Could a school board buy roofing materials tax-exempt under its construction contract's direct-purchase procedures?

Plain-English summary

A Florida school board amended its contract for a high-school re-roofing project to buy selected materials directly. Florida approved the program because the school board was the purchaser in substance as well as form.

The board would issue purchase orders with its consumer's certificate of exemption, receive invoices, pay vendors directly, and take legal and equitable title when materials reached the job site. It also reimbursed the contractor for builder's risk premiums and was the insured party entitled to proceeds, establishing that it bore the risk of loss before installation.

The ruling excluded materials manufactured or fabricated by the contractor or subcontractors. If the contractor fabricated roof parts at its shop or plant, the school board could not buy those articles through the exempt program; the fabricator owed use tax on full fabricated cost.

What this means for you

Keep purchase orders, invoices, payment, title, and risk of loss with the governmental entity, and provide each vendor a valid exemption certificate at purchase. Contract language and actual performance must consistently make the government—not the contractor—the buyer.

Common questions

Did the school board's procedure qualify? Yes, for purchases following the reviewed documents.

Why did insurance matter? It showed the board bore the economic risk while materials awaited installation.

Could shop-fabricated roofing enter the program? No. The contractor would owe use tax on its fabricated cost.

Citations and references

• Fla. Stat. § 212.08(6) and Fla. Admin. Code rr. 12A-1.038 and 12A-1.094, as quoted and applied in the advisement
• Fla. Admin. Code r. 12A-1.051(10) (contractor-manufactured materials)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-018

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 School Board to purchase the
materials tax exempt?
ANSWER - Based on Facts Below: The procedures meet the legal requirement for the School
Board to purchase the materials tax exempt as long as the controlling documents provide:

1. The School Board issues its own purchase orders directly to the vendors for the materials it
   wishes to purchase.
2. The purchase orders include the School Board’s Consumer's Certificate of Exemption
   number and the School Board will supply a copy of the Consumer's Certificate of Exemption
   to the vendor.
3. The vendors invoice the School Board directly for the materials.
4. The School Board must directly pay the vendors for the materials purchased.
5. The School Board takes title to the materials from the vendor and assumes liability for the
   materials when they are delivered to the job site.
6. The School Board assumes risk of loss for the materials upon delivery, which his clearly
   established by the requirement in the controlling documents that the School Board reimburse
   the contractor for premiums paid for insurance against loss or damage and the School Board is
   named as the insured party to receive proceeds in case of loss of the items purchased tax
   exempt.
7. The remaining terms of the documents do not prevent the conclusion that the School Board
   rather than the contractor is in substance as well as form the purchaser of the materials.
   June 24, 2008
   XXX
   Re:

Technical Assistance Advisement 08A-018
Public Works Contract
Section: 212.08, F.S.
Rules: 12A-1.038, 12A-1.094, F.A.C.
Petitioner: XXX (herein "School Board")
FEI: XXX

Technical Assistance Advisement
Page 2

Dear XXX:
This letter is a response to your petition dated May 8, 2008, 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 Section 213.22, Florida Statutes.
Facts
On XXX, the School Board and Contractor entered into a Standard Form Contract between School
Board and Contractor (the "Agreement"), pursuant to which Contractor was engaged to re-roof a
high school (the "Project").
School Board is entitled to make purchases without paying Florida sales and use tax under a
consumer's certificate of exemption. To take advantage of the School Board's exemption, an
Amendment was made to the Agreement, which provides for incorporation of Exhibits A & B into
the Agreement. Exhibit A to the Amendment is entitled "Sales Tax Exempt Guidelines" and Exhibit
B is entitled “[School Board] Purchased Materials” (collectively, the "Procedures"). The
Procedures provide detailed procedures for the direct purchasing program. The Procedures provide
as follows:

1. School Board will issue its own purchase order directly to the vendor of the materials it
   wishes to purchase.
2. Vendor’s invoices will be issued directly to the School Board.
3. School Board will directly pay vendor for the purchase of the materials.
4. School Board will take title to the materials upon delivery to the job site.
5. Contractor will purchase builder's risk insurance sufficient to cover School Board
   purchased materials. School Board will be named as an Additional Insured Party on such
   policy.
   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

Technical Assistance Advisement
Page 3

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), Florida Statutes, 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

Technical Assistance Advisement
Page 4

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

Technical Assistance Advisement
Page 5

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 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 Procedures appear to satisfy the foregoing requirements for exemption of transactions as sales
   to a governmental entity. School Board will make direct purchases of various construction
   materials. After receiving requisition forms from the contractors, School Board will prepare
   purchase orders for direct purchases. After receiving the approved invoices from Construction
   Manager, School Board will pay the vendors directly. School Board will retain legal, and equitable,
   title to all materials it purchases, will be responsible for the cost of builder's risk insurance on those
   materials as a reimbursable cost under the Agreements, and will be a named insured party on the
   builder's risk policy.

Technical Assistance Advisement
Page 6

Based upon the conclusion that School Board is the purchaser, all purchases of materials that are
made in accordance with the Procedures will be exempt from sales tax. However, 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), F.A.C. If Contractor is fabricating the
roof parts at its shop or plant, School Board will not be able to purchase the materials using its tax
exempt status. The Contractor will owe use tax on its fabricated cost of the materials (roof).
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 Section 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
Senior Tax Specialist
Technical Assistance and Dispute Resolution

Control # 45857