Could a Florida school district buy construction materials tax-free through a direct-purchase program while a construction manager built the schools?

Plain-English summary

Florida approved the school district's direct-purchase program for construction materials. The district—not the construction manager or subcontractors—would issue purchase orders carrying its exemption number, provide exemption certificates, receive vendor invoices, and pay vendors directly.

The district would also take title and liability when materials reached the job site and would bear the risk of loss through builder's-risk insurance that it paid for and under which it received the proceeds. Those facts showed that the district was the purchaser in substance as well as form, despite the guaranteed-maximum-price construction contracts.

The ruling did not extend to materials manufactured or fabricated by the contractor or subcontractors. For those items, the contractor remained the ultimate consumer and owed use tax on the full cost under the cited rules.

What this means for you

Government construction owners

A purchase order alone was not enough. The ruling required direct government ordering, invoicing, payment, title, and risk of loss before incorporation into the real property.

Contractors and construction managers

Contractors could prepare requisitions, select proposed suppliers, inspect deliveries, and store materials, but the controlling documents still had to make the governmental entity the real purchaser.

Common questions

Did the guaranteed maximum price make the materials taxable to the contractor? No. The Department looked at the entire transaction and found the district was the purchaser under the direct-purchase program.

Who had to pay the vendors? The school district had to pay them directly.

Why did builder's-risk insurance matter? Assumption of risk of damage or loss was a paramount factor, and the district bore the insurance cost and received related proceeds.

Did the exemption cover contractor-fabricated materials? No. The ruling expressly excluded those materials.

Citations and references

• Fla. Stat. § 212.08(6)
• Fla. Admin. Code r. 12A-1.001(9)
• Fla. Admin. Code r. 12A-1.094
• Fla. Admin. Code r. 12A-1.039
• Fla. Admin. Code r. 12A-1.051(5)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-006

Original ruling text

SUMMARY

Materials for a school board project can be purchased tax
exempt where under the terms of the controlling documents:
(1) the school board issues its purchase orders directly to
the vendors; (2) the purchase orders include the school
board's consumer's certificate of exemption number and the
school board will provide the vendor with a certificate of
exemption; (3) the vendors invoice the school board
directly; (4) the school board issues its checks directly
to the vendors in payment of the invoices; (5) the school
board takes title to the materials from the vendor and
assumes liability for the materials upon their delivery to
the job site; (6) the school board assumes the risk of loss
of the materials upon delivery, which is clearly
established by the school board's being required to
purchase insurance against loss or damage as a
reimburseable cost; and (7) the remaining terms of the
documents do not prevent concluding that the school board
rather than the contractor is in substance as well as form
the purchaser of the materials.

Feb 11, 1999

Re: Technical Assistance Advisement (99A-006)
XXX ("School District)
Sales and Use Tax -- School District Contracts to Construct
Schools
Section 212.08(6), F.S.
Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear :

This is in response to your letters to the Florida Department of
Revenue dated November 21, 1998, in which you asked for
technical assistance advisements indicating that the procedures
proposed in your letters would provide for tax-exempt purchases.
Because your letters involve two contracts that are identical in

all material respects, the requests have been combined. This
technical assistance advisement is equally applicable to both
contracts.

Facts

On October 6, 1998, School District and XXX ("Construction
Manager") entered into two Construction Management Agreements
(the "Agreements"), pursuant to which Construction Manager was
engaged to manage the construction of two kindergarten through
eighth grade schools (the "Projects"). Under the Agreements,
Construction Manager is required to pay enumerated costs of the
Projects, including the cost of materials and builder's risk
insurance on those materials. School District is required to
reimburse Construction Manager for the enumerated costs plus pay
certain fees. Each Agreement provides for a guaranteed maximum
price ("GMP") that caps the cost of the Project to School
District.

School District is entitled to make purchases without paying
Florida sales and use tax under a consumer's certificate of
exemption. Section 10.3 of the Agreements provide for a direct
purchase program to permit School District to take advantage of
its tax exempt status in purchasing construction materials.
Under section 10.3, School District will issue its own purchase
orders to suppliers of materials purchased under the program,
and the suppliers will issue invoices directly to the School
District. School District will pay vendors directly for those
materials, will take title to and assume the risk of loss of
those materials prior to their incorporation into the Projects,
and will pay premiums on all insurance and bonding relating to
those materials. The Construction Manager will not be liable
for damage or loss of directly purchased materials and will not
share in the proceeds from any insurance or bonds covering such
damage or loss.

Section 10.3 incorporates by reference Exhibit IV to the
Agreements, which is entitled The [School District] Direct
Purchased Materials Program (the "Program"). The Program
reiterates and expands upon the provisions of section 10.3 of
the Agreements themselves. The Program provides as follows:

1. School District may elect to purchase materials and
equipment included in a contractor's bid directly from the
supplier. Such items are referred to as "Owner-Purchased
Materials," and School District will hold full title to all
such materials.

2. Contractors will select the suppliers from whom
   materials will be purchased for purposes of making up their
   bids and will submit a list of supplies and suppliers with
   their bids for consideration as Owner-Purchased Materials.

3. Contractors will furnish Construction Manager with
   detailed Purchasing Order Requisition Forms
   ("Requisitions") for all Owner-Purchased Materials.

4. Upon receipt of a Requisition, School District will
   review the Requisition and, if approved, issue its own
   purchase order directly to the supplier, with delivery to
   be F.O.B. job site, where all Owner-Purchased Materials are
   to be stored.

5. Although School District will take title to OwnerPurchased Materials upon delivery to the job site,
   contractors will have contractual obligations to inspect,
   accept delivery of, and store the materials pending
   incorporation into the project and will remain liable for
   their negligence while the materials are in their
   possession.

6. After verifying that delivery is in accordance with the
   purchase order, contractors will forward approved invoices
   to Construction Manager, who will deliver them to School
   District. School District will process the invoices and
   issue payment directly to the supplier.

7. The amount of builder's risk insurance to be carried
   under the Agreement by Construction Manager will be
   sufficient to cover Owner-Purchased Materials. School
   District will bear the cost of that coverage as a
   reimbursable cost under the Agreement. School District is

to be named as an additional insured on the builder's risk
insurance and to receive any proceeds related to School
District-Purchased Materials.

The basic terms of the Program have been summarized and included
in the form agreement used by Construction Manager when
subcontracts are awarded.

Law

Sales to governmental units are exempt from sales tax pursuant
to section 212.08(6), F.S., which provides:

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. 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. The department
shall adopt rules that give special consideration to
factors that govern the status of the tangible personal
property before its affixation to real property. In
developing these rules, assumption of the risk of damage or
loss is of paramount consideration in the determination....

Rule 12A-1.001(9), F.A.C., entitled "Governmental Units,"
contains guidelines for claiming and documenting the exemption.
Governmental entities must obtain a consumer's certificate of
exemption from the Department. Vendors are required to obtain
proper documentation of the exempt status of the sale for their
records.

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 the governmental entity,
purchases tangible personal property which 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 that involved in the instant
case, are contained in Rule 12A-1.094, F.A.C., which provides:

(1) This rule shall govern the taxability of transactions
in which contractors manufacture or purchase supplies and
materials for use in public works,....

(2) The purchase or manufacture of supplies or materials by
the contractor for incorporation into a public works
project is taxable to the contractor since he is the
ultimate consumer....

(3)(a) The purchase or manufacture of tangible personal
property for resale to a governmental body is exempt from
tax provided this exemption shall not include sales of
tangible personal property made to contractors employed
either directly or as agents of the United States
Government, a state, or any county, municipality, or
political subdivision of a state when such tangible
personal property goes into or becomes a part of public
works financed or owned by such governmental bodies or
political subdivisions.

(b) With regard to contracts with government entities, the
exemption in subsection (3)(a) is appropriate only where
the levy would otherwise fall on the government itself, or
on an agency or instrumentality so closely connected with
that government that the two cannot realistically be viewed
as separate entities, at least insofar as the activity
being taxed is concerned. A finding of exempt status,
however, requires something more than the implication of
traditional agency notions, so that to resist a state's
taxing power, a private taxpayer must actually stand in the
government's shoes as a principal, rather than as a
contractor employed either directly or as the government's

agent. A contractor will not be deemed to actually stand
in the government's shoes if the contractor has a
substantial independent role in making purchases.
Accordingly, the fact that title passes directly to the
government and payment is made with government funds, in
and of itself, cannot characterize the transaction as an
exempt purchase if the purchasing entity, in its role as a
purchaser, is sufficiently distinct from the government.

(4) The exemption in subsection (3)(a) is a general
exemption for sales made to the government.... 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 on
the substance of the transaction, rather than the form in
which the transaction is cast. The Executive Director...
will determine whether the substance of a particular
transaction is governed by subsection (2)(a) or is a sale
to a governmental body as provided by subsection (3) of
this rule based on all of the facts and circumstances
surrounding the transaction as a whole. The Executive
Director... will give special consideration to factors
which govern the status of the tangible personal property
prior to its affixation to real property. Such factors
include provisions which govern bidding, indemnification,
inspection, acceptance, delivery, payment, storage, and
assumption of the risk of damage or loss for the tangible
personal property prior to its affixation to real property.
Assumption of the risk of damage or loss is a paramount
consideration. A party may be deemed to have assumed the
risk of loss if the party either: bears the economic burden
of posting a bond or obtaining insurance covering damage or
loss; or enjoys the economic benefit of the proceeds of
such bond or insurance. Other factors that may be
considered by the Executive Director... include whether:
the contractor is authorized to make purchases in its own
name; the contractor is jointly or severally liable to the
vendor for payment: purchases are not subject to prior
approval by the government; vendors are not informed that
the government is the only party with an independent
interest in the purchase; and whether the contractors are

formally denominated as purchasing agents for the
government. Sales made pursuant to so called "cost-plus",
"fixed-fee", "lump sum", and "guaranteed price" contracts
are taxable sales to the contractor unless it can be
demonstrated to the satisfaction of the Executive
Director... that such sales are, in substance, tax exempt
sales to the government.

(5) Contractors who manufacture materials for incorporation
into public works shall be liable for tax in the manner
provided in Rule 12A-1.051(5) or (6), F.A.C....

Discussion, Analysis and Conclusion

Rule 12A-1.001(9), F.A.C., states that in order for a sale to a
state or local governmental entity to be tax exempt, Apayment
must be made directly to the 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
prior to its incorporation into realty, and satisfy various
factors contained in Rule 12A-1.094, F.A.C.

Under Rule 12A-1.094, F.A.C., the Department will also give
special consideration to several factors (bidding,
indemnification, inspection, acceptance, delivery, payment, and
storage) which govern the status of tangible personal property
prior to its affixation to real property when determining
whether the sale is to the tax exempt entity or to a contractor.
However, the assumption of risk of damage or loss during the
time that the building materials are physically stored at the
job site prior to their installation or incorporation into the
project is a paramount consideration. The governmental entity
must assume all risk of loss or damage for the tangible personal
property during that period. To establish that it has assumed
that risk, the governmental entity should purchase, or be the

insured party under, insurance on the building materials.

To summarize, the conditions that must be met to satisfy the
requirements of Rule 12A-1.094, F.A.C., and establish that the
governmental entity rather than the contractor is the purchaser
of materials, include:

1. The governmental entity must execute the purchase orders
   for the tangible personal property involved in the contract,
   which must include the governmental entity's consumer's
   certificate of exemption number. The contractor may present the
   governmental entity's purchase orders to the vendors of the
   tangible personal property;

2. The governmental entity must acquire title to and assume
   liability for the tangible personal property at the point in
   time when it is delivered to the job site up until the time it
   is incorporated as real property;

3. Vendors must directly invoice the governmental entity
   for the 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 building
   materials.

The procedures outlined in the Program appear to satisfy the
foregoing requirements for exemption of transactions as sales to
a governmental entity. School District will make direct
purchases of various construction materials. After receiving
requisition forms from the subcontractors, School District will
prepare purchase orders for direct purchases. After receiving
the approved invoices from the contractors, School District will
pay the vendors directly. School District will retain legal, and
equitable, title to all materials it purchases and will be
responsible for paying for builder's risk insurance on those

materials. School District will receive any insurance proceeds
related to the loss or destruction of those materials.

Based upon the conclusion that School District is the purchaser,
all purchases of materials which are made in accordance with the
Program will be exempt from sales tax. It is necessary,
however, that a properly completed exemption certificate be
extended at the time of purchase to each of the vendors. A
suggested format for an exemption certificate is provided in
Rule 12A-1.039, F.A.C., a copy of which is enclosed.

Please note that this response does not apply to a contractor
that manufactures or fabricates its own materials as specified
in Rule 12A-1.094(5), F.A.C. 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(5), 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 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
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of section 213.22,
F.S. Your name, address, and any other details which might lead
to identification of the taxpayer must be deleted by the
Department before disclosure. In an effort to protect
confidential information, we request you notify the undersigned

in writing within 15 days of any deletions you wish made to the
request or this response.

Sincerely,

Linda W. Bridges
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 922-9412

LWB/
Enclosure.: Rule 12A-1.039
Control #: 35921