Could a Florida water authority buy construction materials tax-free through its owner-direct-purchase procedures?

Plain-English summary

A Florida water authority planned an owner-direct-purchase program for materials used to expand a public water-treatment facility. Florida approved the authority's direct purchases from suppliers as exempt when the authority, rather than the contractor, was the purchaser in both substance and form.

The controlling documents had to require the authority to issue purchase orders bearing its consumer's exemption number, receive invoices directly, pay vendors directly, take title and liability at delivery to the job site, and bear the risk of loss until the materials became real property. Builder's-risk coverage naming the authority as an insured supported the risk-of-loss requirement.

The answer did not cover purchases involving the proposed resale-certificate holder because the ruling said there was not enough information about its relationship with the authority and contractors. It also excluded contractor-manufactured or fabricated materials from the approved direct-purchase result.

What this means for you

Calling a program an owner-direct purchase is not enough. The government entity must actually control the purchase, invoice, payment, title, and pre-installation risk. Other contract terms cannot undermine the conclusion that the government, not the contractor, is the real purchaser.

Common questions

Could the water authority buy materials directly from suppliers without sales tax? Yes, if the stated requirements and controlling contract terms were followed.

Could the contractor prepare or present the purchase order? The authority had to execute the purchase order in its own name with its exemption number; the contractor could present that order to the vendor.

Who had to receive the invoice and pay the vendor? The authority had to be invoiced directly and make payment directly from public funds.

Who bore the risk before installation? The authority, supported by its acquisition of insurance or status as the insured party for the materials.

Did the ruling approve transactions through the resale-certificate holder? No determination was made because the source says the relevant relationships were not sufficiently developed.

Citations and references

• Fla. Stat. § 212.08(6) (governmental sales-tax exemption and public-works contractor limitation)
• Fla. Admin. Code r. 12A-1.038(4) (documentation and direct payment for governmental purchases)
• Fla. Admin. Code r. 12A-1.094(2)-(5) (public-works materials and direct-purchase criteria)
• Fla. Admin. Code r. 12A-1.051(10) (contractor-manufactured or fabricated materials)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-002

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 Water Authority to purchase the
materials tax exempt?
ANSWER: The procedures meet the legal requirement for the Water Authority to purchase the
materials directly from Vendors 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.
   With respect to the transactions involving the Resale Certificate Holder, please note that not
   enough information is known about the relationship between the Resale Certificate Holder, Water
   Authority, and Contractors. Therefore, this TAA does not address the Resale Certificate Holder.
   January 16, 2008
   XXX
   Re:

Technical Assistance Advisement 08A-002
Sales and Use Tax – Public Works Contracts
Section: 212.08(6), Florida Statutes
Rule: 12A-1.094, Florida Administrative Code
Petitioner: XXX
FEI: XXX

Dear XXX:
This letter is a response to your petition dated October 17, 2007, 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

Technical Assistance Advisement
Page 2

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.

PRESENTED FACTS
The petition sets forth the following information:
XXX is a special district of the State of Florida and a regional water supply authority
establish by interlocal agreement . . . . Since XXX, it has been the sole and exclusive
wholesale supplier of potable water to [several Florida] cities . . . and [several Florida]
counties . . . , commonly referred to as the member governments. The water supplied by
XXX to the member governments meets the needs of over 2.4 million residents for drinking
water, as well as the water needs for businesses, fire control, and hospital services. . . .
Water supply sources utilized by XXX to meet the drinking water needs of its member
governments are regulated by . . . Water Management District. The District has

Technical Assistance Advisement
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required XXX to reduce its historic reliance on ground water and develop alternative
sources consisting primarily of surface water. In order to utilize surface water for potable
supply, XXX had to construct a regional surface water treatment plant, and in March 2000,
XXX entered into a contract with XXX to construct and then operate a regional surface
water treatment plant with an initial capacity of 66 million gallons per day on land
purchased by XXX in . . . County. The plant was constructed and placed into operation in
2002 and is known as the XXX. To date, the original contract for construction and
operation of this plant has been amended ten times to, among other things, increase the
treatment capacity of the plant to 72 and then to 120 million gallons per day, to adjust
treatment requirements, and to revise penalties available for failure of performance. On
XXX, the XXX Board of Directors approved the Eleventh Amendment to this contract
which seeks to establish an owner direct purchase program utilizing XXX governmental
sales tax exemption . . . .
The Tenth Amendment to the contract pertaining to the XXX Treatment Plant was executed
on XXX, and provides for expansion of the firm treatment capacity of the plant to 99
million gallons per day average day (sic), with a maximum permitted capacity of 120
million gallons per day. In addition to XXX, the other parties to this amendment are XXX.
...
Since the execution of the Tenth Amendment, XXX and XXX have negotiated the terms of
the Eleventh Amendment . . ., which seeks to implement an owner direct purchase program
in order to utilize XXX sales tax exemption. . . .
The Section 3 of the Eleventh Amendment provides detailed procedures [the “Procedures”] for the
direct purchasing program. The Procedures provide as follows:
(a) XXX shall execute and issue all purchase orders directly to Suppliers or to a Resale
Certificate Holder and shall provide Suppliers or Resale Certificate Holder with a copy
of its Florida Consumer’s [Certificate] of Exemption. . . .
(b) . . . XXX may assign to XXX all contract and warranty rights XXX may have against
such Supplier in order to permit the XXX to assert warranty or contract claims for
defective or nonconforming materials or equipment directly against the Supplier.
(c) When a Resale Certificate Holder is not involved in the purchase of Supplies,
Suppliers shall directly invoice XXX for such Supplies and XXX shall pay Suppliers
directly. XXX acquires title for all Supplies upon Supplier’s delivery of such Supplies
to the Facility . . . .
(d) When a Resale Certificate Holder is utilized by XXX in the purchase of Supplies,
Suppliers shall directly invoice the Resale Certificate Holder for such Supplies which
shall be resold to XXX upon payment by XXX directly to the Resale Certificate
Holder. XXX acquires title for all Supplies upon delivery of such Supplies to the
Facility . . . .
(e) The parties acknowledge that XXX assumes the risk of damage or loss at the time of
purchase of Supplies for the Facility Modification Work by XXX directly or by the
Resale Certificate Holder selected by [XXX. XXX] shall arrange for the purchase of
Builder’s Risk insurance which shall include coverage for Supplies purchased by XXX

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under the Program. . . . XXX shall be named as an Additional Insured under the
Builder’s Risk insurance coverage. . . .
Section 2 of the Eleventh Amendment defines the “Resale Certificate Holder” as follows:
“Resale Certificate Holder” means any person, company, business or other entity that: (i) is
not a public works contractor under the Agreement; and (ii) is an active registered dealer
with a currently valid Florida Certificate of Registration (Form DR-11) which is authorized
to furnish its Florida Annual Resale Certificate for Sales Tax (Form DR-13) to Suppliers for
the purchase of Tangible Personal Property; but (iii) does not perform the Facility
Modification Work and does not incorporate or install such Supplies into the Facility. A
Resale Certificate Holder shall be selected and utilized by XXX only if acceptable to the
XXX and upon request of the XXX.

REQUESTED ADVISEMENT
Advice is requested whether the Procedures are sufficient for XXX to take advantage of its tax
exempt status on the purchase of materials for incorporation into the public work.

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:

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(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.

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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.

Technical Assistance Advisement
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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.
   The Procedures do satisfy the foregoing requirements for exemption of transactions as sales to a
   governmental entity with respect to transactions with the Supplier. XXX will make direct
   purchases of various construction materials. XXX will issue its purchase orders directly to the
   vendor of materials. Vendor will issue its invoice directly to XXX. XXX will make payment
   directly to the vendors. XXX will retain legal, and equitable, title to all materials it purchases, and
   it will assume the risk of loss of the materials and maintain builder’s risk insurance against such
   loss.
   Based upon the conclusion that XXX is the purchaser in transactions directly with the Supplier, all
   purchases of materials from the Supplier that are made by the XXX in accordance with the
   Procedures 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. Transactions involving the
   Resale Certificate Holder are not exempt from tax.
   With respect to the transactions involving the Resale Certificate Holder, please note that not
   enough information is known about the relationship between the Resale Certificate Holder, XXX,
   and XXX. Therefore, this TAA does not address the Resale Certificate Holder.
   This response is predicated on the understanding that the remaining terms of the contract do not
   prevent the conclusion that XXX, rather than the 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

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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 10 days of the date of this
letter.

Sincerely,

Sara D. Faulkenberry
Senior Tax Specialist
Technical Assistance and Dispute Resolution

Control #XXX