Did a Florida county's proposed courthouse direct-purchase procedures qualify construction materials for the governmental sales-tax exemption?

Plain-English summary

The county's proposed courthouse procedures satisfied several direct-purchase factors: the county would issue purchase orders and payments directly to vendors, take title when materials reached the job site, and insure against loss or damage.

The procedures nevertheless failed as presented. Vendors were directed to send original invoices to the contractor with only copies to the county, leaving direct county invoicing unclear. The procedures also did not require Certificates of Entitlement to be issued to vendors.

Because every factor had to establish the county as the actual purchaser, those omissions prevented the governmental sales-tax exemption. Contractor-manufactured or fabricated materials also could not enter a direct-purchase program.

What this means for you

Substantial compliance is not enough for a public-works direct-purchase plan. Purchase orders, invoices, payments, title, risk, insurance, and certificates should all consistently identify the governmental entity as purchaser.

Common questions

What requirements did the county satisfy? Direct ordering and payment, title upon delivery, and risk-of-loss insurance.

What was missing? Clear direct vendor invoicing to the county and Certificates of Entitlement.

Did the Department approve the plan? No.

Citations and references

• Fla. Stat. § 212.08(6) and Fla. Admin. Code rr. 12A-1.038, 12A-1.094, and 12A-1.051(10), as cited in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 12A-002

Original ruling text

SUMMARY

QUESTION: whether the provisions contained in the contract provided are sufficient to
allow the county to take advantage of its tax-exempt status on the purchase of materials
for use in a public works contract.
ANSWER: the county’s procedures do not satisfy the foregoing requirements for
exemption of transactions as sales to a governmental entity. the county will issue its own
purchase orders directly to the vendor of the materials, and it will issue payment for the
materials directly to the vendor. the county also assumes title to the materials at the time
they are delivered to the job site. however, it is not clear that the vendors will issue
invoices directly to the county. and the procedures are silent on the requirement to issue
a certificate of entitlement to the vendors.

January 13, 2012

Re:

Technical Assistance Advisement - TAA 12A-002
Sales and Use Tax – Public Works Contracts
Subsection: 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.038, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner XXX [hereinafter “County”]

Dear:
This letter is a response to your petition dated XXX, 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 the contract provided are sufficient to allow the
County to take advantage of its tax-exempt status on the purchase of materials for use in a
public works contract.

Presented Facts
The County’s petition states that it is “in the process of working with a contractor to
commence with bidding the public works construction project know as ‘New [] County
Courthouse’. . . .” The petition includes a copy of the County’s Owner Direct Purchase

Technical Assistance Advisement
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Procedures, and a copy of the County’s XXX Consumer’s Certificate of Exemption. The
procedures set forth as follows:

1. Section 3.01 A. 1. of the procedures provides that the County will deliver its
   own purchase order directly to the vendor of the materials.
2. Section 3.01 M. of the procedures indicates that the vendor will issue the
   original invoice to the Contractor with a copy going to the County
3. Section 3.01 Q. 1. of the procedures states that the County Accounting
   Division makes payment directly to the vendor of the materials.
4. Section 3.01 D. of the procedures states that the County will retain title to the
   materials despite transfer of possession of the materials to the Contractor.
5. Section 3.01 E. of the procedures states that the County will purchase and
   maintain Builder’s Risk Insurance to protect against loss or damage “from the
   moment . . . County gains title of such material on delivery to the job site until
   such time as Owner Purchased Materials are incorporated into the Work and
   are accepted.”
6. No section of the procedures references or incorporates the requirement to
   issue a Certificate of Entitlement.
   Applicable Authority
   Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6),
   Florida Statutes, which provides in pertinent part:
   (a) 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. . . .
   (b) The exemption provided under this subsection does not include sales of
   tangible personal property made to contractors employed directly to or as agents
   of any such government or political subdivision when such tangible personal
   property goes into or becomes a part of public works owned by such government
   or political subdivision. A determination of whether a particular transaction is
   properly characterized as an exempt sale to a government entity or a taxable sale
   to a contractor shall be based upon the substance of the transaction rather than the
   form in which the transaction is cast. However, for sales of tangible personal
   property that go into or become a part of public works owned by a governmental
   entity, other than the Federal Government, a governmental entity claiming the
   exemption provided under this subsection shall certify to the dealer and the
   contractor the entity’s claim to the exemption by providing the dealer and the

Technical Assistance Advisement
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contractor a certificate of entitlement to the exemption for such sales. If the
department later determines that such sales, in which the governmental entity
provided the dealer and the contractor with a certificate of entitlement to the
exemption, were not exempt sales to the governmental entity, the governmental
entity shall be liable for any tax, penalty, and interest determined to be owed on
such transactions. Possession by a dealer or contractor of a certificate of
entitlement to the exemption from the governmental entity relieves the dealer
from the responsibility of collecting tax on the sale and the contractor for any
liability for tax, penalty, or interest related to the sale, and the department shall
look solely to the governmental entity for recovery of tax, penalty, and interest if
the department determines that the transaction was not an exempt sale to the
governmental entity. The governmental entity may not transfer liability for such
tax, penalty, and interest to another party by contract or agreement. . . . (Emphasis
Supplied)
This statutory section was amended in the XXX Regular Session of the Florida
Legislature to become effective on XXX. It was approved by the Governor on XXX
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

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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.
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

Technical Assistance Advisement
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damage or loss or directly enjoys the economic benefit of the proceeds of such
insurance.
(c)1. To be entitled to purchase materials tax exempt for a public works project, a
governmental entity is required to issue a Certificate of Entitlement to each
vendor and to the governmental entity’s contractor to affirm that the tangible
personal property purchased from that vendor will go into or become a part of a
public work. This requirement does not apply to any agency or branch of the
United States government.

2. The governmental entity’s purchase order for tangible personal property to be
   incorporated into the public works project must be attached to the Certificate of
   Entitlement. The governmental entity must issue a separate Certificate of
   Entitlement for each purchase order. Copies of the Certificate may be issued.
3. The governmental entity will also affirm that if the Department determines that
   tangible personal property sold by a vendor tax-exempt pursuant to a Certificate
   of Entitlement does not qualify for the exemption under Section 212.08(6), F.S.,
   and this rule, the governmental entity will be liable for any tax, penalty, and
   interest determined to be due.
4. The following is the format of the Certificate of Entitlement to be issued by the
   governmental entity:
   CERTIFICATE OF ENTITLEMENT
   The undersigned authorized representative of__ (hereinafter
   “Governmental Entity”), Florida Consumer’s Certificate of Exemption Number
   , affirms that the tangible personal property purchased pursuant to
   Purchase Order Number from _ (Vendor) on or after _
   (date) will be incorporated into or become a part of a public facility as part of a
   public works contract pursuant to contract # __ with __
   (Name of Contractor) for the construction of ____.
   Governmental Entity affirms that the purchase of the tangible personal property
   contained in the attached Purchase Order meets the following exemption
   requirements contained in Section 212.08(6), F.S., and Rule 12A-1.094, F.A.C.:
   You must initial each of the following requirements.
   __ 1. The attached Purchase Order is issued directly to the vendor supplying the
   tangible personal property the Contractor will use in the identified public works.
   _ 2. The vendor’s invoice will be issued directly to Governmental Entity.
   3. Payment of the vendor’s invoice will be made directly by Governmental
   Entity to the vendor from public funds.

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_ 4. Governmental Entity will take title to the tangible personal property from
the vendor at the time of purchase or of delivery by the vendor.
_ 5. Governmental Entity assumes the risk of damage or loss at the time of
purchase or delivery by the vendor.
Governmental Entity affirms that if the tangible personal property identified in the
attached Purchase Order does not qualify for the exemption provided in Section
212.08(6), F.S., and Rule 12A-1.094, F.A.C., Governmental Entity will be subject
to the tax, interest, and penalties due on the tangible personal property purchased.
If the Florida Department of Revenue determines that the tangible personal
property purchased tax-exempt by issuing this Certificate does not qualify for the
exemption, Governmental Entity will be liable for any tax, penalty, and interest
determined to be due.
I understand that if I fraudulently issue this certificate to evade the payment of
sales tax I will be liable for payment of the sales tax plus a penalty of 200% of the
tax and may be subject to conviction of a third degree felony.
Under the penalties of perjury, I declare that I have read the foregoing Certificate
of Entitlement and the facts stated in it are true.

Signature of Authorized Representative

Purchaser’s Name (Print or Type)

Title

Date

Federal Employer Identification Number: ____
Telephone Number: ______
You must attach a copy of the Purchase Order to this Certificate of Entitlement.
Do not send to the Florida Department of Revenue. This Certificate of
Entitlement must be retained in the vendor’s and the contractor’s books and
records.
(d) Sales to contractors, including subcontractors, are subject to tax.
(e) The governmental entity may not transfer liability for such tax, penalty, and
interest to another party by contract or agreement. . . .
(5) Contractors, including subcontractors, that manufacture, fabricate, or furnish
tangible personal property that the contractor incorporates into public works are
liable for tax in the manner provided in subsection (10) of Rule 12A-1.051,
F.A.C. The contractor and subcontractors, not the governmental entity, are

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deemed to be the ultimate consumers of the articles of tangible personal property
they manufacture, fabricate, or furnish to perform their contracts and may not
accept a Certificate of Entitlement for these articles. . . . (Emphasis Supplied)
Determination
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 from the time of delivery to
the jobsite, 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 from the time that the building materials are physically delivered to the
job site is a paramount consideration. The governmental entity must assume all risk of
loss or damage for the tangible personal property from the moment of acceptance of title
to the materials. 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 establish that the governmental entity is entitled to the exemption, it must issue a
Certificate of Entitlement to the vendors, and to the contractors, with each purchase
order. A copy of the governmental entity’s Consumer’s Certificate of Exemption must be
attached to the Certificate of Entitlement. The Certificate of Entitlement sets forth the
requirements of making tax-exempt direct purchases and notes the governmental entity’s
acknowledgement that it is responsible for tax, penalty, and interest on material purchases
that do not meet the exemption criteria. By statute, the governmental entity is prohibited
from assigning liability of the tax, penalty, and interest to another party by contract or
agreement. A suggested format of the certificate is found in Rule 12A-1.094(4)(c),
Florida Administrative Code.
As stated, the statutory section requiring the Certificate of Entitlement was amended in
the XXX Regular Session of the Florida Legislature to become effective on XXX. It was
approved by the Governor on XXX. Additionally, Rule Development Workshops and
Rule Hearings were held by the Department of Revenue during the summer of XXX to
amend Rule 12A-1.094, Florida Administrative Code.

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To summarize, the conditions that must be met to satisfy the requirements of Rule 12A1.094, Florida Administrative Code, 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 to the materials vendors. 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;
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.
6. The governmental entity must issue a Certificate of Entitlement with each
   purchase order, along with a copy of its Consumer’s Certificate of Exemption, to
   each vendor, as well as to the contractor. The governmental entity is responsible
   for payment of tax, penalty, and interest on any purchases that are not found to be
   in compliance with the procedures for tax-exempt direct purchase of materials.
   The County’s procedures do not satisfy the foregoing requirements for exemption of
   transactions as sales to a governmental entity. The County will issue its own purchase
   orders directly to the vendor of the materials, and it will issue payment for the materials
   directly to the vendor. The County also assumes title to the materials at the time they are
   delivered to the job site. However, it is not clear that the vendors will issue invoices
   directly to the County. And the procedures are silent on the requirement to issue a
   Certificate of Entitlement to the vendors.
   Please note a contractor that manufactures or fabricates its own materials, as specified in
   Rule 12A-1.094(5), Florida Administrative Code, does not qualify for inclusion in direct
   purchase programs. 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), Florida Administrative Code.
   Closing Statement
   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

Technical Assistance Advisement
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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 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,

Gary L. Gray
Revenue Program Administrator I
Technical Assistance and Dispute Resolution
GLG/sdf
Control # 109510