Did a governmental owner's proposed direct-purchase procedures qualify materials for a seawall public-works project for sales-tax exemption?

Plain-English summary

The Florida Department of Revenue concluded that a governmental owner's proposed direct-purchase procedures qualified materials for tax-exempt use in a seawall public-works project.

The owner would issue purchase orders directly to suppliers, receive invoices in its own name, pay suppliers directly, issue a Certificate of Entitlement, take title when materials were delivered and accepted, and remain liable for loss or damage. Insurance maintained for the owner's benefit covered materials before incorporation into the project.

Those facts made the owner, rather than the contractor, the purchaser. The contractor could coordinate deliveries, inspect and accept goods, manage warranties, and safeguard the materials as bailee without taking the owner's title or risk of loss.

What this means for you

Governmental project owners

Build the exemption into the purchasing process: direct order, direct invoice, direct public payment, title, risk of loss, and a Certificate of Entitlement for each purchase.

Contractors

Administrative control over delivery and storage does not necessarily make you the purchaser when the government retains the substantive purchase obligations and ownership risk.

Common questions

Q: Were the proposed material purchases exempt?
A: Yes, under the direct-purchase procedures described in the submitted contract.

Q: Could the contractor inspect and safeguard the materials?
A: Yes. The agreement treated the contractor as a bailee while the owner retained title and risk.

Citations and references

• Fla. Stat. §§ 212.08(6) and 213.22
• Fla. Admin. Code r. 12A-1.094

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 14A-002

Original ruling text

Executive Director
Marshall Stranburg

QUESTION:
WHETHER THE PROVISIONS CONTAINED IN THE SUBMITTED
CONTRACT ARE SUFFICIENT TO ENABLE THE TAXPAYER TO REALIZE SAVINGS
OF ITS TAX-EXEMPT STATUS ON THE PURCHASE OF MATERIALS FOR USE IN A
PUBLIC WORKS PROJECT.
ANSWER:
THE OWNER’S DIRECT PURCHASE PROCEDURES MEET THE REQUIREMENTS OF THE
ABOVE-MENTIONED RULE, AND THEREFORE, THE OWNER MAY PURCHASE THE
MATERIALS TAX-EXEMPT FOR USE IN A PUBLIC WORKS CONTRACT.
February 4, 2014

Re:

Subject: Technical Assistance Advisement – TAA 14A-002
Sales and Use Tax – Public Works Contract
Section 212.08(6), Florida Statutes (F.S.)
Rule 12A-1.094, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)

Dear XXX:
This is in response to your letter dated XXX, requesting this Department’s issuance of a Technical
Assistance Advisement (“TAA”) pursuant to section 213.22, F.S., and Rule Chapter 12-11, F.A.C.,
concerning a public works contract. An examination of your letter has established you have
complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the
Department is hereby granting your request for a TAA.
Facts
Taxpayer (hereinafter referred to as Owner) is requesting determination by the Department on
whether a draft Agreement (between the Owner and a contractor to be selected) contains procedures
for purchasing materials tax-exempt for a public works project. The work will take place at the XXX
(hereinafter referred to as XXX), which is a department of XXX. XXX is referred to in the
documents as Owner’s Representative. The project is for the construction of approximately 625
linear feet of seawall bulkhead between Bays xxx-xxx at the XXX to connect two areas of bulkhead,
which already exist. Taxpayer provided a copy of a portion of the Invitation to Bid along with a
document titled Addendum No.2, dated xxx. Section 1.26 of the Invitation to Bid provides the
provisions for the Owner Direct Purchase Procedures.

Child Support Enforcement – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – James McAdams, Director  Information Services – Damu Kuttikrishnan, Director

www.myflorida.com/dor
Tallahassee, Florida 32399-0100

The following provisions are included in Part 3 of the Owner Direct Purchase Procedures:
A) Contractor shall provide Owner’s Representative a list of all intended suppliers,
vendors, and materialmen for consideration as Owner Direct Purchased materials.
This list shall be submitted at the same time as the preliminary schedule of values and
the Project schedule. The Contractor shall submit a description of the materials to be
supplied, estimated quantities and prices.
…
D) After receipt of the Purchase Order Requisition Form, Owner shall prepare its
Purchase Order for equipment, materials or supplies which the Owner chooses to
purchase directly. Promptly upon receipt of each Purchase Order, Contractor shall
verify the terms and conditions of the Purchase Order prior to its issuance to supplier
and in a manner to assure proper and timely delivery of items. After such verification
by the Contractor, the Owner shall issue the Purchase Order to the supplier or vendor.
The Purchase Order shall require that the supplier provide the required shipping and
handling insurance. The Purchase Order shall also require that the supplier invoice
the Owner directly for the purchase price of the Owner Direct Purchased Materials.
The Purchase Order shall also require the delivery of the Owner Direct Purchased
Materials on the delivery dated [sic] provided by the Contractor in the Purchase
Order Requisition Form and shall indicate F.O.B. jobsite. The Owner’s Purchase
Orders shall contain or be accompanied by the Owner’s exemption certificate and
must include the Owner’s name, address, and exemption number with issue and
expiration date shown. The Owner shall issue each supplier or vendor a Certificate of
Entitlement on the Certificate of Entitlement Form attached hereto with each
Purchase Order.
…
F) Contractor shall be fully responsible for all matters relating to the receipt of
materials in accordance with these Procedures, including, but not limited to, verifying
correct quantities, verifying documentation of orders in a timely manner, coordinating
purchases, providing and obtaining all warranties and guarantees in favor of and for
the benefit of the Owner required by the Contract Documents, inspection and
acceptance of the goods at the time of delivery. At the time of, and subsequent to, the
delivery of such materials, the Owner shall be liable for all and loss or damage to
equipment and materials purchased pursuant to the Purchase Order…. The Contractor
agrees to indemnify and hold harmless the Owner from any and all claims of
whatever nature resulting from non-payment of goods to suppliers arising from the
actions or directions of Contractor. Notwithstanding the foregoing, the Owner shall
be responsible for payment off the invoices issued by the supplier or vendor pursuant
to the procedures in Paragraph G below.
G) …The Contractor shall verify in writing to the Owner’s Representative that the
Materials were received and agree to approve the invoice for payment. The invoice
shall be thereupon furnished to the Owner’s Representative for processing and
payment in the manner as all other Owner invoices are processed….
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…
I) The Contractor shall be responsible for obtaining and managing all warranties and
guarantees in favor of and for the benefit of the Owner 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.
J) The transfer of possession of Owner Direct Purchased Materials from the Owner to
the Contractor shall constitute a bailment for mutual benefit of the Owner and the
Contractor. The Owner shall be considered the bailor and the Contractor the bailee of
the Owner Direct Purchased materials. Owner Direct Purchased Materials shall be
considered returned to the Owner for purposes 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 Direct Purchased
Materials.
K) The Contractor shall maintain insurance in favor of and for the benefit of the
Owner 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 which shall be at the time of delivery and acceptance
of the materials by the Contractor as provided in Paragraph F above.
…
M) In order to arrange for the 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 the 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 payment to the supplier based upon the
receipt of data provided. This payment will be released, delivered and remitted
directly to the supplier by the Owner. The Contractor agrees to assists the Owner to
immediately obtain partial or final release of lien waivers as appropriate.
…
O) From the time of delivery and acceptance, the Owner shall have and retain title to
any and all Owner Direct Purchased materials.
…

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Requested Advisement
Whether the provisions contained in the submitted contract are sufficient to enable the Owner to
realize savings of their tax-exempt status on the purchase of materials for use in a public works
contract.
Applicable Authority and Discussion
Sales to governmental units are exempt from sales tax, pursuant to Section 212.08(6), F.S., which
states, 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. This exemption shall not inure to any transaction otherwise
taxable under this chapter when payment is made by a government employee by any
means, including, but not limited to, cash, check, or credit card when that employee is
subsequently reimbursed by the governmental entity….
(b)
The exemption provided under this subsection does not include sales of
tangible personal property made to contractors employed either 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 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 on the substance of the transaction rather than the form in
which the transaction is cast….
(c)
The department shall adopt rules for determining whether a particular
transaction is properly characterized as an exempt sale to a governmental entity or a
taxable sale to a contractor which give special consideration to factors that govern the
status of the tangible personal property before being affixed to real property. In
developing such rules, assumption of the risk of damage or loss is of paramount
consideration in the determination. The department shall also adopt, by rule, a
certificate of entitlement to exemption for use as provided in paragraph (b). The
certificate shall require the governmental entity to affirm that it will comply with the
requirements of this subsection and the rules adopted under paragraph (b) in order to
qualify for the exemption and that it acknowledges its liability for any tax, penalty, or
interest later determined by the department to be owed on such transactions.
Section 212.08(6), F.S., provides only direct purchases by governmental entities are exempt. In
another words, if a contractor, who is employed by a governmental entity, purchases tangible
personal property to be used in a public works contract, then the exemption authorized in s.
212.08(6), F.S., does not apply.

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Rule 12A-1.094, F.A.C., provides the guidelines for purchasing materials tax-exempt for a public
works contract. Rule 12A-1.094, F.A.C., states, in relevant part:
(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)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.

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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.
   …
   Here, the Owner’s Direct Purchase Procedures do satisfy the foregoing conditions. The Owner will
   issue its own purchase orders directly to the suppliers, who will directly invoice the Owner. The
   Owner will issue a check for the materials directly to the supplier, accompanied by a Certificate of
   Entitlement. Moreover, the Owner is assuming liability for the materials upon delivery to the jobsite
   and will acquire title to the materials.
   Concluding Statement
   The Owner’s Direct Purchase Procedures meet the requirements of the above-mentioned Rule, and
   therefore, the Owner may purchase the materials tax-exempt for use in a public works contract.
   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 on 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 than that 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 15 days of the date of this letter.
   Sincerely,

Manshi Shah
Senior Attorney
Technical Assistance and Dispute Resolution
850-717-7312
Record ID: 154968

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