Could a Florida county buy materials for airport-terminal renovations tax exempt while its contractor handled requisitions and delivery?

Plain-English summary

Florida approved the county's direct purchases of airport-renovation materials as tax exempt, provided the county remained the purchaser in substance as well as form. The contractor could select suppliers, prepare requisitions and the county's purchase-order forms, inspect deliveries, and store materials, but it could not buy in its own name.

The county had to issue its own purchase orders with its consumer's certificate of exemption number, receive invoices directly, pay vendors directly, take legal and equitable title and liability when materials reached the job site, and bear the risk of loss through insurance. The Department treated risk of loss as especially important.

The ruling did not cover materials manufactured or fabricated by the contractor or subcontractors. For those items, the contractor remained the taxable consumer under the cited rule.

What this means for you

Government funding or title language alone did not establish the exemption. The county had to control the purchase and bear the material's economic risk before incorporation into the project.

Common questions

Q: Could the contractor prepare purchase orders? It could prepare the county's forms for county approval. A purchase made on the contractor's form was not exempt.

Q: Who had to pay the vendor? The county, by direct payment.

Q: When did title and risk pass to the county? At delivery to the job site, before installation.

Q: Was vendor exemption documentation required? Yes. Each vendor had to receive a properly completed exemption certificate at purchase.

Q: Did the ruling cover contractor-fabricated materials? No.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-unit sales-tax exemption
• Fla. Admin. Code r. 12A-1.001(9) — government purchase documentation
• Fla. Admin. Code r. 12A-1.094 — public-works materials and purchaser factors
• Fla. Admin. Code rr. 12A-1.039 and 12A-1.051(5) — exemption certificates and contractor-fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-010

Original ruling text

SUMMARY

QUESTION: Do the procedures for purchase of materials set
out in the county's contract for airport passenger terminal
construction and other airport renovations meet legal
requirements for the county to purchase the materials tax

exempt?

ANSWER - Based on Facts Below: As long as the controlling

documents provide: (1) the county issues its own purchase
orders, not the contractor's, directly to the vendors; (2)

the purchase orders include the county's consumer's
certificate of exemption number and the county will supply
a copy of the consumer's certificate of exemption to the
vendor; (3) the vendors invoice the county directly; (4)

the county issues its checks to the vendors directly; (5)

the county takes title to the materials from the vendor and
assumes liability for the materials when they are delivered
to the job site; (6) the county assumes risk of loss for

the materials upon delivery which is clearly established by
the requirement in the controlling documents that the
county purchase insurance against loss or damage; and (7)
the remaining terms of the documents do not prevent the
conclusion that the county rather than the contractor is in
substance as well as form the purchaser of the materials,
the procedures meet legal requirements for the county to

purchase the materials tax exempt.

Mar 03, 2000

Re: Technical Assistance Advisement (O0A-010)
XXX ("County") Your file: XX
Sales and Use Tax -- County Contracts to Renovate Airport
Terminals
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 1, 2000. You asked for a technical
assistance advisement confirming that the procedures proposed in

your letter would provide for tax-exempt purchases.

Facts

Your letter states that, on XX, 1999, XXX (hereafter "County")

and XXX (hereafter "Contractor") entered into a Construction
Agreement, (hereafter "Agreement,") pursuant to which Contractor
was engaged to construct Terminals X and X renovations at XXX
Airport in XXX Florida (the "Project"). A copy of the complete
Construction Agreement was not enclosed with your request for
technical assistance advisement. Enclosed was a copy of Section
11.4 of the Construction Agreement, titled "County Furnished

Materials."

Under the Section 11.4 of the Construction Agreement, County
reserves the right to require Contractor to assign subcontracts

or other agreements with material suppliers to County. Any
materials purchased by County pursuant to such agreements are
referred to as “County Furnished Materials," (hereafter,
"Materials"). Section 11.4 of the Construction Agreement
governs terms and conditions relating to "County Furnished
Materials," and takes precedence over other terms and conditions
of the Contract Documents where inconsistencies or conflicts

exist.

Section 11.4.1 requires Contractor to provide County a list of
vendors with prices of materials to be supplied with

descriptions and estimated quantities.

Section 11.4.2 provides that, on request of County, Contractor
shall prepare a requisition in a form acceptable to County,
reflecting items that County may elect to purchase directly.
The requisition form must include complete information to
identify and contact the vendor; the complete description of the
item to be ordered; the quantity needed as estimated by
Contractor; quoted price together with associated sales tax and

shipping insurance cost; performance bond cost; delivery dates

established by Contractor; and detail concerning bonds and

letters of credit provided by vendor, if applicable.

Section 11.4.3 includes a statement that waiver of the County
Procurement Code was approved by the County Board of
Commissioners on Tuesday, November 7, 1989. It states further
that Contractor is to prepare a purchase order in accordance
with the requisition for County to use for direct purchase. The
vendor is expected to fill County's order at the price quoted to
Contractor less any sales tax quoted. Each purchase order is to

contain County's consumer's certificate of exemption number.

Section 11.4.3 presents some confusion, because it states that
Contractor, having prepared the purchasing requisition form
according to Section 11.4.2, next receives the purchasing
requisition forms that it prepared, then prepares a purchase

order "in accordance with County requirements for approval and
prompt entry by Aviation Department or its agents" for each item
that County chooses to purchase. Apart from the confusion about
the route that the paperwork follows, it is not clear whether
Contractor uses its own purchase order form or uses County's
purchase order form. It is assumed for the purposes of

affirming that County is in compliance with the law for the
purposes of securing its tax exemption, that Contractor prepares
County's purchase order form, not its own. Any purchase made on

Contractor's purchase order form is not tax exempt.

The purchase order provides for reimbursement to the vendor of
shipping costs and insurance, as well as the costs of providing
a performance bond in favor from the vendor to County,

presumably all paid for by County.

According to Section 11.4.6 of Agreement, Contractor is
responsible for overseeing that the correct materials in the
correct amounts are received timely with appropriate warranties;
for inspecting and accepting the goods; and for unloading,

handling, and storing the materials until installed.

According to Section 11.4.7 of Agreement, Contractor is to
visually inspect the materials when they arrive at the jobsite;

verify that all necessary documentation accompanies the delivery

and conforms with the purchase order; and forward the invoice to

County for payment.

Section 11.4.8 of Agreement requires Contractor to verify that
the materials conform to plans and specifications, and, to
determine before installation, that such materials are not
defective. This section also makes Contractor liable to County

for any failure to carry out this obligation.

Section 11.4.9 of Agreement requires Contractor to maintain

records of the use of the materials and report same to County.

According to Section 11.4.10 of Agreement, the Contractor is

required to manage and enforce warranties on the materials.

Section 11.4.11 of Agreement provides that County retains legal
and equitable title to the materials while such materials are in

Contractor's possession.

According to Section 11.4.12 of Agreement, transfer of the
materials into Contractor's possession constitutes a bailment
from County to Contractor until such time as those materials are

returned to County by being incorporated into the project.

According to Section 11.4.13 of Agreement, County purchases
insurance on the materials against loss or damage, thereby

retaining risk of loss of the materials.

According to Section 11.4.14 of Agreement, County is not liable
for delays in the Project attributable to delivery delays or

defective materials.

According to Section 11.4.15 of Agreement, Contractor reviews
invoices for materials delivered to the construction site ona
monthly basis and advises County whether it concurs or objects
to the payment of the invoices based on its own records of

actual deliveries and of defects detected in the materials.

According to Section 11.4.16 of Agreement, Contractor must
provide to County by the 15th of the month following delivery,

requisition for payment of the associated invoices. The

requisition must include copies of the purchase orders and
relevant documentation. Upon receipt of this requisition, County

pays the vendor directly by check.

To summarize:

1. The County may elect to purchase materials and equipment

included in a contractor's bid directly from the supplier.

2. Contractor will select the suppliers from whom materials

will be purchased.

3. Contractor shall furnish County with detailed Purchase

Order Requisition Forms for all materials.

4. Upon request of County, Contractor shall prepare a
   requisition, then prepare County's purchase order for
   review by County's Aviation Department or agent, and, if
   such order is approved, issue the purchase order directly
   to the supplier, with delivery of the materials to be made

to the Project location.

5. Although County will take title to materials purchased
   pursuant to the Agreement upon delivery to the job site,
   the Contractor will have contractual obligations to
   inspect, accept delivery of, and store the materials
   pending incorporation into the project. Contractor's
   possession of the materials will constitute a bailment.
   Contractor, as bailee, will have the duty to safeguard,
   store and protect the materials while in its possession
   until returned to County through incorporation into the

Project.

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

supplier.

7. County will carry insurance sufficient to cover County

purchased materials.

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 ....

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
for their records proper documentation of the exempt status of

the sale.

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 a 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
situation, 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 asa

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 fora sale toa

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 supplies;

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.

Section 11.4 of Agreement appears to satisfy the foregoing
requirements for exemption of transactions as sales toa
governmental entity. County will make direct purchases of
various construction materials. After receiving requisition
forms from the contractors, Contractor will prepare, for County
approval, purchase orders for direct purchases. It is assumed
that County's purchase orders are used for this purpose, not
Contractor's. After receiving the approved invoices from
Contractor, County will pay the vendors directly. County will
retain legal, and equitable, title to all materials it

purchases, and it will be responsible for the cost of insurance

on those materials under the Agreement.

Based upon the conclusion that County is the purchaser, all
purchases of materials that are made in accordance with the
Agreement will be exempt from sales tax. However, it is
necessary 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.

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,

Karen Kugell

Senior Attorney

Technical Assistance and Dispute Resolution
(850) 922-4834

KK/
Enclosure.: Rule 12A-1.039, F.A.C.
Control #: 40250(TADR); 17154 (ED)

cc: Jim Zingale