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

Plain-English summary

The county's procedures qualified its direct purchases of materials for the port public-works project. The county would issue purchase orders and payments directly to vendors, receive invoices directly, take title upon delivery, assume risk of loss, and issue Certificates of Entitlement.

The Department stressed that substance and controlling contract terms mattered. If another contract section actually left risk of loss with the contractor, the purchases were not exempt even though the owner-direct-purchase provision said the county bore that risk.

Purchases made before the amendment could qualify only if they already met the statutory and regulatory direct-purchase requirements when made; they could not be fixed after the fact. Materials manufactured or fabricated by the contractor or subcontractors were also excluded because those parties were the ultimate consumers and owed use tax on full cost.

What this means for you

Review the entire contract, not just the direct-purchase exhibit. Ordering, payment, title, invoicing, insurance, and risk provisions must consistently establish the government as the actual purchaser at the time of sale.

Common questions

What supported the exemption? Direct county ordering and payment, direct vendor invoices, county title and risk of loss, and Certificates of Entitlement.

Could earlier purchases be amended into compliance? No.

What if the contractor actually bore risk of loss? The purchases did not qualify, regardless of contradictory owner-direct-purchase wording.

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-008

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 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 VENDOR IS REQUIRED TO ISSUE ITS INVOICES
DIRECTLY TO COUNTY. THE COUNTY ALSO ASSUMES TITLE TO THE
MATERIALS AT THE TIME THEY ARE DELIVERED TO THE JOB SITE.
COUNTY ASSUMES RISK OF LOSS OF COUNTY PURCHASED MATERIALS,
AND COUNTY WILL ISSUE A CERTIFICATE OF ENTITLEMENT TO THE
VENDORS.
March 16, 2012
Re:

Technical Assistance Advisement 12A-008
Sales and Use Tax – Public Works Contract
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 XXX:
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, F.A.C. 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
County has entered into contract for the construction necessary to strengthen and
lengthen wharves at the county port. A copy of the agreement, executed XXX, was
included with County’s petition. Section 1.26 of the agreement contains the Owner
Direct Purchases Procedures. The procedures are set forth as follows:

Technical Assistance Advisement
Page 2

1.

Part 3.01 D of the procedures provides that the County will prepare its own
purchase order to be issued to the supplier(s) of materials. The purchase order
will contain or be accompanied by the County’s “exemption certificate.”

2.

Part 3.01 M of the procedures provides that County will remit payment
directly to the supplier(s) of the materials.

3.

Part 3.01 O of the procedures states that County will retain title to any “Owner
Direct Purchased” materials.

4.

Part 3.01 K of the procedures requires the Contractor to “maintain insurance
pursuant to the requirements set forth in the Owner and Contractor Agreement
which shall be sufficient to protect against any loss of or damage to Owner
Direct Purchased equipment, materials or supplies. Such insurance shall
cover the value of any Owner Direct Purchased Materials not yet incorporated
into the Project from the time the Owner first takes title.” Section 24 of the
contract discusses the insurance and risk of loss requirements; paragraph B
specifically requires the Contactor to bear the risk of loss of all materials,
including materials furnished by the County (paragraph D).

5.

No section of the procedures contains a requirement that vendors directly
invoice the County for the materials.

6.

No section of the procedures references or incorporates the requirement to
issue a Certificate of Entitlement.

The contract will be amended to make changes to Section 1.26, to conform the contract to
the statutory and regulatory requirements to allow County to enjoy its tax exempt status
on the direct purchase of materials. As of the date of this advisement, the amendment has
not been executed. It is the intent of County to have the amendment retroactively
effective to XXX, the date the original agreement was signed. The amendment contains
the following relevant provisions:

1. Part 3.01 D of the procedures provides that the County will prepare its own
   purchase orders for the purchase of materials. The Purchase Order will be issued
   to the supplier(s) or vendor(s) of the materials. The purchase order will contain or
   be accompanied by the County’s “exemption certificate.”
2. Parts 3.01 F and M of the procedures provide that County will remit payment
   directly to the supplier(s) of the materials.
3. Parts 3.01 K and O of the procedures state that County will retain title to any
   “Owner Direct Purchased” materials from the time of delivery and acceptance of
   the materials.

Technical Assistance Advisement
Page 3

4. Part 3.01 K of the procedures requires the Contractor to “maintain insurance in
   favor of and for the benefit of the [County] pursuant to the requirements set forth
   in the Owner and Contractor Agreement which shall be sufficient to protect
   against any loss of or damage to Owner Direct Purchased equipment, materials or
   supplies. Such insurance shall cover the value of any Owner Direct Purchased
   Materials not yet incorporated into the Project from the time the Owner first takes
   title.” Section 24 of the contract discusses the insurance and risk of loss
   requirements; paragraph B specifically requires the Contactor to bear the risk of
   loss of all materials, including materials furnished by the County (paragraph D).
5. Part 3.01 D of the procedures states that County’s Purchase Order will require
   vendors or suppliers of materials to directly invoice County for the payment of the
   materials.
6. Part 3.01 D of the procedures provides that County will issue a Certificate of
   Entitlement with each Purchase Order.
   The amendment contains a provision that if there is a conflict between amended
   Condition 1.26 and other terms of the contract, then terms of the amendment shall
   control.
   Applicable Authority
   Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6),
   F.S., 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
   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

Technical Assistance Advisement
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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)
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.

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(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.

Technical Assistance Advisement
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(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.

Technical Assistance Advisement
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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. . . .

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(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
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), 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 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, 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 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),
F.A.C.

Technical Assistance Advisement
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As stated, the statutory section requiring the Certificate of Entitlement was amended in
the 2010 Regular Session of the Florida Legislature to become effective on January 2,
2011. It was approved by the Governor on May 27, 2010. Additionally, Rule
Development Workshops and Rule Hearings were held by the Department of Revenue
during the summer of 2010 to amend Rule 12A-1.094, F.A.C.
To summarize, the conditions that must be met to satisfy the requirements of Rule 12A1.094, 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 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;
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;
   and
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 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 vendor is required to issue its invoices directly to County.
   The County also assumes title to the materials at the time they are delivered to the job
   site. County assumes risk of loss of county purchased materials, and County will issue a
   Certificate of Entitlement to the vendors.
   However, please note that any purchases made prior to the date the amendment is signed
   can qualify for exemption only if the purchases were made in accordance with the
   provisions of section 212.08(6), F.S., and Rule 12A-1.094(4), F.A.C, outlined herein, at

Technical Assistance Advisement
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the time of the purchase, regardless of the terms of the contract. Purchases that were not
made in accordance with the applicable provisions do not qualify for exemption, and any
such purchases cannot be amended in an attempt to cause them to qualify for exemption
after the fact.
Please also note that if the Contractor in fact assumes risk of loss of the materials as set
forth in Section 24 of the contract, the purchases do not qualify for exemption, regardless
that amended Condition 1.26 states that County assumes risk of loss.
Finally, please note a contractor that manufactures or fabricates its own materials, as
specified in Rule 12A-1.094(5), F.A.C., 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), F.A.C.
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
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 # 111782