Could a Florida county buy performing-arts-center construction materials tax-free through direct purchasing?

Plain-English summary

The county could buy qualifying project materials without sales tax under the reviewed direct-purchase program. The county, rather than the contractor, was the purchaser in substance: it issued purchase orders, was invoiced and paid vendors directly, took title and liability at delivery, and was protected by builder's-risk insurance.

The Department expressly conditioned its answer on adopting an amendment limiting the contractor's responsibility for loss or damage to its own negligence. Contractor-manufactured or fabricated items remained outside the approved exemption and were subject to the separate use-tax rule.

What this means for you

Public ownership of the finished project was not enough. The transaction documents and actual purchasing process had to place purchase control, payment, title, liability, and risk of loss with the county.

Common questions

Q: Was the original loss clause acceptable? The ruling required the proposed clarifying amendment before approving the procedures.

Q: What showed the county bore risk of loss? It was a named insured and would receive insurance proceeds for county-owned materials.

Q: Did the answer cover contractor-fabricated items? No. The ruling expressly excluded them.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-unit exemption
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.094 — government and public-works purchases
• Fla. Admin. Code rr. 12A-1.039, 12A-1.051(5) — certificates and fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-049

Original ruling text

SUMMARY

Question: Do purchases of materials for a public performing
arts center project under a direct purchase program qualify
for exemption from sales tax under s. 212.08(6), F.S.?

Answer - Based on Facts Below: Materials for a public
performing arts center 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 named as an
insured party under insurance against loss or damage to the
materials; 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.

Sep 17, 1999

Re: Technical Assistance Advisement (99A-049)
XXX ("County")
Sales and Use Tax -- Contract to Construct Performing Arts
Center
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 July 26, 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

On June 25, 1999, County issued a five-volume Project Manual
containing bidding requirements, form contracts, procedures, and
specifications relating to acting as general contractor
("Contractor") for the construction of a performing arts center
(the "Project"). The form contract calls for a base lump sum
contract price, although bidders are required to provide unit
pricing for various components of the Project to support their
bid and to facilitate pricing any change orders that may be
issued. The bid documents state that Contractor will be
responsible for paying for all labor and materials required for
the Project. Bidders were instructed to include Florida sales
taxes on materials and supplies in their bid price. Contractor
will be required to provide builder's risk insurance in an
amount equal to the full contract amount. The builder's risk
policy must name Contractor and County as insured parties to the
extent of their respective interests.

County is entitled to make purchases without paying Florida
sales and use tax under a consumer's certificate of exemption.
On July 25, 1999, Addendum No. 2 to the bid documents was
issued. It modifies the conditions of the contract by providing
procedures (the "Procedures") for direct purchases of materials
by County to permit County to take advantage of its exemption
from Florida sales taxes. The Procedures include a list of
items under consideration for direct purchase, although items
may be added or deleted from that list. The Procedures contain
the following provisions:

1. County may elect to purchase materials and equipment
   included in a contractor's bid directly from the supplier.
   County will hold full title to all such materials.

2. Contractor and the various subcontractors will select the
   suppliers from whom materials will be purchased for

purposes of making up their bids and County will purchase
materials based on the price and other terms negotiated by
the contractors.

3. Contractor or the subcontractors will furnish County with
   detailed Purchase Order Requisition Forms ("Requisitions")
   for all materials to be purchased by County.

4. Upon receipt of a Requisition, County will issue its own
   purchase order directly to the supplier, with suppliers to
   pay shipping and insurance and delivery to be F.O.B. job
   site.

5. Although County will take title to direct purchase
   materials upon delivery to the job site, the Procedures
   provide that Contractor and the subcontractors will be
   responsible for inspection, acceptance, storage, and "loss
   or damage to equipment and materials following acceptance
   by [County]."

6. After verifying that delivery is in accordance with the
   purchase order, contractors will forward approved invoices
   to County, and County will process the invoices and issue
   payment directly to the supplier.

7. The amount of builder's risk insurance to be carried by
   Contractor will be sufficient to cover direct purchase
   materials. (As noted, County is to be named as an
   additional insured on the builder's risk insurance and
   would receive any proceeds related to materials it owns.)

On September 1, 1999, we discussed the intended scope of the
provision that Contractor and subcontractors were responsible
for "loss or damage" to materials purchased by County. You
subsequently provided a proposed clarifying amendment that
limits that responsibility to loss or damage resulting from the
negligence of Contractor or its agents. This advisement is
expressly conditioned upon the adoption of that amendment by the
parties as part of the contract.

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 those 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 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 the Project
contractors, County will prepare purchase orders for direct
purchases. After receiving the approved invoices from
Contractor or the subcontractors, County will pay the vendors
directly. County will retain legal, and equitable, title to all
materials it purchases and will be a named insured party on
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 which are made in accordance with the
Procedures 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. For example, if a
contractor enters a contract to manufacture elevators at the
contractor's plant and to deliver and install those elevators,
that contractor is liable for tax on the fabrication cost of
those elevators. That tax arises and is imposed prior to
delivery to the job site and transfer of title and risk of loss
to County.

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., 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,

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

LWB/
Enclosure.: Rule 12A-1.039
Control #: 38472