Could a Florida county buy courthouse construction materials tax-free through a direct-purchase procedure?

Plain-English summary

Florida approved a county's direct-purchase procedure for construction materials used in courthouse, administrative, records-storage, and law-enforcement projects.

The exemption depended on the county being the real purchaser in substance as well as form. The county issued purchase orders bearing its exemption number, vendors invoiced the county, and the county paid vendors directly. At delivery to the job site, the county took title and liability and assumed the risk of loss through builder's-risk insurance.

The county also had to provide each vendor with a properly completed exemption certificate at the time of purchase. Contractors could prepare requisitions and present county purchase orders, but could not become the purchaser.

The ruling did not extend the direct-purchase procedure to off-site materials manufactured or fabricated by a contractor or subcontractor. For those items, the contractor remained the taxable consumer under the cited rules.

What this means for you

Counties and public agencies

Build the purchasing procedure into the controlling documents. Direct orders and payments are essential, but title, liability, insurance, and risk of loss are equally important.

Contractors and vendors

Confirm who is legally buying each item before accepting an exemption certificate. Contractor-fabricated materials were outside this TAA's direct-purchase approval.

Common questions

Could the contractor send requisitions? Yes. The county could prepare its purchase order after receiving a contractor requisition.

Who had to pay the vendor? The county had to pay directly.

When did the county take title and risk? Upon delivery to the job site and before incorporation into the real property.

Did the ruling cover contractor-made materials? No. The contractor or subcontractor remained the taxable consumer of off-site manufactured or fabricated articles.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-023

Original ruling text

SUMMARY

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

May 19, 1999

Re: Technical Assistance Advisement (99A-023)
XXX ("County")
Sales and Use Tax -- Courthouse and Administrative Annex
Section 212.08(6), F.S.
Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated February 23, 1999, in which you asked for a
technical assistance advisement indicating that the procedures
proposed in your letter would provide for tax-exempt purchases.

Facts

County has undertaken renovation and construction of the county
courthouse, related administrative annex, records storage
facility, and law enforcement administrative complex (the
"Project"). County originally retained XXX ("Manager") as
construction manager. Manager compiled bidder lists, developed
bid packages, advertised and solicited bids, prepared a bid
tabulation dated May 2, 1996, and computed a guaranteed maximum
price for which the Project could be done. The projected price
exceeded the Project budget. County terminated the contract and
decided to self administer the Project through its own
Construction Management Department (the "CMD"). Plans for
certain phases of the Project have been modified to effect cost
savings. The remainder of the Project is still under
evaluation. Contractors identified in the Manager bid
tabulation were invited to resubmit bids based on the completed
revised plans.

County is entitled to make purchases without paying Florida
sales and use tax under a consumer's certificate of exemption.
Section 2.7 of the Procurement Procedure pursuant to which the
CMD solicited and accepted revised bids provides as follows:

The County may elect to contract directly for certain parts
of the works. The County may directly purchase materials,
equipment, supplies, etc. from a Contractor's selected
vendors. In such cases, the CMD will prepare all data and
materials necessary and suitable for the County's issuance
of its purchase order. Upon delivery, materials purchased
directly by the County will be turned over to the
Contractor for installation. The County will prepare and
submit to the Florida Department of Revenue a request for a
Technical Assistance Advisory, if so required, which shall
stipulate the guidelines for tax exempt direct purchases to
be followed and the County and CMD shall conform to those
guidelines.

The Contractor shall retain responsibility for ordering,
expediting, transit, inspection, receiving, on site
storage, maintenance, handling, installation, and warranty
management work similar to as if he had purchased the item

directly from the vendor. The cost of the above listed
services shall be included in the Contractor's price.

The CMD has developed a form contract (the "Agreement") for use
with contractors who submit winning bids. Article 2.L. of the
Agreement provides as follows:

The County being exempt from Sales Tax, reserves the right
to make direct purchases of various construction equipment
and materials or supplies as deemed necessary to benefit
the County, this Contractor will cooperate fully and
implement any actions required of this Contractor to
satisfy the requirements of the... Owner Direct Materials
Purchasing Policy... and Materials Purchase Order
Procedures... as incorporated into this Contract Document,
without any additional costs to the County.

The [County] Owner Direct Materials Purchasing Policy (the
"Policy") permits County to elect to purchase construction
equipment, materials, and supplies included in any contractor's
bid directly from the contractor's vendor. The [County] Owner
Direct Materials Purchase Order Procedure (the "Procedure")
provides detailed guidance for contractors on requesting
purchase orders from County, submitting change orders to remove
the price of, and sales tax on, County-purchased materials from
the contract, and approving invoices for payment by County. In
conjunction, the Policy and Procedure provide:

1. County may elect to purchase materials and equipment included
   in a contract directly from the supplier. Such items are
   referred to as "County-Purchased Materials," and County will
   hold title to all such materials.

2. Contractors will select the suppliers from whom materials
   will be purchased and will submit a list of supplies and
   suppliers for consideration as County-Purchased Materials.

3. Contractors will furnish CMD staff with detailed Purchasing
   Requisition Forms ("Requisitions") for all County-Purchased
   Materials.

4. Upon receipt of a Requisition, County 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.
The purchase order will direct the vendor to issue its invoice
to County and will contain County's consumer's certificate of
exemption number.

5. Although County will take title to County-Purchased 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 loss of or damage to those materials resulting from
   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
   the CMD staff, who will deliver them to Finance Department of
   the Clerk of the Circuit Court for processing and payment in the
   same manner as other County invoices are processed. Payment
   will be issued directly to the vendor.

7. County will purchase and maintain builder's risk insurance
   sufficient to protect against any loss or damage to CountyPurchased Materials. The insurance will cover the full value of
   any such materials from the time County takes title until the
   materials are incorporated into the Project.

Article 2.B. of the Agreement is entitled "Protection of
Materials and Work." It provides, "When any material is
furnished to this Contractor by the County or others it shall be
used without waste and the Contractor shall pay for any
materials ruined, lost, stolen, or damaged." This appears to
place the risk of loss of such materials on the contractor.
Article 6, however, requires County to provide builder's risk
insurance that, to the extent of the coverage, limits the
contractor's exposure. The insurance must cover both completed
work and not yet incorporated materials at the job site. The
contractor is bound by the adjustment agreed to by County and
the insurance company, which shall pay the proceeds directly to
County. Article 6 provides that the contractor will be liable
for any insurance deductible applicable to a covered loss, which

would put the contractor at risk if County fails to purchase
adequate insurance. The Policy, however, requires County to
insure County-Purchased Materials for their full value. You
confirmed by telephone on April 21, 1999, that County would not
be entitled to any reimbursement from any contractor for loss or
damage to materials purchased under the direct purchase program
unless caused by the contractor's negligence.

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, "payment
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 Agreement, Policy, and Procedure
appear to satisfy the foregoing requirements for exemption of
transactions as sales to a governmental entity. County will
make direct purchases of various construction materials. After
receiving requisition forms from contractors, County will
prepare purchase orders for direct purchases. After receiving
the approved invoices from the contractors, County will pay the
vendors directly. County 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. County

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

Based upon the conclusion that County is the purchaser,
purchases of materials that are made in accordance with the
procedures described above 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 at an off-site plant 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.
Because the contractor or subcontractor rather than County is
the taxable user of those fabricated articles, the direct
purchase procedures cannot be applied to materials purchased to
be incorporated into those articles.

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, your request and
related backup documents are public records under Chapter 119,
F.S., which are subject to disclosure to the public under the

conditions of s. 213.22, F.S. Your name, address, and any other
details which might lead to identification of the taxpayer must
be deleted before disclosure. In an effort to protect the
confidentiality of such information, we request you provide the
undersigned with a redacted copy of your request for.

Sincerely,

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

LWB/
Enclosure: Rule 12A-1.039, F.A.C.
Control #: 36853