How could a nonprofit hospital buy materials tax free for additions to its hospital and emergency outpatient center?

Subject

Contract for Construction of Additions to Medical Facility

Plain-English summary

The nonprofit hospital's proposed direct-purchase procedures allowed tax-free construction-material purchases. The hospital issued purchase orders with exemption documentation, received vendor invoices, paid vendors directly, held legal and equitable title, insured the materials, and bore risk of loss before incorporation into the building.

Subcontractors could prepare requisitions, inspect and safeguard deliveries, enforce warranties, and route invoices while holding materials as bailees. They did not become the purchasers under the approved structure.

The hospital could alternatively use a retail-sale-plus-installation contract, but all tangible-property sales had to be separately stated before the contract was made. Contractors and subcontractors manufacturing or fabricating items remained ultimate consumers and owed use tax on full fabricated cost.

What this means for you

Nonprofit status did not automatically exempt contractor purchases. The documents and actual purchasing responsibilities had to establish the hospital as the buyer.

Common questions

Q: Did the direct-purchase procedures qualify? Yes.

Q: Could subcontractors handle delivery and warranty tasks? Yes.

Q: Did contractor fabrication become exempt? No.

Citations and references

• Fla. Stat. § 212.08(7)(p) — section 501(c)(3) organization exemption
• Fla. Admin. Code r. 12A-1.051(3)(d) and (10) — retail-sale installation contracts and fabrication
• Fla. Admin. Code rr. 12A-1.001, 12A-1.039, and 12A-1.094 — exempt purchases and public-works procedures
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 01A-034

Original ruling text

SUMMARY

QUESTION: What procedures will permit a nonprofit hospital
to purchase materials tax exempt for the construction of
additions to its facilities?

ANSWER - Based on Facts Below: The nonprofit hospital may
enter into a "retail sale plus installation contract"
pursuant to Rule 12A-1.051(3)(d) with a contractor to
purchase materials tax-exempt. However, in that instance,
all sales of tangible personal property must be separately
stated in the contract before it is entered into. This is
difficult to document. Or the hospital could use the same
procedures for direct purchases as governmental entities
use to secure their exemption pursuant to Section 212.08(6),
F.S. Such procedures require that (1) the hospital prepares
and provides to its vendor its Purchase Order, accompanied
by the owner's exemption certificate with exemption number
with issue and expiration date. The Purchase Order states
the hospital's name and address. (2) The hospital pays the
vendor directly. (3) The subcontractor may be responsible
for such things as receipt and inspection of materials,
warranties, for loss or damage after receipt or non-payment
due to negligence of the subcontractor, making certain that
the materials conform to the Purchase Order, for correcting
nonconformities and defects, for informing the hospital of
these, for keeping records, for enforcing warranties, and
for forwarding the invoice to the hospital for payment. (4)
The hospital retains title to materials while they are in
subcontractor's possession, as a bailment. The
subcontractor has duty to store and protect them. (5) The
hospital insures the materials and bears the risk of their
loss.

Jun 21, 2001

Re: Technical Assistance Advisement 01A-034
XXX ("Taxpayer")

Sales and Use Tax - Contract for Construction of Additions
to Medical Facility
Sections 212.08(6), 212.08(7)(p), F.S.
Rules 12A-1.001(3)(a), 12A-1.001(9), 12A-1.038, 12A-1.039,
12A-1.051(3), 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue postmarked March 26, 2001. You asked for a technical
assistance advisement confirming that the model procedures
proposed in your documents would provide for tax-exempt
purchases for contracts for the construction of additions to and
improvements of a medical facility.

Facts

Your correspondence of March 26, 2001 states that you represent
the Taxpayer, a Florida not-for-profit corporation that has been
granted Section 501(c)(3) status under the Internal Revenue
Code. Taxpayer leases the XXX ("Hospital") from the XXX
("District") pursuant to a Lease Agreement between Taxpayer, as
Lessee, and District, as Lessor, dated January 26, 1998
(hereafter "Lease"), which you submit Exhibit A. The term of the
lease is ten (10) years, renewable twice. Improvements become
part of the leased premises and revert to the District when the
lease terminates.

Taxpayer has entered into two contracts for additions to its
facilities, one an addition to the Hospital and another an
emergency outpatient center. You have submitted Exhibit B,
Standard Form of Agreement Between Owner and Construction
Manager where the Construction Manager is also the Constructor
(hereafter "Addition Agreement"), for a guaranteed maximum
price. Exhibit C is a Standard Form Agreement Between Owner and
Contractor where the basis of payment is a Stipulated Sum,
(hereafter "Outpatient Center Agreement").

Subsequently, you have supplied Amendment to Contract
("Amendment") and Attachment I, Sales Tax Exempt Purchase
Procedures for Nonprofit Projects ("Procedures"). You advise

that these will become part of the two Agreements in question.
Relevant parts of the Amendment to Contract are paraphrased and
provide as follows:

Taxpayer is referred to as "the Owner."

11.3 All direct purchases of materials by the Owner shall
be made in accordance with the procedures in amended
paragraph 11.16.

11.16 Direct Materials Acquisition by Owner
...
11.16.2 Owner may purchase materials and equipment included
in a contractor's bid directly from the supplier. Such
purchases will be governed by Sales Tax Exempt Purchasing
Procedures for Non-Profit Projects (the "Procedures").

11.16.3 Owner will issue its own purchase orders directly
to the vendors and suppliers selected by the Subcontractor.
The purchase order will be accompanied by the Owner's
consumer's certificate of exemption, including the
exemption number with issue and expiration date.

11.16.4 and 11.16.5 Contractor and subcontractor, as the
Owner's representatives, are responsible for ensuring that
the materials delivered are correct and kept securely and
are responsible for forwarding the invoice to the Owner for
payment.

11.16.6 and 11.16.7 The Owner retains title to and will
insure the Owner Purchased Materials while they are in the
possession of the Subcontractor.
...
11.16.9 In case of a conflict between the contract and the
Amendment, the Amendment controls.

The Procedures are paraphrased and provide as follows:

1. The Owner reserves the right to make tax exempt
   purchases in accordance with the form of Purchase Order
   attached herewith.(FN 1) Such purchases will be governed

by these procedures.

2. The Subcontractor will select the materials suppliers
   and has included the price of all materials plus applicable
   taxes in his bid.

3. The Subcontractor shall submit a description of the
   materials to be supplied with estimated quantities and
   prices.

4. Upon request by the Contractor, the Subcontractor will
   prepare a standard Purchase Order Requisition Form, in a
   form acceptable to the Owner, which shall include complete
   information concerning the vendor, brand and identification
   numbers of the item requisitioned, quantity, price, sales
   tax, and Subcontractor's requested delivery date, as well
   as terms negotiated with vendor, such as payment terms,
   warranties, etc.

5. From the requisition, the Owner will prepare its
   Purchase Order for direct purchase. Owner's Purchasing
   Director or his designated representative will be the
   approving authority for the Purchase Order, which will
   require the supplier to insure the materials during
   shipment, will require delivery of the materials F.O.B.
   jobsite, will contain or be accompanied by the owner's
   exemption certificate, and must include the Owner's name,
   address and exemption number with issue and expiration date
   shown.
   ...

6. The Subcontractor will be fully responsible for all
   matters relating to the receipt of materials, such as
   verifying quantities, documentation, warranties, inspection
   and acceptance of goods, and for loss or damage after
   receipt or non-payment due to negligence of the
   Subcontractor.

9., 10., 11., and 12. The Contractor and Subcontractor are
responsible for inspecting the materials as they are
delivered, for making certain that the materials conform to
the Purchase Order, for correcting nonconformities and

defects, for informing the Owner of these, for keeping
records, for enforcing warranties, and for forwarding the
invoice to the Owner for payment.

13. and 14. Owner will retain title to materials while they
    are in Subcontractor's possession, as a bailment, the duty
    to safeguard, store, and protect the materials being that
    of the Subcontractor.

14. The Owner shall insure the materials.
    ...

15. The Owner shall pay the vendor directly.

Requested Advisement

You are requesting advisement that the procedures that you
propose will allow the nonprofit hospital to purchase materials
for its construction projects exempt from sales tax.

Law

Section 212.08(7)(p), F.S. provides:

Section 501(c)(3) organizations.--Also exempt from the tax
imposed by this chapter are sales or leases to organizations
determined by the Internal Revenue Service to be currently
exempt from federal income tax pursuant to s. 501(c)(3) of the
Internal Revenue Code of 1986, as amended, when such leases or
purchases are used in carrying on their customary nonprofit
activities.

Section 212.08(7), F.S., also provides where relevant:

Exemptions provided to any entity by this subsection shall
not inure to any transaction otherwise taxable under this
chapter when payment is made by a representative or
employee of such entity by any means, including, but not
limited to, cash, check, or credit card even when that
representative or employee is subsequently reimbursed by
such entity.

Rule 12A-1.001(3)(a), F.A.C., provides:

A sale or lease directly to or sales or leases of tangible
personal property by churches, or a sale or lease directly
to nonprofit religious, nonprofit educational, nonprofit
charitable institutions... for use in the course of their
customary nonprofit religious, nonprofit educational,
nonprofit charitable activities... are exempt from the tax
imposed by Chapter 212, F.S. ... However, such
institutions or organizations desiring to qualify for the
exemption must obtain from the Department of Revenue a
consumer's certificate of exemption, and payment must be
made directly to the dealer by the exempt entity.... This
exemption shall not inure to any transaction otherwise
taxable when payment is made by an exempt entity's employee
by any means, including but not limited to, cash, check, or
credit card, when that employee is subsequently reimbursed
by the exempt entity. See Rules 12A-1.038 and 12A-1.039,
F.A.C.

Rule 12A-1.051(3)(d), F.A.C. states:

Retail sale plus installation contracts. These are
contracts for improvements to real property in which the
contractor or subcontractor agrees to sell specifically
described and itemized materials and supplies at an agreed
price or at the regular retail price and to complete the
work either for an additional agreed price or on the basis
of time consumed. In order for a contract to fit in this
category, all the materials that will be incorporated into
the work must be itemized and priced in the contract before
work begins. If a contract itemizes some materials but does
not itemize other materials that will be incorporated into
the work, the contract is not included in this category.
Because the sale of the materials is a separable
transaction from the installation, the purchaser must
assume title to and risk of loss of the materials and
supplies as they are delivered, rather than accepting title
only to the completed work. The contractor may remain
liable for negligence in handling and installing the items.

Discussion, Analysis and Conclusion

An exempt entity may enter into a "retail sale plus installation
contract" pursuant to Rule 12A-1.051(3)(d) with a contractor to
enjoy their tax-exempt status on their purchases. However, all
sales of tangible personal property must be separately stated in
the contract before it is entered into. This can be difficult to
document. Another way to secure their exempt status is to follow
the same procedures for direct purchases that governmental
entities follow to secure their exempt purchases pursuant to
Section 212.08(6), F.S.

Rule 12A-1.001(9), F.A.C., interprets the statute and states
that in order for a sale to a state or local governmental entity
to be tax exempt, "[p]ayment 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) that 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.

The Amendment and Procedures appear to satisfy the foregoing
requirements for exemption of transactions as sales to a
nonprofit entity. Taxpayer will make direct purchases of various
construction materials. The Subcontractors will prepare
requisitions for direct purchases for Taxpayer's approval. The
Taxpayer will prepare detailed Purchase Orders, including its
exemption documentation and forward them to the vendor. After
receiving the approved invoices from the Subcontractor, the
Taxpayer will pay the vendors directly. The Taxpayer 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 Amendment and Procedures.

Based upon the conclusion that Taxpayer is the purchaser, all
purchases of materials that are made in accordance with the
Amendment and Procedures 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.

Any contractor or subcontractor that manufactures or fabricates
materials as specified in Rule 12A-1.094(5), F.A.C., is deemed
to be the ultimate consumer 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.

Advisement

The procedures that you propose will allow the nonprofit
hospital to purchase materials for its construction projects
exempt from sales tax.

This response constitutes a Technical Assistance Advisement
under Article 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 Article 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 Article 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 #: 44741

FOOTNOTE 1: The Purchase Order form was aot attached to the
Procedures submitted, but it is described in sufficient detail
in Paragraph 5 of the Procedures for the purposes of this
Technical Assistance Advisement.