Did a city's proposed public-works contract terms support exempt direct purchases of construction materials?

Plain-English summary

A city proposed standard terms for future public-works contracts so it could buy construction materials directly and have contractors incorporate them into city projects.

Florida found the proposed documents satisfied the five direct-purchase criteria: city purchase orders with its exemption certificate, vendor invoices to the city, direct city payment, city title from delivery through incorporation, and city assumption of risk through insurance.

The result depended on those exact terms appearing in the governing contracts and no other provisions conflicting with them. Under those conditions, the legal incidence of tax fell on the exempt city, not the contractor.

What this means for you

Government ownership of the completed project is not enough. The public entity must be the real purchaser throughout ordering, invoicing, payment, title, and risk of loss.

Common questions

Could the contractor select vendors and negotiate prices? Yes, while the city still issued the purchase order and made the purchase and payment.

Who held title before incorporation? The city retained title even while contractors possessed the materials.

Who bore the risk of loss? The city, through insurance covering the full value from the time it took title.

Citations and references

• Fla. Stat. § 212.08(6) (direct sales to governmental entities)
• Fla. Admin. Code r. 12A-1.038(4) (government exemption certificate and direct payment)
• Fla. Admin. Code r. 12A-1.094(4)(b) (public-works direct-purchase criteria)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-001

Original ruling text

SUMMARY
QUESTION: Are the terms and conditions proposed by the city to be included into public works contracts with
contractors sufficient to allow the city to purchase materials which are incorporated by the contractors into public
works projects exempt from sales tax?
ANSWER - Based on Facts Below: Based on the proposed terms and conditions provided by the City, which terms
and conditions are to be included in future public works contracts between the City and contractors, the legal
incidence of sales tax on purchases of tangible personal property that will be incorporated into public works projects
would be directly upon the City. Such purchases would be exempt from sales tax as long as no other provisions in any
contract would serve to override any of the proposed terms and conditions provided by the City with this request for a
Technical Assistance Advisement. This response is not applicable to any contractor that uses its own materials in the
manufacture or fabrication of tangible personal property which is incorporated into the city's public works project.

March 14, 2006

Re: Technical Assistance Advisement 06A-001
Sales and Use Tax - Public Works Contracts
Statute(s): Section 212.08(6), F.S.
Rule(s): 12A-1.038, 12A-1.094, F.A.C.
Petitioner: XXX(herein "City")
FEI:
Dear:
This letter is a response to your petition dated November 28, 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 (F.A.C.). This response to your request constitutes a TAA and is issued to you under the
authority of s. 213.22, Florida Statutes (F.S.).
FACTS
The subject, as listed in your letter of request for a Technical Assistance Advisement is "Tax Savings Procedure for
New Airport Terminal Project." The letter was submitted with four enclosures: 1) Exhibit M - Direct Materials
Acquisition by City; 2) Attachment 1 to Exhibit M - Sales Tax Exempt Purchasing Procedures for Public Projects; 3)
Sample Copy of City's Purchase Order; 4) AIA Document (Sample Contract) - Standard Form of Agreement Between
Owner and Contractor.
Exhibit M sets forth the terms and conditions which City proposes to incorporate into agreements with suppliers and

vendors for the acquisition of direct materials used by contractors operating under public works contracts with City.
Attachment 1 to Exhibit M sets forth the terms and conditions which City proposes to incorporate into agreements for
tax-exempt purchases of items of tangible personal property, where the items purchased will be incorporated into
public works projects by contractors operating under public works contracts with City.
REQUESTED ADVISEMENT
Though your letter dated November 28, 2005, requesting a Technical Assistance Advisement includes the documents
listed in the FACTS section of this advisement, you fail to specify a requested advisement with regard to the relevance
of the submitted documents to a specific issue or transaction. A presumption is made that the non-specified requested
advisement is whether a public works contract can be structured between City and contractors, using the proposed
terms and conditions found in Exhibit M and Attachment 1 to Exhibit M, where City may purchase materials and
supplies exempt from sales tax, and the tax-exempt items may be incorporated by contractors into a public works
project.
LAW
Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6), Florida Statutes, 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....
[Emphasis Supplied]
Two agency rules provide further guidance. First, Rule 12A-038(4), F.A.C., identifies the minimum criteria that must be
fulfilled for a public entity to legally make tax exempt purchases. It states:
(a) Any state, or any county, municipality, or political subdivision of a state that holds a valid Consumer's Certificate of
Exemption (form DR-14) issued by the Florida Department of Revenue may issue a copy of its certificate to the selling
dealer to purchase or rent taxable items or services tax exempt in lieu of paying sales tax. The United States
Government is not required to hold a Consumer's Certificate of Exemption to make tax exempt purchases and rentals.
(b) Payment for tax exempt purchases or rentals of property or services must be made directly to the selling dealer by
the governmental unit of a state, or any county, municipality, or political subdivision of a state. Payments made with an
authorized P-Card are considered to be made directly by the governmental unit. When the payment for taxable
property or services is made with the personal funds of an authorized representative of the governmental unit, the
purchase is subject to tax, even if the representative is subsequently reimbursed with the governmental unit's funds.
The authorized representative of any state, county, municipality, or political subdivision of a state, must CHOOSE
ONE of the following methods to make tax exempt purchases or rentals:

1. Use an authorized Purchasing or Procurement Card ("P-Card") which indicates on its face that it is a Florida
government purchasing card for official business only. Information printed on the front of the card will include the
agency's name, the agency's Consumer's Certificate of Exemption number, the account number, the name of the
cardholder (employee), and the expiration date. The selling dealer who accepts the "P-Card" should retain a copy of
the face of the "P-card" to note the Consumer's Certificate of Exemption number, account number, and cardholder
name for its books and records to properly document the exempt sale. When the selling dealer cannot copy the "PCard," the dealer must retain the Consumer's Certificate of Exemption number, the account number, cardholder's
name, and the expiration date of the "P-Card."

2. Issue a certificate containing the governmental unit's name, address, the Consumer's Certificate of Exemption
   number, the effective date and expiration date of the Consumer's Certificate of Exemption, and the signature of an
   authorized representative of the governmental unit....
   Second, Rule 12A-1.094, Florida Administrative Code, provides administrative guidelines to help determine whether
   the governmental entity or the contractor is making the purchase. It provides in part:
   (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:
3. 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.
4. Direct Invoice. The vendor's invoice must be issued to the governmental entity, rather than to the contractor.
5. Direct Payment. The governmental entity must make payment directly to the vendor from public funds.
6. 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.
7. 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.
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 made exempt from tax, the entity must obtain a Consumer Certificate of Exemption issued by the
Department and the payment for the tax exempt purchases must be made directly to the selling dealer by the public
entity. Authorized representatives of governmental units may make tax exempt purchases only if they use an
authorized purchasing or procurement card stating it is the governmental entity's purchasing card to be used for
official business only, or if they use a entity issues a certificate that contains similar specific information issued by the
governmental entity.
Rule 12A-1.094(2) and (3), Florida Administrative Code, states 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.
Rule 12A-1.094(4), F.A.C., outlines the specific guidelines required to treat a transaction as an exempt purchase of
tangible personal property by a governmental entity. The rule generally requires that there be:

1. A direct purchase order from the exempt entity with its Consumer's Certificate of Exemption number;
2. A direct invoice from the vendor to the exempt entity;
3. A direct payment of the invoice by the exempt entity;
4. Passage of title from the vendor to the exempt entity from the point in time when it is delivered to the job site up
   until the time it is incorporated as real property; and
5. An assumption by the exempt entity of the risk of loss or damage. To establish that the governmental entity has
   assumed that risk, the governmental entity should purchase, and be the insured party for, the building materials used
   in public works projects.
   CONCLUSION
   The decision rendered in this Technical Assistance Advisement shall be given with exclusive regard to whether the
   terms and conditions found in the documents provided with your request for a Technical Assistance Advisement meet
   the criteria found in Rule 12A-1.094(4)(b), F.A.C., which are necessary to exempt purchases of tangible personal
   property that is incorporated into a City's public works project. Likewise, a presumption is made that the vendor and
   City have complied with the provisions of Rule 12A-1.038(4), F.A.C.

The decision provided below is made without any regard to City's reference to a New Airport Terminal Project, since
neither Exhibit M - Direct Materials Acquisition by City, nor Attachment 1 to Exhibit M - Sales Tax Exempt Purchasing
Procedures for Public Projects, nor the Sample Purchase Order, nor the Consumer's Certificate of Exemption, nor the
Sample Contract contain any reference to a New Airport Terminal Project. Further, the sample invoice does not list
specific items of tangible personal property. This decision shall be made solely from the perspective that if the terms
and conditions found in the documents provided become the identical terms and conditions written into
contracts/agreements associated with public works projects between City and contractors, City would either meet or
would not meet the criteria necessary to exempt purchases of tangible personal property from sales tax on future
public works projects.

CRITERION 1 - Direct Purchase Order.
Exhibit M, Condition #4 provides:
The City will issue its own Purchase Orders directly to the vendor(s). The City's Purchase Order shall contain or be
accompanied by the City’s exemption certificate....
Attachment 1 to Exhibit M, Condition #7 provides:
After receipt of Purchase Order Requisition Form, City shall prepare its Purchase Orders for equipment, materials, or
supplies which the City chooses to purchase directly. Pursuant to the Purchase Order, the vendor will provide the
required quantities of material at the price established in the vendor's quote to the (sub)contractor, less any sales tax
associated with such price. Promptly upon receipt of each Purchase Order, (sub)contractor shall verify the terms and
conditions of the Purchase Order prior to its issuance to supplier and in a manner to assure proper and timely delivery
of items. City's Purchasing Director or his designated representative shall be the approving authority for the City on
Purchase Orders in conjunction with City purchased materials. The Purchase Order shall require that the supplier
provide the required shipping and handling insurance. The Purchase Order shall also require the delivery of the City
purchased materials on the delivery dated provided by the (sub)contractor in the Purchase Order Requisition Form
and shall indicate F.O.B. jobsite. The City Purchase Orders shall contain or be accompanied by the City's Exemption
certificate and must include...
Decision Regarding Criterion 1:
Determination is made that if the terms and conditions found in Condition #4 of Exhibit M, and the terms and
conditions of Condition #7 of the Attachment to Exhibit M, are contained in a public works contract between City and
contractors, City satisfies the criterion of subparagraph 1 in Rule 12A-1.094(4)(b), F.A.C.

CRITERION 2 - Direct Invoice.
Exhibit M, Condition #6 provides:
As City purchased materials are delivered to the job-site, the contractor as City's representative, shall visually inspect

all shipments from the suppliers, and approve the vendor's invoice for material delivered. The contractor shall assure
that each delivery of City purchased material is accompanied by documentation adequate to identify the Purchase
Order against which the purchase is made. This documentation may consist of a delivery ticket and an invoice from
the supplier conforming to the Purchase Order, together with such additional information as the City or (sub)contractor
may require. The contractor, as City's representative, shall verify in writing to the City the accuracy of the delivery
ticket. The contractor will then forward the invoice to the City through the Construction Manager for payment. The
invoice shall be thereupon furnished to the City for processing and payment in the manner as all other City invoices
are processed.
...
Attachment 1 to Exhibit M, Condition #18 provides:
As invoices are generated, the suppliers, vendors, and material-men will mail invoices directly to the Contractor or
subcontractors associated with each specific [City] purchase order number for review and signature approval. The
subcontractors will then forward said invoices to the Contractor who shall either concur or object to the City's issuance
of payment to the suppliers, based upon (sub)contractor's records of materials delivered to the site and any defects in
such materials. Once Contractor gives signature approval to said invoices, Contractor shall, on no less than a bimonthly basis, send said invoices to City Procurement personnel for processing and payment in the manner as all
other City invoices are processed.
Decision Regarding Criterion 2:
The terms and conditions of Condition #6 of Exhibit M, and Condition #18 of Attachment 1 to Exhibit M, require
contractors to compare delivery tickets and invoices issued by suppliers to corresponding City Purchase Orders to
verify that the items listed on the City Purchase Orders were the items invoiced and delivered to the job-site without
defects. Since the terms and conditions cause the invoices issued by suppliers to be issued to the entity that issued
purchase orders to the suppliers, invoices would then be issued by the suppliers to City.
Determination is made that if the terms and conditions found in Condition #6 of Exhibit M, and the terms and
conditions of Condition #18 of Attachment 1 to Exhibit M, are contained in a public works contract between City and
contractors, City satisfies the criterion of subparagraph 2 in Rule 12A-1.094(4)(b), F.A.C.

CRITERION 3 - Direct Payment.
Exhibit M, Conditions #4 and #5 provide:

4. The City will issue its own Purchase Orders directly to the vendor(s)... The materials shall be purchased from the
   vendors and suppliers selected by the (sub)contractor, for prices negotiated by the (sub)contractor. The contractor will
   provide all the necessary information for preparation of the purchase order by the City and will coordinate the
   purchase of the materials in a timely manner so as not to negatively impact on the performance of the construction
   activity of the project.

5. The contract amount shall be reduced by the net, un-discounted amount of these purchase orders, plus all sales
taxes. Issuance of the purchase orders by the City shall not relieve the (sub)contractor of any of their responsibilities
regarding material purchases, or installation, with the exception of the payment for the material so purchased....
Attachment to Exhibit M, Conditions #18 and #19 provide:

18. As invoices are generated, the suppliers, vendors, and material-men will mail invoices directly to the Contractor or
    subcontractors associated with each specific [City] purchase order number for review and signature approval. The
    subcontractors will then forward said invoices to the Contractor who shall either concur or object to the City’s issuance
    of payment to the suppliers, based upon (sub)contractor’s records of materials delivered to the site and any defects in
    such materials. Once Contractor gives signature approval to said invoices, Contractor shall, on no less than a bimonthly basis, send said invoices to City Procurement personnel for processing and payment in the manner as all
    other City invoices are processed.
19. In order to arrange for the prompt payment to the supplier, the contractor shall provide to the City, a list indicating
    the acceptance of the goods or materials in accordance with the established monthly Payment Request Schedule....
    Upon receipt and verification of the appropriate documentation, the City shall prepare a check drawn to the supplier
    based upon the receipt of data provided. This check will be released, delivered, and remitted directly to the supplier....
    Decision Regarding Criterion 3:
    Condition #4 of Exhibit M, requires City to issue purchase orders for materials directly to suppliers. Though contractors
    have authority granted by City to select suppliers and to negotiate prices with regard to purchases from the selected
    suppliers, the materials will be purchased from the suppliers by City. Condition #5 of Exhibit M, provides that City will
    hold contractors accountable for material purchases with the exception of the actual payment for such materials.
    Determination is made that if the terms and conditions found in Conditions #4 and #5 of Exhibit M, and the terms and
    conditions of Conditions #18 and #19 of Attachment 1 to Exhibit M, are contained in a public works contract between
    City, contractors, and vendors, City satisfies the criterion of subparagraph 3 in Rule 12A-1.094(4)(b), F.A.C.

CRITERION 4 - Passage of Title.
Exhibit M, Condition #7 provides:
Notwithstanding the transfer of City purchased materials by the City to the (sub)contractors['] possession, the City
shall retain title to any and all City purchased materials.
Attachment 1 to Exhibit M, Conditions #14 and #15 provide:

14. Notwithstanding the transfer of City purchased materials by the City to the (sub)contractors['] possession, the City
    shall retain title to any and all City purchased materials.
15. The transfer of possession of City purchased materials from the City to the (sub)contractor shall constitute a

bailment for mutual benefit of the City and the (sub)contractor. The City shall be considered the bailor and the
(sub)contractor the bailee of the City purchased materials. City purchased materials shall be considered returned to
the City for purposes of its bailment at such time as they are incorporated into the project or consumed in the process
of completing the project. Bailee shall have the duty to safeguard, store and protect all City purchased materials.
Decision Regarding Criterion 4:
Criterion 4 is satisfied by the terms and conditions of Exhibit M, Condition #7, and Attachment 1 to Exhibit M,
Conditions #14 and #15, which specify that City shall retain title to any and all City purchased materials even after the
transfer of the materials to contractors. Condition #15 of Attachment 1 to Exhibit M, further specifies that a bailment
exists between City and contractors where City shall be considered the bailor and contractors bailees, and that City
purchased materials shall be considered returned to the City for purposes of the bailment at such time as the
materials are incorporated into the project.
Determination is made that if the terms and conditions found in Condition #7 of Exhibit M, and the terms and
conditions of Conditions #14 and #15 of the Attachment to Exhibit M, are contained in a public works contract between
City and contractors, City satisfies the criterion of subparagraph 4 in Rule 12A-1.094(4)(b), F.A.C.

CRITERION 5 - Assumption of the Risk of Loss.
Exhibit M, Condition #8 provides:
The City shall purchase and maintain insurance pursuant to the requirements set forth in the City and contractor's
agreement which shall be sufficient to protect against any loss of or damage to City purchased equipment, materials
or supplies. Such insurance shall cover the value of any City purchased materials not yet incorporated into the project
from the time the City first takes title.
Attachment 1 to Exhibit M, Condition #16 provides:
The City shall purchase and maintain insurance pursuant to the requirements set forth in the City and contractor
Agreement which shall be sufficient to protect against any loss of or damage to City purchased equipment, materials,
or supplies. Such insurance shall cover the full value of any City purchased materials not yet incorporated into the
project from the time the City first takes title.
Decision Regarding Criterion 5:
Determination is made that if the terms and conditions found in Condition #8 of Exhibit M, and the terms and
conditions of Condition #16 of the Attachment to Exhibit M are contained in a public works contract between City and
contractors, the City satisfies the criterion of subparagraph 5. in Rule 12A-1.094(4)(b), 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,
Lynwood Taylor
Tax Law Specialist
Technical Assistance and Dispute Resolution
Control # 18060