Did the county's proposed public-works material purchases qualify as exempt direct purchases?

Plain-English summary

A county proposed special contract procedures so it could purchase materials tax-free for a new operations and support center. The documents provided that the county would pay suppliers directly, hold title to county-furnished materials, and obtain builder's-risk insurance covering those materials.

Florida nevertheless found the procedures insufficient. The contract did not clearly require the county itself to issue purchase orders directly to vendors, with its exemption number, or require vendors to invoice the county directly. Both were required elements of an exempt government direct purchase.

The ruling also carved out materials manufactured or fabricated by the contractor or subcontractors. They remained the ultimate consumers and owed use tax on the full cost of those fabricated articles.

What this means for you

Direct payment, title, and insurance were not enough. The controlling documents also had to establish the county's direct purchase order and the vendor's direct invoice. Public-works exemption planning must satisfy the transaction requirements as a whole.

Common questions

Why did the proposed purchases fail? The documents were unclear about direct county purchase orders and direct vendor invoices to the county.

Did the county assume risk of loss? The proposal said the county would maintain builder's-risk insurance, but satisfying that factor did not cure the other deficiencies.

Were contractor-fabricated materials exempt? No. The contractor and subcontractors were treated as the consumers and owed use tax on their full fabricated cost.

Citations and references

• Fla. Stat. § 212.08(6) (government purchases)
• Fla. Admin. Code r. 12A-1.038(4) (government exemption documentation)
• Fla. Admin. Code r. 12A-1.094 (public-works materials)
• Fla. Admin. Code r. 12A-1.051(10) (fabricated materials)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-043

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 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;
2. The governmental entity must directly pay the vendors for the tangible personal property; and
3. 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.
   However, is it not clear in the controlling documents that:
4. 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;
5. Vendors must directly invoice the governmental entity for supplies;

October 21, 2005

Re: Technical Assistance Advisement 05A-043
Sales and Use Tax - Public Works Contract
Sections: 212.08(6), F.S.
Rule: 12A-1.038(4), 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
Dear :
This letter is a response to your petition dated September 14, 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, Florida
Administrative Code. This response to your request constitutes a TAA and is issued to you under the authority of s.
213.22, Florida Statutes.

FACTS
Your letter provides that County is preparing to construct a new Operations and Support Center. Among other things,
the contract between County and the Contractor will include Special Condition 10.1, concerning County-Furnished
Materials. The purpose of this Special Condition is to allow County to take advantage of sales tax savings by
purchasing certain materials used in the performance of the contract.
Special Condition 10.1.5 discusses the issuance of Purchase Orders. This condition makes it unclear whether County
will issue its own Purchase Order directly to the vendor of the materials or if the Purchase Order will be issued to
Contractor. It is also appears that Contractor may issue its own purchase orders "for the County's signature" for
purchases of materials, in lieu of County issuing County Purchase Orders.
According to Special Condition 10.1.13, County will retain "legal and equitable title to any and all County-Furnished
Materials" regardless that the materials are in the possession of Contractor.
Special Condition 10.1.15 requires that County purchase and maintain builder's risk insurance to cover loss or
damage to County-Furnished Materials from the time County takes title to the materials until they are incorporated into
the Project or consumed in the process of completing the project.
According to Special Condition 10.1.18, County will issue a check directly to the supplier of the materials, which will be
"released, delivered and remitted directly to the supplier."
No section of Special Condition 10.1 makes it clear that a vendor of materials will directly invoice County for the
materials it is attempting to purchase.
REQUESTED ADVISEMENT
You request advice whether the terms of the subject contract 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 and 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 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
   The Special Condition does not satisfy the foregoing requirements for exemption of transactions as sales to a
   governmental entity. County will pay the vendors directly, hold title to all materials it purchases, and purchase and
   maintain builder's risk insurance. However it is not clear that County will issue its own Purchase Orders directly to the
   vendors of the materials and that the vendor will in turn invoice County directly for payment of those materials.
   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, 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 #16601