Did a county's contract procedures make construction-material purchases exempt as direct government purchases?

Plain-English summary

A county and contractor created procedures intended to let the county buy selected construction materials directly under its governmental exemption. The contractor prepared requisitions, the county processed them, the project manager and contractor approved invoices at delivery, the contractor accepted responsibility for the materials, and the county paid suppliers directly.

Florida found the program insufficient. Direct payment was the only required factor clearly met. The documents did not expressly establish county-issued purchase orders bearing its exemption number, direct invoices from vendors to the county, passage of title and liability to the county at delivery, or the county's assumption of risk of loss through insurance or equivalent protection.

Because the county was not the purchaser in substance, the material purchases made under the procedures were taxable. The public-works contractor remained the ultimate consumer of materials incorporated into the project.

What this means for you

A government check alone does not turn a contractor's material purchase into an exempt government purchase. Florida examined who ordered, was invoiced, paid, held title, bore liability, and carried the risk of loss before the materials became real property.

Common questions

Was direct payment enough for exemption? No. It was only one of the required factors.

Who had to issue the purchase order? The governmental entity, directly to the vendor, with its consumer's certificate of exemption number.

Who had to receive the vendor invoice? The governmental entity rather than the contractor.

When did the county need title and liability? From delivery to the job site until the materials were incorporated into real property.

Why did insurance matter? Assumption of risk of loss was a paramount consideration; the ruling said the government should buy or be the insured party under coverage for the building materials.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 07A-001

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 provided do not meet the legal requirement for
the County to purchase the materials tax exempt. The procedures do not contain the following
necessary provisions:

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 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 provisions meet only one of the requirements to make a tax exempt purchases – the provision
   indicate that County will issue payment directly to the vendor.

February 12, 2007
Re:
Technical Assistance Advisement 07A-001
Sales and Use Tax – Public Works Contract
Section: 212.08, F.S.
Rules: 12A-1.038, 12A-1.051, 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
FEI: XX

Dear
This letter is a response to your petition dated December 8, 2006, but mailed on December 21,
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

Technical Assistance Advisement
Page 2

response to your request constitutes a TAA and is issued to you under the authority of s. 213.22,
F.S.
Facts
XXX and XXX have entered into a Unit Price XXX Contract (the "Agreement"), pursuant to which
Contractor is engaged to construct a new XXX (the "Project").
County is entitled to make purchases without paying Florida sales and use tax under a consumer's
certificate of exemption. To take advantage of the County's exemption, Exhibit G, Article 23, was
incorporated into the Agreement. Article 23, which is entitled "Materials Direct Purchasing
Procedures" (the "Procedures"), provides detailed procedures for the direct purchasing program.
The Procedures provide as follows:

1. The County has identified “structures” and “reinforced XXX” as potential direct
   purchase items.
2. Contractor shall furnish detailed Direct Purchase Order Requisitions ("Requisitions") for
   all County purchased materials on the form provided by County.
3. The Requisition will be routed to County for processing.
4. Upon delivery to the jobsite, the XXX Project Manager and the Contractor will approve
   the vendor’s invoice for payment. The Contractor (or subcontractor) will accept
   responsibility for the materials.
5. County will issue a check for the approved invoice amount directly to the supplier.
   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.

Technical Assistance Advisement
Page 3

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:

Technical Assistance Advisement
Page 4

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

Technical Assistance Advisement
Page 5

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.
   Article 23 does not satisfy the foregoing requirements for exemption of transactions as sales to a
   governmental entity. The only requirement that the contract documents submitted meets is that
   County will issue payment for the materials directly to the supplier.
   The contract documents submitted imply that County may be issuing purchase orders to the
   supplier, but it is not expressly stated in the documents submitted.
   The contract documents submitted neither express nor imply that County will acquire title to the
   materials directly from the supplier at the time the materials are delivered to the jobsite.
   The contract documents submitted neither express nor imply that the supplier is required to directly
   invoice County for the materials.
   The contract documents submitted imply that Contractor, and not County, will assume liability for
   the materials at the time that they are delivered to the jobsite.
   Based upon the conclusion that County is not the purchaser, all purchases of materials that are
   made in accordance with the Procedures will be subject to sales tax.

Technical Assistance Advisement
Page 6

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 #27510