Did a county's public-works purchasing procedures make incorporated construction materials tax exempt?

Plain-English summary

A county's construction contract included a special condition for direct purchase of public-works materials. Contractors submitted requisitions and reviewed invoices, while the county issued purchase orders, paid vendors, held title, and was added as an insured under builder's-risk coverage.

Florida found the procedures made the county the purchaser in substance and form. Materials and equipment bought under the special condition and incorporated into the public work were exempt when a proper exemption certificate was provided to each vendor.

The exemption did not cover items not incorporated into the project. It also did not cover materials manufactured or fabricated by contractors, who remained ultimate consumers liable for use tax on the full fabricated cost.

What this means for you

Direct-purchase procedures must cover every stage from ordering through risk of loss. The government exemption does not extend to temporary items or a contractor's own fabrication merely because the finished project is public.

Common questions

Who issued the purchase order and paid the vendor? The county did both directly.

Who held title and risk of loss? The county held title and was insured under the builder's-risk policy.

Did all project materials qualify? No. Only materials and equipment incorporated into the public work qualified.

Citations and references

• Fla. Stat. § 212.08(6) (direct sales to governmental entities)
• Fla. Admin. Code r. 12A-1.038(4) (government exemption documentation)
• Fla. Admin. Code r. 12A-1.094(4)-(5) (public-works direct purchase and contractor fabrication)
• Fla. Admin. Code r. 12A-1.051(10) (fabricated cost)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-052

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 meet the legal requirement for the County to purchase the
materials tax exempt as long as the controlling documents provide:

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.

December 19, 2005
Re: Technical Assistance Advisement 05A-052
Sales and Use Tax - Public Works ContractSection: 212.08(6), F.S.Rules: 12A-1.038(4), 12A-1.094, F.A.C.
Petitioner: XXX(herein "County")
FEI: XX

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 do a Courthouse Restoration project. Among other things, the contract
between County and the Contractor will include Special Condition 9, entitled "Sale and Use Tax Exemption for
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.
Under Special Condition 9.1, County will "... make direct purchases of all materials and equipment purchased for, or to
be incorporated into the Project, as requested by the Contractor...." (FN 1)
Special Condition 9.1.1 requires Contractor to provide County a list of vendors, prices of materials to be supplied by
such vendors, and descriptions and estimated quantities of the materials, and for the Contractor to prepare a
requisition on the County's requisition 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. County's purchase order will include a copy of County's Consumer's Certificate of Exemption.
According to Special Condition 9.1.2, upon delivery, Contractor will insure that materials and equipment conform with
the purchase order, and when Contractor determines that the materials and equipment are conforming, County shall
take title and possession of said materials and equipment before incorporation into the Work.
Special Condition 9.1.3 provides that County assumes risk of loss of the materials it purchases pursuant to its sales
and use tax exemption. According to Special Condition 9.1.11, Contractor will purchase builder's risk insurance on the
materials against loss or damage, naming County as an additional insured. The insurance will cover the CountyFurnished Materials from the time County takes title to the materials until completion of the Work.
According to Special Condition 9.1.6, Contractor is 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. Please note, that part of conformance to the purchase order includes the invoice
being directly billed to County.
According to Special Condition 9.1.14, Contractor must provide to County, within 15 days of delivery, a list indicating
acceptance of the goods or materials. The list must include copies of the purchase orders and relevant
documentation. Upon receipt of the appropriate documentation, County pays the vendor directly by check.
To summarize:

1. County will prepare and issue a purchase order directly to the supplier, with delivery of materials to be made to the
   Project location.
2. Upon delivery of the materials to the jobsite, Contractor will determine that the materials are in conformance with
   the purchase order, and County will immediately take title and possession of the materials.
3. After verifying that delivery is in accordance with the purchase order, Contractor will forward approved invoices to

County with appropriate documentation.

4. County will process the invoices and issue payment directly to the supplier.
5. Contractor will carry insurance sufficient to cover County purchased materials with the County named as an
   additional insured.
   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 appears to satisfy the foregoing requirements for exemption of transactions as sales to a
governmental entity. 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. Contractor will verify
that vendor invoices are in conformance with County's purchase orders; in order to be properly in conformance with
County's purchase orders, the vendor's invoice needs to be issued (billed to) County(FN 2). County will pay the
vendors directly. County will hold title to all materials it purchases, and it will be named as an additional insured under
Contractor's builder's risk insurance on those materials it purchases.
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 the Special Condition will be exempt from sales tax. It is
necessary that a properly completed exemption certificate be extended at the time of purchase to each of the vendors.
Materials and equipment that are not incorporated into the work do not qualify for County's sales tax exemption.
This response assumes that the remaining terms of the contract also indicate that the County rather than Contractor is
in substance, as well as in form, the purchaser of the 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 #16578

FOOTNOTE 1. The exemption applies only to materials and equipment that are incorporated into the public work. The
quoted phrase should be amended to reflect that County will only directly purchase materials and equipment that will
be incorporated into the project.
FOOTNOTE 2. It is strongly advised that Special Condition 9.1.6 to specifically state that vendor invoice conformance
to County Purchase Order includes that the vendor invoice be issued directly to County.