Can a Florida community college buy materials for a public construction project tax-free through a direct-purchase program?

Plain-English summary

The community college could buy the project materials without Florida sales tax under the direct-purchase procedures reviewed. The exemption worked because the college, rather than its construction manager or subcontractors, was the purchaser in substance as well as form.

The college issued purchase orders bearing its exemption number, vendors invoiced it directly, and it paid vendors with its own checks. It took title and liability when materials reached the job site and bore the risk of loss by purchasing builder's-risk insurance. Those facts satisfied the public-works rule's direct-purchase requirements.

The ruling did not cover materials manufactured or fabricated by a contractor or subcontractor. For those items, the ruling said the contractor remains the ultimate consumer and owes use tax on the full cost.

What this means for you

A government exemption does not automatically shelter materials incorporated into public works. The documents and actual process must make the public agency the purchaser, with direct purchase orders, invoices and payments, title, liability, exemption documentation, and risk of loss.

Common questions

Q: Was government funding alone enough? No. The Department examined who actually purchased the materials and emphasized the substance of the transaction.

Q: What factor received special weight? Risk of loss before installation. The college paid for insurance and was entitled to insurance proceeds.

Q: Did the ruling exempt contractor-fabricated materials? No. It expressly excluded that situation.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-unit exemption
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.094 — governmental 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-057

Original ruling text

SUMMARY

QUESTION: Do purchases of materials for a community college
facility 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 community
college facility 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.

Oct 15, 1999

Re: Technical Assistance Advisement (99A-057)
XXX ("College")
Sales and Use Tax -- Community College Contract to
Construct Facilities
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 September 1, 1999, in which you asked for a
technical assistance advisement indicating that the procedures
proposed in your letter would provide for tax-exempt purchases.
In addition to your letter, further information and
documentation has been provided at your request by a
representative of XXX ("Contractor").

Facts

On April 7, 1998, the Florida Department of General Services
("DMS"), acting as the Agent for College, entered into a
contract (the "Agreement") with Contractor pursuant to which
Contractor was engaged to manage the construction of a community
college center (the "Project"). All funding for the Project is
from and under the control of College. Under the Agreement,
Contractor is required to pay enumerated costs, including the
cost of materials, sales and use taxes on the materials, and
builder's risk insurance covering the materials. College is
required to reimburse Contractor for the enumerated costs plus
pay certain fees. Contractor is required by Article 7 to develop
and propose a guaranteed maximum price ("GMP") that caps the
cost of the Project to College.

College is entitled to make purchases without paying Florida
sales and use tax under a consumer's certificate of exemption.
Article 2 of the Agreement requires Contractor to submit a
"direct tax savings purchase plan" that will become part of
Contractor's services upon acceptance by College. Contractor had
previously submitted to the Department a document entitled
"Sales Tax Exempt Purchasing Procedures for Public Projects"
(the "Procedures") and requested advice on whether the
Procedures would provide for tax-exempt transactions. The
Procedures provide the following:

1. The public agency reserves the right to purchase directly
   materials included in bids of subcontractors, and
   subcontractors will provide lists of materials and
   suppliers for review by the public agency to determine
   whether to make direct purchases.

2. Subcontractor bids will be reduced through change orders to

reflect that the subcontract does not include materials
that the public agency chooses to purchase directly and to
subtract from the contract price their cost and related
sales/use taxes. In such case, the public agency will
purchase from the same vendor that the subcontractor would
have purchased from and at the same price and on the same
terms as the vendor extended to the subcontractor.

3. Seven days prior to the date on which materials the public
   agency has elected to purchase must be ordered, the
   subcontractor shall provide a Purchase Order Requisition
   Form so that the public agency can process it and issue its
   own Purchase Order to the vendor, which purchase order
   shall identify the public agency as purchaser and contain
   the public agency's consumer's exemption certificate
   number, issue date and expiration date.

4. The subcontractor and Contractor will inspect all materials
   purchased pursuant to the Procedures upon their delivery
   and shall verify the correctness of the delivery and the
   lack of defects in the materials. Invoices will be
   forwarded to Agency for payment after such verification.

5. The public agency shall take title upon delivery and shall
   retain title to all materials it purchases and
   subcontractors shall act as bailees as to all agencypurchased materials in their possession, which shall be
   stored and safeguarded by the subcontractors for the public
   agency during the period of bailment until returned to the
   public agency through incorporation into the project under
   construction. Subcontractors shall be liable for loss or
   damage to agency-purchased materials in their possession if
   such loss or damage results from the subcontractor's
   negligence. Subcontractors shall be liable for obtaining
   any warranties on such materials as required by the
   contract and for managing any such warranties while the
   materials are in their possession.

6. Upon verification by the subcontractor of receipt and
   inspection of materials, the public agency will prepare its
   own checks to vendors for payment and deliver such checks

directly to the vendors.

7. The public agency shall purchase and maintain insurance
   sufficient to protect against any loss of or damage to
   agency-purchased materials. The insurance shall cover the
   full value of such materials from the time the public
   agency takes title until they are incorporated into the
   project.

On February 18, 1997, the Department issued to Contractor a
letter of technical assistance (the "LTA") that concluded that
transactions conducted in accordance with the Procedures would,
subject to certain limitations, be exempt from sales tax.

On December 7, 1998, Contractor submitted copies of the LTA and
the Procedures to DMS for review and incorporation into the
Agreement by amendment. On March 19, 1999, Contractor submitted
its GMP Proposal. It provided a statement of qualifications on
which the GMP was based, one of which was inclusion of "Direct
Owner Purchase Plan" pursuant to the terms of the Procedures as
submitted on December 7, 1998. A copy of the Procedures was
attached to the Proposal. Also on March 19, 1999, Contractor
and DMS entered into Amendment Two to the Agreement. Amendment
Two accepted the proposed GMP and specifically stated it was
based upon enumerated drawings, specifications, and documents,
including the Proposal. You have represented that the parties
intended to and have adopted the Procedures as part of Agreement
by virtue of their attachment to the Proposal and reference to
the Proposal in Amendment Two.

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 the one 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." Subsections (2) and (3) of Rule
12A-1.094, 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.
College will make direct purchases of various construction
materials. After receiving requisition forms from the
subcontractors, College will prepare purchase orders for direct
purchases. After receiving the approved invoices from the
contractors, College will pay the vendors directly. College 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. College will receive any insurance proceeds
related to the loss or destruction of those materials.

Based upon the conclusion that College is the purchaser, all
purchases of materials that 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.

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 #: 38833