county retained title and paid for insurance covering them while the contractor held them as bailee.

Q: Could the county repair the procedure?
A: Yes. The Department said adding a direct-invoice requirement would satisfy the five listed criteria, assuming no other contract provision conflicted.

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

Citations and references

• Fla. Stat. § 212.08(6) — exemption for direct government purchases and exclusion for contractor purchases incorporated into public works
• Fla. Admin. Code r. 12A-1.038(4) — direct payment and exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works taxability and the five direct-purchase factors
• Fla. Admin. Code r. 12A-1.051(10) — tax on contractor-manufactured or fabricated materials

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-023

Original ruling text

SUMMARY
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 County to purchase the materials tax exempt?
ANSWER - Based on Facts Below: The procedures do not meet the legal requirement for the County to purchase
the materials tax exempt. The controlling documents provide:

1. The County issues its own purchase orders directly to the vendors.
2. The County issues its checks to the vendors directly.
3. The County takes title to the materials from the vendor and assumes liability for the materials when they are
   delivered to the job site.
4. The County assumes risk of loss for the materials upon delivery, as indicated by the entity's acquisition of, or
   inclusion as the insured party under, insurance on the building materials.
   However, the controlling documents do not clearly establish the 5th requirement set forth in Rule 12A-1.094, F.A.C.,
   that the vendors directly invoice the County.

May 3, 2005
Re: Technical Assistance Advisement 05A-023
Sales and Use Tax - Public Works Contract
Section: 212.08(6), F.S.
Rules: 12A-1.001(9), 12A-1.094, F.A.C.
Dear:
This letter is a response to your petition dated January 24, 2005, 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 provides that on November 16, 2004, County entered into a Construction Agreement with Contractor for
the first phase of the expansion to Airport. Construction Agreement was modified on December 14, 2004, to add
Article 21, entitled "County-Furnished Materials." The purpose of this Article is to allow County to take advantage of
sales tax savings by purchasing certain materials used in the performance of the contract. Your letter also provides

that County owns the land and terminal buildings of the airport.
A copy of the complete Construction Agreement was not included with your request for technical assistance
advisement. Only a copy of Article 21, which is specific to the current contract, and "Exhibit B," containing generic
language for a sales tax savings program for future contracts, were included. Therefore, this response is based only
upon the language of Article 21 and Exhibit B.
Section 21.
Under Section 21 of the Construction Agreement, County reserves the right to require Contractor to assign baggage
conveying systems contractor's materials suppliers to County. Any materials purchased by County pursuant to such
agreements are referred to as "County Furnished Materials" (hereafter, "Materials"). Section 21 states the
Construction Agreement governs terms and conditions relating to "County Furnished Materials," and takes
precedence over other terms and conditions of the Contract Documents where inconsistencies or conflicts exist.
Section 21.4 includes words to the effect that Contractor is to prepare a County-issued purchase order in accordance
with the requisition discussed in another subsection for County to use for direct purchase. (Purchases made on
Contractor's purchase order forms are not tax exempt.) The vendor is expected to fill County's order at the price
quoted to Contractor less any sales tax quoted. Each purchase order is to contain County's consumer's certificate of
exemption number.
Section 21.8 includes a statement that Vendor's invoice will "conform[] to the Purchase Order." Neither this section nor
any other section specifically requires that Vendor directly invoice County.
Sections 21.12 and 21.13 of Construction Agreement provide that County retains legal and equitable title to the
materials while such materials are in Contractor's possession. The Construction Agreement describes this transfer of
possession of the county-furnished materials as a bailment until such time as those materials are returned to County
by being incorporated into the project.
According to Section 21.14 of Construction Agreement, County purchases insurance on the materials against loss or
damage, thereby retaining risk of loss of the materials.
According to Section 21.17 of Construction Agreement, Contractor must provide to County 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, County pays the vendor directly by
check.
Exhibit B.
Exhibit B includes the pertinent provisions made in Section 21 in sections 20.3, 20.7, 20.11 & 20.12, 20.13, and 20.16,
respectively.
Section 21 and Exhibit B both contain additional provisions related to Contractor's requirements for expediting the

acquisition of the County purchased materials.
To summarize:

1. Upon request of County, Contractor shall prepare a requisition, then prepare County's purchase order for review by
   County's Contract Administrator or agent, and, if such order is approved, issue the purchase order directly to the
   supplier, with delivery of materials to be made to the Project location.
2. No section specifically requires Vendor(s) to directly invoice County.
3. Although County will take title to materials purchased pursuant to the Attachment 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.
4. 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.
5. County will carry insurance sufficient to cover County-purchased materials.
   REQUESTED ADVISEMENT
   You request advice whether the terms of Section 21 and Exhibit B are sufficient to allow the county to purchase
   construction materials exempt from tax.
   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
   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.
   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 named 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:
6. 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
   In their current forms, neither Section 21 nor Exhibit B satisfies the foregoing requirements for exemption of
   transactions as sales to a governmental entity, because neither document specifically requires vendors to directly
   invoice County. See Rule 12A-1.094(4)(b)2., Florida Administrative Code. However, the four other requirements set
   forth in Rule 12A-1.094(4)(b), Florida Administrative Code, for County to effectuate an exempt direct purchase of
   materials for incorporation into a public work are met. County will make direct purchases of various construction
   materials. After receiving requisition forms from the contractors, Contractor will prepare, for County approval, Countyissued purchase orders for direct purchases. After receiving the approved invoices from Contractor, County will pay
   the vendors directly. County will retain legal, and equitable, title to all materials it purchases, and it will be responsible
   for the cost of insurance on those materials under the Agreement.
   If County modifies Section 21 and Exhibit B to include a statement that Vendors will directly invoice County for
   materials purchases, then Section 21 and Exhibit B will meet all of the requirements for County to exercise its tax
   exempt status to purchase materials for incorporation into public works.
   Since only Section 21 of the current contract and Exhibit B for future anticipated contracts were provided for review,
   this conclusion is based on language and information contained in these documents, and presumes that no other
   sections of the current contract or future contracts compromise the provisions of Section 21 and Exhibit B,
   respectively.
   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 12A-1.051(10), Florida Administrative
   Code.

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 #12332