Did a city's direct-purchase procedures make construction materials exempt for a public-works project?

Plain-English summary

A city built a direct-purchase program into a stipulated-sum construction contract. Contractors selected suppliers and prepared requisitions, but the city decided what to buy, issued its own purchase orders with exemption information, paid vendors directly, retained title, and insured materials before they became part of the project.

Florida found purchases made under the program exempt, provided the agreement, exhibit, and procedures were fully executed and incorporated into the controlling contract. Contractor inspection, storage, and responsibility for its own negligence did not displace the city's title and insured risk of loss.

The ruling did not cover materials manufactured or fabricated by the contractor or subcontractors. For those items, the contractors remained the ultimate consumers and owed use tax on full fabricated cost.

What this means for you

The approved program gave the city substantive purchaser control over orders, invoices, payment, title, and risk. The exemption depended on executing the documents and giving each vendor a properly completed exemption certificate at purchase.

Common questions

Who issued the purchase orders? The city, directly to vendors, with its exemption number and certificate information.

Who paid the vendors? The city paid them directly after contractor verification of delivery and invoices.

Who held title and risk of loss? The city retained title and purchased insurance for the materials before incorporation into the project.

Did the unexecuted draft qualify immediately? No. The ruling made its conclusion contingent on full execution and incorporation of the exhibit and procedures.

Were contractor-fabricated materials exempt under this program? No. The ruling expressly excluded them and treated contractors as the taxable consumers of their fabricated articles.

Citations and references

• Fla. Stat. § 212.08(6) (direct governmental purchases and contractor exclusion)
• Fla. Admin. Code r. 12A-1.038(4) (government exemption documentation)
• Fla. Admin. Code r. 12A-1.094(2)-(5) (public-works direct-purchase criteria)
• Fla. Admin. Code r. 12A-1.051(10) (contractor-fabricated materials cited in the ruling)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-037

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 City to purchase the materials tax exempt?
ANSWER - Based on Facts Below: The procedures meet the legal requirement for the City 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.

November 21, 2006
Re: Technical Assistance Advisement 06A-037
Sales and Use Tax - XXX Contract
Section: 212.08(6), F.S.
Rule: 12A-1.094, F.A.C.
Petitioner: City of XXX (herein "City")
FEI:XX
Dear:
This letter is a response to your petition dated October 6, 2006, 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

Taxpayer's petition includes the following documents related to a XXX contract:

1. AIA Document A101, Standard Form of Agreement between City and Contractor where the basis of payment is a
   Stipulated Sum, 1987 Edition(FN 1) (hereinafter "Agreement").
2. Exhibit M [to the Agreement] (hereinafter "Exhibit"), Direct Materials Acquisition by City.
3. Attachment 1 to Exhibit M, Sales Tax Exempt Purchasing Procedures for Public Projects (hereafter "Procedures").
   Article 1 of the Agreement makes the Exhibit and the Procedures part of the Agreement.
   Article 7 of the Agreement, Subsection 7.3, Other provisions, states:
   Wherever the Contract Documents or the Bid Documents conflict with the [Exhibit] and the [Procedures], the [Exhibit]
   and [Procedures] shall prevail.
   Article 9 of the Agreement, Enumeration of Contract Documents, Subsection 9.1.3, contains provisions to identify the
   Exhibit and Procedures as Supplementary Conditions to the Agreement.
   The Exhibit provides in summation that:
4. The term "(sub)contractor" shall mean the contractor and/or a subcontractor, as applicable.
5. Each contractor or subcontractor shall include applicable sales tax for all materials, supplies, and equipment
   included in its bid.
6. The City may elect to purchase materials and equipment included in a contractor's bid directly from the supplier.
   Any materials so purchased will be called "City purchased materials" and be governed by the Procedures. The
   Procedures govern where inconsistencies exist between the Procedures and the Agreement.
7. The City will issue its own purchase orders directly to the vendor, which will contain the City's exemption certificate,
   issue and expiration date, and name and address. (Sub)contractors will select the suppliers from whom materials will
   be purchased, for prices negotiated by the (sub)contractors.
8. (Sub)contractors will remain responsible for coordination of material purchases, protection, warranties, and
   installation.
9. Upon delivery to the job site, the contractor will have contractual obligations to inspect and accept delivery of
   materials pending incorporation into the project, will verify the delivery ticket in writing, and will furnish the invoice to
   the City.
10. Notwithstanding the transfer of the City purchased materials to the (sub)contractor, the City retains title to the
    materials.

8. The City shall purchase and maintain insurance on the materials, equipment, and supplies not yet incorporated into
the project from the time that the City first takes title.

9. The materials suppliers may be required to carry a bond in the amount of 100% of the purchase price, the cost of
   which will be added to the purchase price.
10. If the state assesses any sales tax, penalties and/or interest against the contractor or any of the subcontractors or
    materials suppliers relating to the direct acquisition of materials and/or equipment by City, such taxes or charges will
    be reimbursed by the City to the contractor.
    The Procedures provide substantially what the Exhibit provides, plus what follows, in pertinent summation that:
11. (Sub)contractors will select the suppliers from whom materials will be purchased.
12. Contractor shall provide the City with a list of all intended suppliers, vendors, and materialmen, as well as materials
    to be supplied, estimated quantities, and prices.
13. Upon request of the Contractor, the Subcontractor shall prepare a standard purchase order requisition form
    acceptable to the City to specifically identify the materials that the City, at its sole option, elected to purchase. This
    requisition form shall include:
    a. Name, address, telephone number, and contact person for the material supplier;
    b. Manufacturer or brand, model, or specification number of the item;
    c. The quantity needed as estimated by (sub)contractor;
    d. The price quoted by the supplier for the materials identified;
    e. Any sales tax associated with the price quote;
    f. Delivery dates established by (sub)contractor;
    g. Copy of written quote from vendor.

6. Upon receipt of a Requisition, City shall review the Requisition and, if approved, issue its own purchase order and
   forward it to the Subcontractor for verification prior to its issuance to the supplier, with delivery to be made to the
   Project location on an F.O.B. job site basis. The purchase order shall provide the City's name, address, exemption
   number, and issuance and expiration date, and shall provide for insurance. It shall be accompanied by the City's
   exemption certificate.

9. The Subcontractor is responsible for risk of loss of the materials due to its own actions or negligence.

14. and 15. Notwithstanding transfer of possession of the materials from the City to the (sub)contractor, the City shall
    retain title to the materials. Such transfer of possession shall be deemed a bailment until the materials are
    incorporated into the project.
15. The City shall purchase and maintain insurance on the materials.

19. The subcontractor shall review invoices to be certain that the materials delivered are satisfactory and meet the
    specifications of the purchase order and shall advise the City of conforming invoices, for which the City shall pay
    directly to the supplier.
20. At the end of the project, credit is given to the City for refunds on surplus materials, and salvaged materials are the
    property of the City, removed from the Project site at the direction of the City.
    The Sample Purchase Order that you provide conforms to the requirements of the Exhibit and the Procedures.
    The City and its contractors have not yet executed the Agreement, and the sales tax exemption will not be available
    until the Agreement is fully executed, incorporating the two additional Exhibits into the Agreement. The conclusions
    set out in this advisement are contingent on such executions.
    To summarize:
21. The City may elect to purchase materials and equipment included in a contractor's bid directly from the supplier.
22. Contractor will select the suppliers from whom materials will be purchased.
23. From the Requisition, the City prepares a Purchase Order containing necessary exemption information and the
    signature of the City's authorized personnel and issues the purchase order directly to the supplier.
24. Although the City will take title to materials purchased pursuant to the Procedures 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 will have the duty to safeguard, store, and protect the materials and will be
    liable to City for the performance of these duties while the materials are in its possession until returned to City through
    incorporation into the Project.
25. After verifying that delivery is in accordance with the purchase order, Contractor will forward approved invoices to
    City with appropriate documentation, and City will process the invoices and issue payment directly to the supplier.
26. The City will carry insurance sufficient to cover City purchased materials.

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), 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, Florida Administrative
Code, 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 Agreement, Exhibit, and Procedures satisfy the foregoing requirements for exemption of transactions as sales to
   a governmental entity. City will make direct purchases of various construction materials. Contractor will prepare, for
   City approval, requisitions for direct purchases. City will prepare detailed Purchase Orders, including its exemption
   documentation, and forward them to the vendor. After receiving the approved invoices from Contractor, City will pay
   the vendors directly. City 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.
   Based upon the conclusion that City is the purchaser, all purchases of materials that are made by the city in
   accordance with the Agreement 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.
   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
Senior Tax Specialist
Technical Assistance and Dispute Resolution
850/488-7758
Control #25292

FOOTNOTE 1. The Agreement is unexecuted, and spaces for inserting information are not filled out.