Did a county's proposed direct-purchase procedure make construction-material sales exempt for a Florida public works project?

Plain-English summary

A Florida county proposed to buy materials directly for a construction project instead of allowing its contractor to purchase them. The contractor would negotiate vendor terms and prepare requisitions, but the county would turn each requisition into its own purchase order and deal directly with the vendor for invoicing and payment.

The Department approved the arrangement, provided the reviewed terms were incorporated into the final contract and no other terms conflicted. The county satisfied all five factors used to distinguish an exempt direct government purchase from a taxable contractor purchase:

1. The county would issue the purchase order.
2. The vendor would invoice the county directly.
3. The county would pay the vendor directly by ACH or check.
4. The county would take and retain title when the materials arrived at the job site.
5. The county would bear the risk of loss: builder's-risk coverage would protect the materials, name the county as an additional insured, and pay the county any claim proceeds.

The contractor could hold and oversee the materials after delivery without becoming their owner. The substance of the transaction remained a direct purchase by the county under section 212.08(6) and Rule 12A-1.094.

The ruling excluded items manufactured or fabricated by the contractor or subcontractors. Those businesses remained the ultimate consumers of their fabricated articles and owed use tax on the full cost under the cited rules.

What this means for you

A requisition from the contractor is not the purchase order

The contractor could specify materials and negotiate pricing, delivery, payment, warranties, retainage, and F.O.B. terms. The county still had to issue the actual purchase order to the awarded vendor for the exemption to apply.

Direct invoicing and payment are indispensable

Invoices had to name and go to the county, and the county's finance department had to remit payment directly to the vendor. Reimbursing the contractor would not match the approved structure.

Insurance must give the county the economic protection

The contractor arranged the builder's-risk policy on the county's behalf, but the policy named the county as an additional insured and directed claim proceeds to it. That supported the county's assumption of risk from delivery until incorporation.

Contractor-fabricated materials stay taxable

The county could directly purchase vendor-supplied materials, but it could not place articles made by the contractor or a subcontractor into the same exempt program.

Common questions

Q: Did the county's direct-purchase plan qualify for exemption?
A: Yes, subject to the final contract preserving the reviewed provisions and containing no conflicting language.

Q: Could the contractor negotiate with vendors?
A: Yes. The contractor could negotiate and prepare requisitions, while the county remained responsible for the purchase order, invoice, payment, title, and risk of loss.

Q: Who received insurance proceeds if materials were lost or damaged?
A: The county was an additional insured and would receive proceeds related to claims on owner-purchased materials.

Q: Could subcontractor-fabricated items be bought tax-exempt through the plan?
A: No. The ruling says contractor- and subcontractor-fabricated materials cannot be included in a governmental direct-purchase program.

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 direct payment)
• Fla. Admin. Code r. 12A-1.094(1)-(5) (public-works materials and direct-purchase criteria)
• Fla. Admin. Code r. 12A-1.051(10) (contractor-manufactured materials)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-015

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 public works contract?
ANSWER:
The procedures and contract provided meet the legal requirement for the County to purchase
materials tax exempt for incorporation into a public works contract.
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.
April 2, 2009
XXX
Re:

Technical Assistance Advisement 09A-015
Sales and Use Tax – Public Works Contract
Section: 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.038, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner: XXX

XXX:
This letter is a response to your petition dated February 11, 2009, 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 Section 213.22, F.S.
ISSUE
Whether the provisions contained in Exhibit J of the Construction Administration Agreement are
sufficient to allow XXX to take advantage of its tax-exempt status on the purchase of materials for
use in a public works contract.

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PRESENTED FACTS
The petition states that you are anticipating entering into a contract for a XXX Construction Project.
A contract has been drawn up to cover that project, and you ask if the direct purchase procedures
outlined in said contract are sufficient to allow XXX to use its consumer’s certificate of exemption to
procure materials for incorporation into the public works contract.
Attached to your request was Exhibit J, which is a part of the proposed Construction Administration
Agreement. Exhibit J was modified by your office and the changes to Exhibit J were e-mailed to the
Department on XXX, 2009. As modified, Section 3.01 of Exhibit J provides in relevant part:

A. The [Contractor] shall execute or cause to be executed a Requisition, clearly specifying the
materials that [XXX] will purchase directly under this process. All material terms negotiated
by the [Contractor] with the vendor (i.e., pricing, delivery date, payment terms, warranties,
retainage, FOB), as more specifically described throughout this Exhibit J, shall be noted on
the Requisition. [XXX] shall, within five (5) Business Days of receipt of the Requisition,
prepare its Purchase Order for the items and the terms listed on the Requisition. [XXX] shall
deliver such Purchase Order to the awarded vendor with a copy to the [Contractor]. . . .
D. Notwithstanding the transfer of Owner Purchased Materials by [XXX] to [Contractor’s]
possession, [XXX] shall retain title to any and all Owner Purchased Materials. Retaining of
such title by [XXX] shall not relieve the [Contractor] of the responsibility for oversight of the
Owner Purchased Materials.
E. [Contractor] shall, on [XXX’s] behalf, purchase and maintain, or cause to be purchased and
maintained, builder’s risk insurance pursuant to the requirements set forth in the Construction
Administration Agreement. Such insurance shall in an amount sufficient to cover the
replacement cost of the Owner Purchased Materials and shall protect against loss or damage
to the Owner Purchased Materials from the moment [XXX] gains title of such material upon
delivery to the job site until such time as Owner Purchased Materials are incorporated into the
Work and are accepted. [XXX] shall be named as an additional insured on the policy and shall
receive any proceeds related to any claims on the Owner Purchased Materials. . . .
M. Accurate and current invoices shall be submitted by the vendor(s) when the correct
material is received. Original invoices are to be sent to [XXX] and to the [Contractor] with
[XXX] shown as the entity being invoiced. It is the policy of [XXX] that payment for all
purchases by [XXX] shall be made in a timely manner and that interest payments be made on
late payments. [XXX] shall not be held liable for costs associated with any interest payments
or any delay charges for late payments made as a result of instructions, directions or late
approvals by the [Contractor]. All payments due from [XXX] and not made within the time
specified by this section shall bear interest on the unpaid balance from thirty (30) days after
the due date at the rate of one percent (1%). . . .

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P. [XXX] will assign a [XXX] employee, [known as Administrator] to verify and audit the
accuracy of the documentation relating to Owner Purchased Materials. Within seven (7)
Business Days of receipt of the invoice including the above-referenced documents, the
[Administrator] will determine whether the invoice is payable and prepare a voucher for
approval and submission to [XXX’s] Finance Department. [XXX’s] Finance Department shall
release an ACH payment or prepare and release a check drawn to the vendor based upon the
receipt of data provided. This ACH payment or check shall be released and remitted directly
to the vendor. [XXX] shall have twenty five (25) calendar days to process invoices beginning
on the date the XXX receives a proper invoice for goods received that has been authorized for
payment by the [Contractor]. [XXX] shall provide the [Contractor] a monthly

report as to the amount, date, payee and check number/ACH confirmation number, as
applicable, of all such direct payments to vendors
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

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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.

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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. (emphasis added)
   (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. . . .
   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
   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:
6. 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;

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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 until the time it is incorporated
   as real property;
3. Vendors must directly invoice the governmental entity for tangible personal property;
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 tangible personal property.
   In this case, the procedures outlined in “Exhibit J” clearly indicate that:
   1.
   2.
   3.
   4.
   5.

Purchase orders shall be executed by the XXX;
Title shall pass to the XXX upon the merchandise arriving at the job site;
The suppliers shall be required to invoice the XXX directly;
Payments shall be made directly by XXX to vendors; and
The XXX has assumed all risk of damage or loss of the supplies, as is indicated by XXX
being named as an insured party on the insurance on the supplies.
CONCLUSION

The procedures outlined in the documents provided are in compliance with the direct purchase
procedures set forth in Rule 12A-1.094(4), F.A.C. Provided that these provisions are incorporated
into the final contract for the project, and no other contract provisions conflict, the XXX will be 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, 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
Section 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort to

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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 # 59188