Did a county's direct-purchase procedures make convention-center construction materials exempt from Florida sales tax?

Subject

Public Works Contract

Plain-English summary

The county's direct-purchase procedures could exempt convention-center construction materials from sales tax. The county, rather than the contractor, would issue the purchase orders and exemption certificate, receive direct invoices, pay vendors directly, and take title and liability when materials reached the job site.

The county also carried insurance and bore the risk of loss before the materials became part of the real property. The contractor could requisition, inspect, store, and safeguard materials as bailee without becoming the purchaser. The answer did not cover materials manufactured or fabricated by the contractor or subcontractors.

What this means for you

Government funding or title language alone was not enough. The complete transaction had to show that the government was the actual purchaser and bore the pre-installation economic risk.

Common questions

Q: Were the county's direct material purchases exempt? Yes, under the stated procedures.

Q: Could the contractor handle delivered materials? Yes, as bailee.

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

Citations and references

• Fla. Stat. § 212.08(6) — government purchases and contractor exclusion
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.094, and 12A-1.039 — government units, public works, and exemption certificates
• Fla. Admin. Code r. 12A-1.051(10) — contractor-manufactured materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-020

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of a
convention center meet the legal requirements for the
County to purchase the materials tax exempt?

ANSWER - Based on Facts Below: The procedures meet the
legal requirement for the County to purchase the materials
tax exempt as long as the controlling documents provide:

1. The County issues its own purchase orders directly to
   the vendors.

2. The purchase orders include the County's Consumer's
   Certificate of Exemption number, and the County issues its
   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.

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.

Apr 24, 2001

Re: Technical Assistance Advisement 01A-020
Sales and Use Tax - Public Works Contract
Sections: 212.08(6), F.S.

Rule: 12A-1.001(9), 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
FEI: XX

Dear :

This letter is a response to your petition dated March 23, 2001,
for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

FACTS

Your letter provides that County is preparing to construct a new
convention center. Among other things, the contract between
County and the Contractor will include Special Condition 10.1
entitled "County Furnished Materials." The purpose of this
Special Condition is to allow County to take advantage of sales
tax savings by purchasing certain materials used in the
performance of the contract.

Under Special Condition 10.1.1, 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 "CountyFurnished Materials" (hereafter, "Materials"). Section 10.1.1
states the Special Condition 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.

Special Condition 10.1.3 requires Contractor to provide County a
list of vendors, prices of materials to be supplied by such
vendors, and descriptions and estimated quantities of the
materials.

Special Condition 10.1.4 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.

Special Condition 10.1.5 includes a statement that County is to
prepare a purchase order for materials that County wishes to
directly purchase The vendor is expected to fill County's order
at the price quoted to Contractor less any sales tax quoted.

Special Condition 10.1.6 provides that, in conjunction with the
execution of a purchase order, the Contractor shall issue a
deductive change order to the County for the cost of countyfurnished materials, plus sales tax, plus savings to Contractor
in the cost of Payment and Performance Bonds associated with
County Furnished Materials.

According to Special Condition 10.1.8, Contractor is fully
responsible for all matters relating to the receipt of countyfurnished materials, including but not limited to, overseeing
that the correct materials in the correct amounts are received
timely with appropriate warranties; and for inspecting and
accepting the goods; and for unloading, handling, and storing
the materials until installed.

According to Special Condition 10.1.9, Contractor is to visually
inspect the materials when they arrive at the job site, verify
that all necessary documentation accompanies the delivery and
conforms with the purchase order, and forward the invoice to
County for payment.

Special Condition 10.1.10 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.

Special Condition 10.1.11 requires Contractor to maintain
records of the use of the materials and report same to County.

According to Special Condition 10.1.12, the Contractor is
required to manage and enforce warranties on the materials.

Special Condition 10.1.13 Agreement provides that County retains
legal and equitable title to the materials while such materials
are in Contractor's possession. Special Condition 10.1.14
describes this transfer of possession of the county-furnished
materials as a bailment until such time as those materials are
returned to County by being incorporated into the project.

According to Special Condition 10.1.15, County will purchase
builder's risk insurance on the materials against loss or
damage, thereby retaining risk of loss of the materials.

According to Special Condition 10.1.16, County is not liable for
delays in the Project attributable to delivery delays or
defective materials.

According to Special Condition 10.1.17, Contractor reviews
invoices for materials delivered to the construction site on a
monthly basis and advises County whether it concurs with 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 Special Condition 10.1.18, Contractor must provide
to County, within 15 days of delivery, a list indicating
acceptance of the goods or materials. The list must include
copies of the purchase orders and relevant documentation. Upon
receipt of the appropriate documentation, 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. County will prepare and issue a purchase order directly
   to the supplier, with delivery of materials to be made to
   the Project location.

5. Although County will take title to materials purchased
   pursuant to the Attachment 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.

REQUESTED ADVISEMENT

You request advice whether the terms of the subject contract are
sufficient to allow the county to purchase construction
materials exempt from tax.

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[10], F.A.C....

DISCUSSION & ANALYSIS

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.

CONCLUSION

The Special Condition appears 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 Contractor, County will prepare and issue
purchase orders for direct purchases. 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
Special Condition 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(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 upon 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 from that which is 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 s. 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,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/414-9838

Control #44580
Enclosure