Could a governmental unit buy wastewater-project materials tax-free through direct purchases?

Subject

City Contract to Design and Construct a Wastewater Collection System and Treatment Facility

Plain-English summary

Materials for the wastewater project could be purchased tax-free when the governmental unit—not the contractor—was the true purchaser. The government had to issue purchase orders bearing its exemption number, give vendors its exemption certificate, receive invoices directly, and pay vendors with its own checks.

It also had to take title and liability when materials reached the job site and bear the risk of loss before installation, shown through insurance it purchased or under which it was the insured party. The ruling did not cover materials a contractor or subcontractor manufactured or fabricated for the project.

What this means for you

Writing a direct-purchase clause was not enough. The government's ordering, payment, title, liability, insurance, and actual control had to make it the purchaser in both form and substance.

Common questions

Q: Could the contractor prepare requisitions? Yes, but the government had to approve and issue its own purchase orders.

Q: Could the contractor pay vendors and seek reimbursement? No; the government had to pay vendors directly.

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

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code r. 12A-1.001(9) — direct payment by government
• Fla. Admin. Code r. 12A-1.094 — public-works contracts and direct purchases
• Fla. Admin. Code r. 12A-1.039 — exemption certificate
• Fla. Admin. Code r. 12A-1.051(10) — contractor fabrication
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-043

Original ruling text

SUMMARY

QUESTION: Do the procedures for purchase of materials set
out in the authority's contract for the construction of a
wastewater collection system and treatment facility meet
legal requirements for the authority to purchase the
materials tax exempt?

ANSWER - Based on Facts Below: As long as the controlling
documents provide: (1) the authority issues its own
purchase orders directly to the vendors; (2) the purchase
orders include the authority's consumer's certificate of
exemption number and the authority will supply a copy of
the consumer's certificate of exemption to the vendor; (3)
the vendors invoice the authority directly; (4) the
authority issues its checks to the vendors directly; (5)
the authority takes title to the materials from the vendor
and assumes liability for the materials when they are
delivered to the job site; (6) the authority assumes risk
of loss for the materials upon delivery which is clearly
established by the requirement in the controlling documents
that the authority reimburse the contractor for the
premiums for purchase of insurance against loss or damage
and the authority is named as the insured party to receive
proceeds in case of loss of the items purchased tax exempt;
and (7) the remaining terms of the documents do not prevent
the conclusion that the authority rather than the
contractor is in substance as well as form the purchaser of
the materials, the procedures meet legal requirements for
the authority to purchase the materials tax exempt.

Aug 02, 2000

Re: Technical Assistance Advisement 00A-043
XXX ("Governmental Unit")
Sales and Use Tax -- City Contract to Design and Construct
a Wastewater Collection System and Treatment Facility
Section 212.08(6), F.S.

Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear XXX:

This is in response to your letters to the Florida Department of
Revenue dated XX. You asked for a technical assistance
advisement confirming that the procedures proposed in your
letter of XX would provide for tax-exempt purchases.

Facts

Your letter of June 6, 2000 states that, you represent
Governmental Unit, which entered into a Construction Agreement,
(hereafter "Agreement"), with XXX, which is presumed to be the
contractor (hereafter "Contractor") pursuant to which Contractor
was engaged to design and construct a wastewater collection
system and treatment facility (the "Project"). Copies of the
complete Construction Agreement and Appendix K, presumably to
the Agreement, were not enclosed with your request for technical
assistance advisement. Also missing was Appendix J, a copy of
the purchase order form referred to in Article 20 as attached to
"this Contract." Enclosed was a copy of "Article 20, Materials
and Machinery (Procurement Process)" (hereafter, "Article 20"),
and Page X of X, XXX Wastewater Treatment System Design/Build
Contract ("Agreement," sometimes "Contract").

Under the Section 1.25 Machinery of the Agreement, the word
"machinery" is defined to be any and all complex devices, tools,
facilities, or other apparatuses, together with the necessary
supplies for upkeep and maintenance thereof, that are necessary
for the construction and acceptable completion of the Work; that
are incorporated into the Facilities; and that are, or will,
become the property of Governmental Unit.

Under the Section 1.26 Material of the Agreement, the word
"material" is defined as any substance to be incorporated into
the Work or consumed in the performance of the Work that will
become the property of Governmental Unit upon Governmental
Unit's acceptance of the Project.

Section 20.1 of Article 20 requires Contractor to identify all

Materials and Machinery, the cost of which exceeds $2,500.00 per
item, or which, when purchased in bulk, exceed $2,500.00 and
that are required by Contract Documents to satisfactorily
complete the Project. It states further that the Contractor may
not purchase any such Materials and Machinery on the Project
without obtaining the prior, written consent of Governmental
Unit.

Section 20.1 of Article 20 states that upon approval of the
content of Appendix K, Governmental Unit agrees to purchase
those Materials and Machinery identified therein directly from
the supplier(s) through the procedures set forth below. The
Contract Price is reduced by the cost of the Materials and
Machinery directly purchased by Governmental Unit. By
purchasing Materials and Machinery, Governmental Unit acquires
sole title to the Materials and Machinery. Contractor is
required to inspect, accept delivery of and store the Materials
and Machinery pending their incorporation into the Project and
is liable to Governmental Unit for any negligence in meeting
those obligations. After accepting delivery of Governmental
Unit's Materials and Machinery, the contractor is not relieved
of its obligation to protect, maintain, and replace Materials
and Machinery until final acceptance of the project by
Governmental Unit.

Section 20.2 provides that Contractor must provide Governmental
Unit with written notice of its or its subcontractors' intent to
purchase Materials and Machinery that qualify under Section 20.1
not less than sixty (60) calendar days before the items are
needed for the Project.

Section 20.2.1 provides that the written notice must identify
the Materials and Machinery to be purchased by suppliers' name,
address, telephone number, the number of similar items that are
estimated to be used, the unit price, and the date that each
item is needed. A detailed Purchase Order Form, a copy of which
is "attached to this Contract as Appendix J" is to accompany the
written notice.

Section 20.3 provides that on receipt of a Requisition,
Governmental Unit will review the requisition and, if approved,

Governmental Unit issues its own purchase order directly to the
suppliers of the Material and Machinery, with delivery to be
F.O.B. Project site. Governmental Unit's purchase order
contains or is accompanied by its certificate of exemption and
includes its exemption number, issue date and expiration date.
The Contractor gets a copy of the purchase order.

Section 20.4 provides that Governmental Unit takes title to the
Materials and Machinery it purchases on delivery. The
Contractor inspects, accepts delivery of, and stores the
Materials and Machinery and is responsible for warranty
enforcement and is liable to Governmental Unit for negligence in
performing these duties.

Section 20.5 provides that Contractor forwards invoices for
delivered items to Governmental Unit for approval and payment
directly to the supplier by Governmental Unit.

Section 20.6 provides that on behalf of Governmental Unit, the
Contractor shall purchase and maintain builder's risk insurance
sufficient to cover any Governmental Unit purchased Materials
and Machinery from the time that Governmental Unit takes title
to Materials and Machinery until the time that the Materials and
Machinery are incorporated into the Project. Governmental Unit
is to reimburse the Contractor for the premiums the Contractor
pays and Governmental Unit is named as the insured party to
receive proceeds related to the Materials and Machinery in the
event of a loss.

Section 20.7 provides that Governmental Unit is to reimburse the
Contractor for sales tax that it incurs on the first two hundred
thousand ($200,000.00) dollars spent by the Contractor to
purchase miscellaneous items that do not exceed the $2,500.00
threshold required by Section 20.1.

To summarize:

1. The Governmental Unit 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 furnishes Governmental Unit with detailed
   Purchase Order Requisition Forms for all materials that
   exceed the $2,500.00 threshold below which items will not
   be purchased tax-free.

4. From the Requisition, Governmental Unit prepares a
   Purchase Order containing necessary exemption information
   and issues the purchase order directly to the supplier,
   copy to the contractor, with delivery of materials to be
   made to the Project location.

5. Although Governmental Unit will take title to Materials
   purchased pursuant to Article 20, 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 will
   have the duty to safeguard, store and protect the Materials
   and will be liable to Governmental Unit for the performance
   of these duties while the materials are in its possession
   until returned to Governmental Unit through incorporation
   into the Project.

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

7. On behalf of Governmental Unit, the contractor will
   carry builders risk insurance sufficient to cover
   Governmental Unit purchased materials. Governmental Unit
   will reimburse the Contractor for premiums paid to insure
   the Materials and Machinery.

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 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 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 29 of Article 20 of the Agreement appears to satisfy the
foregoing requirements for exemption of transactions as sales to
a governmental entity. Governmental Unit will make direct
purchases of various construction materials. Contractor will
prepare for Governmental Unit approval, requisitions for direct
purchases. Governmental Unit will prepare detailed Purchase
Orders including its exemption documentation and forward them to
the vendor. After receiving the approved invoices from
Contractor, Governmental Unit will pay the vendors directly.
Governmental Unit 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 Governmental Unit is the
purchaser, all purchases of materials that are made in
accordance with the Agreement will be exempt from sales tax. 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(10), 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 #: 41644