Did a city's generator direct-purchase arrangement qualify for exemption when the contractor kept title and risk of loss until final acceptance?

Plain-English summary

The city's generator purchase did not qualify for the government exemption because the contractor retained title and risk of loss until city acceptance. The city issued purchase orders with exemption information, paid vendors directly, and was protected by insurance, but those facts could not overcome the contract's express allocation.

Florida required the city to hold title and bear the risk of loss from delivery until incorporation into the water-treatment facility. Being the insurance beneficiary was not enough when the agreement still made the contractor responsible for loss.

The parties could amend the contract for future transactions. Purchase orders issued after a proper amendment making the city retain title and risk could qualify; earlier purchase orders could not be rescued retroactively.

What this means for you

Risk-of-loss language is a decisive direct-purchase term. Government ordering and payment do not establish exemption when the construction contract says the contractor owns and bears the materials until acceptance.

Common questions

Q: Did the generator purchase qualify? No.

Q: What defeated exemption? The contractor retained title and risk of loss until acceptance.

Q: Did insurance fix the problem? No.

Q: Could a later amendment help? Yes, prospectively for purchase orders issued after proper execution.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code r. 12A-1.038(4) — government exemption documentation and direct payment
• Fla. Admin. Code rr. 12A-1.051 and 12A-1.094 — contractor and public-works treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-005

Original ruling text

SUMMARY

QUESTION: Does a city's Agreement Between City and
Contractor (hereinafter "Agreement") for purchase of a
generator for installation into a water treatment facility
meet legal requirements for claiming the city's exemption
exempt from sales and use taxes?

ANSWER - Based on Facts Below: The exemption is fails to
meet the legal requirements to claim the city's exemption
because the Agreement states, "The risk of loss, injury or
destruction shall be on [Contractor] until acceptance of
the work by C[ity]. Title to the work shall pass to C[ity]
upon acceptance of the [w]ork by C[ity]." This is so even
where (1) the city issues its own purchase orders directly
to the vendors; (2) the purchase orders include the city's
consumer's certificate of exemption number; (3) the vendors
invoice the city directly; (4) the city issues its checks
to the vendors directly; and (5) the city is named as the
insured party to receive proceeds in case of loss of the
items. The risk of loss provisions of the documents prevent
the conclusion that the city rather than the contractor is,
in substance as well as form, the purchaser of the
materials because the Agreement fails to meet the
requirements of Rule 12 A-1.094, F.A.C., that the city take
risk of loss of and title to the materials from the vendor.

Jan 14, 2002

Re: Technical Assistance Advisement 02A-005
XXX (hereinafter "City")
Sales and Use Tax -- City Contract to Supply and Install
Emergency Power Generator for Water Treatment Facility
Section 212.08(6), F.S.
Rules 12A-1.038(4), 12A-1.051, 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated September 13, 2001 requesting a technical
assistance advisement that the City may purchase a generator tax
exempt for installation into the water treatment facility being
constructed for the City.

Facts

Your letter of September 13, 2001 states the following. Your
company, XXX, (hereinafter "Contractor"), and the City have
entered into a contract for the supply and installation of an
emergency powered generator system for a water treatment plant.
The price of the equipment to be purchased is $XX.XX. Tax on the
equipment would be $XX in the event that the City's tax
exemption does not apply to the purchase.

You state that the City has issued a purchase order to the
vendor for standby generator equipment, but will not issue a
change order reducing the contract price until the end of the
project as defined in Section 2.14.4.12 of the Agreement, Page

15. Your concern is that this delay in reducing Contractor's
    risk under the Agreement leaves the bond and its premium
    unnecessarily higher than if the change order were issued
    immediately.

You cite Rule 12A-1.094(4), F.A.C., concerning the role of
assumption of risk in the question of the City's tax exemption:

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.

You are concerned that if Contractor purchases the bond for the
full amount of the contract, including the bond cost covering
the equipment, the purchase will no longer qualify as a tax-free
purchase because Contractor will bear the economic burden of
posting a bond for the equipment. In response to an inquiry from
Contractor, the City has advised that it declines to purchase,

insurance to cover the equipment or builder's risk insurance
because it believes that such insurance is the responsibility of
Contractor under the Agreement. You state that under such
circumstances the City does not retain the risk of loss of the
materials.

You cite Section 2.13 of the Agreement, Risk of Loss; Title, set
out below, as additional evidence of the City's failure to
retain the risk of loss of the materials.

You submit the following:

1. Agreement Between the City and Contractor (hereafter
   "Agreement").

2. Certificate of Liability Insurance Contractual Attachment
   to Contract General Conditions, and the Bid Documents Table
   of Contents.

3. Performance Bond dated July 9, 2001 naming Contractor as
   "Contractor".

4. Contractor's letter of July 16, 2001 to the City.

5. XXX (hereinafter "Vendor") letter of August 20, 2001 to the
   City.

6. City's letter of September 5, 2001 to XXX (hereinafter
   "Contractor's Attorney").

Article 5 of the Agreement designates this as a lump sum
contract with provisions for deductive change orders in the
event that the City purchases items directly that Contractor
would otherwise purchase. Section 2.13 of the Agreement, Risk of
Loss; Title, states:

The risk of loss, injury or destruction shall be on
[Contractor] until acceptance of the work by C[ity]. Title
to the work shall pass to C[ity] upon acceptance of the
[w]ork by C[ity].

Section 2.14 of the Agreement, Taxes, provides that Contractor
shall pay all sales, consumer, use and other similar taxes
required to be paid by Contractor in accordance with laws and
regulations of the State of Florida and its political
subdivisions. Contractor is responsible for reviewing the
pertinent state statutes involving such taxes and complying with
all requirements.

Pursuant to Section 2.14.2 of the Agreement, goods and services
purchased directly by Contractor are subject to all state and/or
local taxes. All items, materials, supplies and/or equipment
incorporated and/or used in the construction of the project and
paid for by the Contractor are, consequently, subject to
applicable taxes. It is [Contractor]'s sole responsibility to
incorporate any and all applicable taxes into the bid proposal
for this project without regard to the purchasing procedures
defined in the Agreement.

Pursuant to Section 2.14.3 of the Agreement, major items
included in the Tax Savings Program for City-purchase are as
follows:

2.14.3.1 Diesel Engine Generators and appurtenances
manufactured by Caterpillar or Cummins as specified in
Section 16210 Diesel Engine Generators.

2.14.3.2 Engine Generator Switchgear and appurtenances
manufactured by Russelectric or ASCO as specified in
Section 16250 Engine Generator Switchgear.

Section 2.14.4 of the Agreement establishes "Administrative
and/or Purchasing Procedures" to permit the City to purchase in
its own name some of the items, equipment, materials, and
supplies which will form part of the work that Contractor is
obligated to furnish, install, and construct under the
Agreement.

Under Section 2.14.4.1 and 2 of the Agreement, Contractor
supplies the City with documentation necessary for the City to
purchase items from listed vendors, using one purchase order per
vendor.

Section 2.14.4.2 of the Agreement states that documentation
includes Contractor's Letter of Quotation from the vendor with
vendor information, description of item to be procured,
quantity, taxes, freight, and insurance to be included in owner
purchase, warranty, shipment schedule, and other terms and
conditions.

Under Section 2.14.4.3 of the Agreement, the City's purchasing
department prepares the purchase orders for the City-purchased
materials with the understanding that Contractor is obligated to
incorporate these materials into the project as well as
expedite, unload, store onsite, performance test, and enforce
the warranties on the City-owned materials.

Under Section 2.14.4.4 of the Agreement, purchase orders are
issued and sent to Contractor with the Letter of Quotation,
omitting any sales tax, but having the City's Certificate of
Exemption number attached. Each purchase order shall be
completed and countersigned by Contractor. Contractor is
responsible for conforming the information on the purchase order
to the project's technical specifications.

Under Section 2.14.4.5 of the Agreement, Contractor returns the
completed purchase order to the City for countersignature by the
City's project manager, approving the purchase as to conformity
to specifications, and to the City's purchasing department for
countersignature by the City's purchasing manager.

Under Section 2.14.4.6 of the Agreement, after obtaining all
signatures, the City's project manager simultaneously
distributes the original to the vendor with copies to the City's
purchasing department, Contractor, and the engineer.

Under Section 2.14.4.7 of the Agreement, Contractor is obligated
to receive receipt for, inspect, accept, and to the extent
necessary, unload, store, and protect the City-purchased items,
either at the jobsite or other place as Contractor may deem
appropriate until brought to the work site by Contractor.

Under Section 2.14.4.8 of the Agreement, Contractor accepts

delivery of City-purchased items from appropriate vendor as
conforming to both the terms and conditions of the purchase
order and applicable technical specifications.

Under Section 2.14.4.9 of the Agreement, when Contractor
receives an invoice for City-purchased items that have been
delivered, Contractor shall write on the face of the invoice
that it is "okay for payment", sign it, date it, and send it to
the City's project manager for authorization for payment.

Under Section 2.14.4.10 of the Agreement, when the City receives
a properly approved invoice, the City pays the vendor of the
City-purchased items without any sales tax.

Under Section 2.14.4.11 of the Agreement, Contractor shows the
tax savings under this program when applying for its progress
payments.

Under Section 2.14.4.12 of the Agreement, the City deducts total
of City-purchased materials from progress payments, issuing a
change order at the end of the contract.

Under Section 2.14.4.13 of the Agreement, Contractor assumes
full responsibility for any change in price and liability
associated with ordering the proper quantity and type of
materials and equipment for scheduling the appropriate delivery
date, correctness of the paperwork, storage, delivery, and
protection of the materials.

Under Section 2.14.4.14 of the Agreement, subcontractors must
adhere to the procedures set forth above.

Article 7 of the Agreement, Insurance and Bonds, requires
Contractor to carry insurance on the project and name the City
as an additional insured.

To summarize:

1. The City 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 and submit documentation to the City that
will describe the purchase.

3. From the documentation submitted, the City prepares a
   Purchase Order containing necessary exemption information
   and the signature of the City's authorized personnel and
   issues the purchase order directly to the supplier.

4. 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 City for the performance of these duties while
   the materials are in its possession until returned to City
   through incorporation into the Project.

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

6. On behalf of City, the Contractor will carry builders
   risk insurance sufficient to cover City 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-1.038(4), F.A.C., 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 that 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 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) Contractor s who manufacture materials for
incorporation into public works shall be liable for tax in
the manner provided in Rule 12A-1.051, F.A.C.....

Discussion, Analysis and Conclusion

Section 212.08(6), F.S., provides 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 2.13 of the Agreement shifts the risk of loss of the
City-purchased items from the City to the Contractor until

completion of the work. This precludes the tax exemption.

Other than that, the provisions of the direct purchase
procedures would have satisfied the requirements to make the
purchases tax exempt. Contractor will prepare, for City
approval, requisitions for direct purchases. City will prepare
detailed Purchase Orders, including its exemption documentation,
and forward them to the vendor. After receiving the approved
invoices from Contractor, City will pay the vendors directly.
Contractor may receive, inspect, enforce warranties on, and use
the materials on behalf of the City without disrupting the
City's entitlement to the exemption. However, since the City
refuses to accept risk of loss, even though the loss is covered
by insurance, the exemption fails to take effect. The City need
not be responsible for the cost of insurance on those materials
under the Agreement, as long as it enjoys the economic benefit
of the insurance.

For future transactions, the risk of loss of City-purchased
materials terms could be altered so that the city would retain
the risk of loss of the materials. Any purchase orders issued
after correction of the Agreement could qualify for the
exemption, but not any purchase orders issued before such
amendment to the Agreement was properly executed.

Please note that a contractor that manufactures or fabricates
its own 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 it manufactures or fabricates to perform its
contracts, even when the contract allows the exemption. 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, F.A.C.

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-1.038, F.A.C.
Control #: 46915