Did a county's project manual create a qualifying tax-exempt direct-purchase program for construction materials?

Plain-English summary

A Florida county included an owner-direct-purchase procedure in a five-volume project manual. The program applied only to supplies, equipment, appliances, and materials bought from third-party vendors, not to purchases from the contractors or subcontractors performing construction services.

The Department approved the procedure. Although the contractor selected vendors, determined quantities, negotiated terms, coordinated delivery, inspected goods, managed warranties, stored materials, and prepared requisitions and draft purchase orders, the county retained the five functions that established the true purchaser:

1. The county approved, executed, and issued the purchase orders using its exemption.
2. Vendors invoiced the county directly.
3. The county paid vendors directly.
4. Title passed to the county at F.O.B. job-site delivery and remained with it while the contractor held the goods as bailee.
5. Insurance covered the county-owned materials after delivery, with the county named as an additional insured or beneficiary.

The contract price was reduced through deductive work orders for materials the county purchased. The contractor remained responsible for receipt, inspection, coordination, storage, protection, defects, warranty administration, and negligence after delivery without becoming the owner.

Contractor- and subcontractor-manufactured items could not be included. Those fabricators remained the ultimate consumers and owed use tax on their full fabricated costs.

What this means for you

Direct purchase does not require the government to manage logistics

The contractor may do extensive procurement coordination. The government must still control the legal purchase, payment, title, and economic risk.

Limit the program to genuine vendor purchases

This county expressly excluded materials bought from the construction contractors themselves. That reinforced the distinction between owner purchases and taxable contractor consumption.

Use deductive change orders consistently

Removing the owner-purchased amount from the construction contract helps show that the contractor did not buy and resell the material to the county.

Bailment preserves government title during contractor custody

The contractor could unload, store, inspect, and protect the goods while the county remained owner from delivery through incorporation.

Common questions

Q: Did the county's program qualify?
A: Yes. The project manual satisfied the five direct-purchase criteria and contained no conflicting provisions identified by the Department.

Q: Could the contractor choose vendors and negotiate terms?
A: Yes, while the county still executed the purchase order, was invoiced, paid directly, held title, and bore the insured risk.

Q: Could the county buy fabricated items from the contractor through this program?
A: No. Contractor- and subcontractor-fabricated items remained taxable to the fabricator.

Q: Who held the materials after delivery?
A: The county owned them; the contractor possessed them as bailee and had to safeguard them.

Citations and references

• Fla. Stat. § 212.08(6) (government purchases and public-works contractor exclusion)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)
• Fla. Admin. Code r. 12A-1.038(4) (government exemption documentation and payment)
• Fla. Admin. Code r. 12A-1.094(1)-(5) (public-works direct-purchase criteria)
• Fla. Admin. Code r. 12A-1.051(10) (contractor-manufactured materials)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-024

Original ruling text

SUMMARY
QUESTION:
Are the procedures and contract provided sufficient to allow County to take advantage of its tax
exempt status on the purchase of materials for use in a real property construction contract?
ANSWER:
The procedures and contract provided meet the legal requirement for the County to purchase
materials tax exempt for incorporation into real property construction.
The County is directly issuing the purchase order to the suppliers, is receiving the invoice directly
from the suppliers, and is directly paying said suppliers. The title to the property is passing directly
to the County at the time of delivery and the County is assuming the risk of loss.
September 17, 2008
XXX
Re:

Technical Assistance Advisement 08A-024
Sales and Use Tax – Public Works Contract
Section: 212.08(6), F.S.
Rules: 12A-1.038, 12A-1.094, F.A.C.
Petitioner: XXX [hereinafter “County”]

Dear XXX:
This letter is a response to your petition dated June 9, 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, 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.
ISSUE
Whether the provisions contained in the Project Manual are sufficient to allow County to take
advantage of its tax-exempt status on the purchase of materials for use in a public works contract.
PRESENTED FACTS
The petition sets forth the following information:
By means of this letter I am requesting a Technical Assistance Advisement concerning
direct purchase of materials, supplies and equipment by [County] for the construction of
[Project]. The direct purchase procedure will be used exclusively for purchase of supplies,

Technical Assistance Advisement
Page 2 of 8
goods, equipment, appliances and other materials from third party suppliers and not from
contractors or subcontractors providing construction services for the Project. . . .
Provided with this letter is a copy of the final draft of the entire Project Manual for the
project (5 volumes); Appendix A “Owner Direct Material Purchases” of Specifications
contains Owner purchase provisions of the project . . . .
The Project Manual in relevant part states:
1.01 REQUIREMENTS INCLUDED
A. The Owner, being exempt from Sales and Use Tax, may elect to directly purchase certain
items on this Project for the purpose of realizing a Sales and Use Tax savings. The
Contractor shall remain fully responsible for choosing vendors, determining quantities,
coordinating delivery, scheduling purchases and deliveries, unloading the items, on-site
storage, and all other normal practices for a construction project. If this option is elected, the
Owner will execute a purchase order with the vendors to purchase the items directly, without
Sales and Use Tax, for items determined by the Contractor and Owner to be suitable for
purchase under this program. A general list of items that may be directly purchased via the
method outlined herein is included below. Items may be added to or deducted from this list.
A minimum purchase threshold of $XXX will be maintained for all purchases to be made
under this system. The Contractor shall carry the cost of a person or persons necessary to
coordinate this purchasing process with the Owner as part of this base bid. . . .
3.01 PROCEDURES
A. A copy of the standard [County] Purchase Order (see sample copy) is included herein for
reference. The Contractor shall execute or shall direct his Sub-contractors to execute a
standard Purchase Order Requisition Form, to specifically identify the materials, which the
Owner will purchase directly. Any specific terms negotiated with the vendor i.e. payment
terms, warranties, retainage, etc., shall be noted on this form. After approval of the Purchase
Requisition Form by the Owner, the Contractor shall prepare a Purchase Order for the items
identified in Section 2.01 of this Appendix, for the Owner's signature. Pursuant to the
Purchase Order, the vendor shall provide the required quantity of materials at the price
established in the vendor's quote to the Sub-contractor or Contractor, less the Sales and Use
Tax associated with such price. Promptly upon receipt of the Purchase Order, the Contractor
shall verify the Terms and Conditions of the Purchase Order, prior to its issuance to the
Vendor. The Purchase Order shall require the Vendor to bear the risk of lost until delivery
F.O.B. (free on board) jobsite. It shall also require the delivery of the items purchased on the
date specified by the Contractor or Sub-contractor in the Purchase Order Requisition Form,
and shall indicate F.O.B. job site. All vendors will be required to comply with the terms of
the Purchase Order, including having a valid vendor number. In addition, all vendors must
comply with the requirements to become a registered vendor as outlined in the County's
Department of Procurement Management's Business Entity Registration Application and all
applicable legislation, including the relevant affidavits. Refer to the Bid documents for
complete instructions.

Technical Assistance Advisement
Page 3 of 8
B. Simultaneously, upon completion of each purchase a deduct work order will be executed
with the Contractor against the lump sum contract amount for the full amount of the
purchase, excluding any amount of Florida Sales and Use Tax that would have been
applicable to the purchase. The Florida Sales and Use Tax savings have been prepaid to the
Owner by the Contractor in the Negotiated Phase I price.
C. The Contractor shall be fully responsible and/or shall direct the applicable Subcontractors to be fully responsible for all matters related to the receipt of the materials
furnished by the Owner under this program, including but not limited to, verifying correct
quantities, coordinating purchases, providing and obtaining all warranties required by the
Contract Documents, inspection and acceptance of the goods at the time of delivery and any
negligence by the Contractor or its agents which results in loss or damage to equipment or
materials following acceptance by the Owner. The Contractor shall coordinate and shall
direct his Sub-contractor (if applicable) to coordinate delivery schedules, sequence of
delivery, loading orientation, and other arrangements normally required by the Contractor
for the particular materials furnished. The Contractor shall unload the materials and provide
storage and protection of the goods through installation. The Contractor agrees to indemnify
and hold harmless the Owner from any and all claims of whatever nature resulting from nonpayment to suppliers arising from the actions or directions of the Contractor. As Owner
purchased materials are delivered to the job site, the Contractor shall visually inspect all
shipments and approve review the vendor's invoice for material delivered. The Contractor
shall furnish to the Owner documentation such as a delivery ticket to identify the Purchase
Order against which the purchase is made. The Owner will assign purchasing staff to verify
and audit the accuracy of all Direct Purchase documents.

1. The Contractor shall ensure and/or direct the applicable Sub-contractors, suppliers
   and/or vendors to directly invoice the Owner for payment on the items that the
   Owner purchases directly.
   D. The Contractor shall ensure that the directly purchased materials conform to the
   Specifications and Drawings, determine prior to incorporation into the work whether they
   are patently defective, and whether the materials are identical to the materials ordered and
   match the description on the Bill of Lading. If the Contractor or a Subcontractor discovers
   defective or non-conformities in the Owner Purchased material upon such visual inspection,
   the Contractor shall not utilize or shall direct his Sub-contractor to not utilize such nonconforming or defective materials in the Work and instead shall promptly notify the Vendor
   of the defective or non-conforming condition in order to pursue repair or replacement of
   those materials without any undue delay or interruption to the Project. Additionally, the
   Contractor shall direct his Sub-contractor to notify the Owner, through the Contractor, of
   such occurrence. If the Sub-contractor fails to perform such inspection and otherwise
   incorporates Owner Purchased materials, the conditions of which it either knew or should
   have known by performance of an inspection, the Contractor shall be responsible for
   correcting the affected Work and shall not be entitled to seek a Delay to the Work, whether
   Compensable or Non-Compensable.

Technical Assistance Advisement
Page 4 of 8
E. The Contractor shall maintain records of all Owner Purchased materials.
F. The Contractor shall be responsible for obtaining and managing all warranties and
guarantees for all materials and products as required by the Contract Documents. All repairs,
maintenance or damage repair calls shall be forwarded to the Contractor for resolution with
the appropriate supplier or vendor.
G. Notwithstanding the transfer of Owner Purchased materials by the Owner to the
Contractor's possession, the Owner shall retain title to any and all Owner Purchased
materials.
H. The transfer of possession of Owner Purchased materials from the Owner to the
Contractor shall constitute a bailment of mutual benefit of the Owner and the Contractor.
The Owner shall be considered the bailer and the Contractor the bailee of the Owner
Purchased material. Owner Purchased materials shall be considered returned to the Owner
for purpose 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 Owner Purchase materials.
I. The Contractor shall purchase and maintain insurance pursuant to the requirements set
forth in the Owner and Contractor Agreement which shall be sufficient to protect against
any loss or damage to Owner Purchased equipment, materials, or supplies after materials
and supplies are delivered on site. Such insurance shall cover the value of any Owner
Purchased materials not yet incorporated in the Project from the time the Owner first takes
title. Such insurance shall name the Owner as an additional insured party.
J. On a monthly basis, the Contractor shall be required to review invoices submitted by all
suppliers of Owner Purchased materials delivered to the Project site during that month and
whether it concurs or objects to Owner issuance of payment to the suppliers, based upon
Contractor's records of materials delivered to the site and defects in such materials.
K. In order to arrange for prompt payment to the supplier, the Contractor shall provide to
the Owner, a list indicating the acceptance of the goods or materials in accordance with the
established monthly payment request schedule. The list shall include a copy of the
applicable purchase order; invoices, delivery tickets, written acceptance of delivered items
and such other documentation as may be reasonably required by the Owner. Upon receipt
and verification of the appropriate documentation, the Owner 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. The Contractor agrees to assist the Owner to
immediately obtain partial or final release of lien waivers as appropriate.
L. The provisions of the XXX and the XXX goals for Phase I of this contract shall be as
included in ITP Section 3.12 MDAD 04-04. The XXX participation goals apply to the
complete contract award amount including the Owner Purchases as outlined in this Section.
To the extent they are incorporated into the Work by XXX or they are purchases in regard to
which XXX perform a commercially useful function, they shall be reported as contributing

Technical Assistance Advisement
Page 5 of 8
to the participation goals. (Emphasis added).
LAW AND DISCUSSION
Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6), F.S., 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 . . . .
Rule 12A-1.038(4), F.A.C., 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), F.S., 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, F.A.C.,
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.

Technical Assistance Advisement
Page 6 of 8
(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
   added)
   Rule 12A-1.038(4)(b), F.A.C., 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

Technical Assistance Advisement
Page 7 of 8
by the . . . political subdivision of a state. . . ." Rule 12A-1.094(2) and (3), F.A.C., state that
purchases of materials for public works contracts are 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, F.A.C.
Rule 12A-1.094(4), F.A.C., 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.
   In this case, the procedures outlined in the Project Manual clearly indicate that:
   1) Purchase orders shall be executed by the County,
   2) Title shall pass to the County upon the merchandise arriving at the job site F.O.B.,
   3) The suppliers shall be required to invoice “County” directly,
   4) Payments shall be made directly by County to vendors, and
   5) The County has assumed all risk of damage or loss of the supplies, as is indicated by County
   being a named beneficiary on the insurance obtained by builder

Technical Assistance Advisement
Page 8 of 8

CONCLUSION
The procedures outlined in County's Project Manual are in compliance with the direct purchase
procedures set forth in Rule 12A-1.094(4), F.A.C. Since these provisions are incorporated into the
contract for the project, and no other contract provisions conflict, the County is able to take
advantage of its tax-exempt status for the purchase of materials to be incorporated into the project.
Please be advised that, as specified in Rule 12A-1.094(5), F.A.C., contractors, including
subcontractors, that manufacture or fabricate their own materials for installation in the project
cannot be included in a governmental entity's direct purchase program. 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.
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,

Kama D. S. Monroe
Senior Attorney
Technical Assistance and Dispute Resolution
Control # 46667