Could a school board buy materials tax exempt for a junior-high media-center project under its proposed direct-purchase procedures?

Plain-English summary

The school board's procedures qualified its direct purchases of construction materials for the sales-tax exemption. The board—not the construction manager—would issue purchase orders carrying the board's Consumer's Certificate of Exemption number, receive vendor invoices, and pay vendors directly.

The board also retained legal and equitable title, accepted liability at job-site delivery, reimbursed the builder's-risk premium, and was named as an insured party. Those facts made the board the purchaser in substance and form before the materials were incorporated into the junior-high media center.

The exemption required a properly completed exemption certificate at purchase. The ruling did not extend to materials manufactured or fabricated by the contractor or subcontractors; they remained the consumers of those articles and owed use tax on their cost.

What this means for you

A public entity cannot obtain the exemption merely by reimbursing a contractor. The controlling documents and transaction flow must make the entity the direct buyer, title holder, payer, and bearer of pre-installation loss.

Common questions

Q: Did the proposed media-center procedures qualify? Yes.

Q: Who had to issue purchase orders and pay vendors? The school board directly.

Q: When did the board take title and liability? At delivery to the job site, before incorporation into real property.

Q: Were contractor-fabricated materials covered? No. The contractor or subcontractor remained the taxable consumer of materials it manufactured or fabricated.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-015

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of school
additions meet the legal requirements for the School Board
to purchase the materials tax exempt?

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

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

2. The purchase orders include the School Board's
   Consumer's Certificate of Exemption number and the
   School Board will supply a copy of the Consumer's
   Certificate of Exemption to the vendor.

3. The vendors invoice the School Board directly.

4. The School Board issues its checks to the vendors
   directly.

5. The School Board takes title to the materials from the
   vendor and assumes liability for the materials when
   they are delivered to the job site.

6. The School Board assumes risk of loss for the
   materials upon delivery, which his clearly established
   by the requirement in the controlling documents that
   the School Board reimburse the contractor for premiums
   paid for insurance against loss or damage and the
   School Board is named as the insured party to receive
   proceeds in case of loss of the items purchased tax
   exempt.

7. The remaining terms of the documents do not prevent
   the conclusion that the School Board rather than the
   contractor is in substance as well as form the

purchaser of the materials.

Mar 18, 2002

Re: Technical Assistance Advisement 02A-015
Public Works Contract
Section: 212.08, F.S.Rules: 12A-1.038, 12A-1.051, 12A1.094, F.A.C.
Petitioner: XXX (herein "School Board")
FEI: XX

Dear :

This letter is a response to your petition dated February 25,
2002, 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

On September 14, 2000, the School Board and XXX ("Construction
Manager"), entered into a Standard Form Contract between Owner
and Construction Manager (the "Agreement"), pursuant to which
Construction Manager was engaged to construct a media center at
a junior high school (the "Project"). Under the Agreement,
Construction Manager is required to pay enumerated costs of the
Project, including the cost of materials and builder's risk
insurance on those materials. School Board is required to
reimburse Construction Manager for the enumerated costs, plus
pay certain fees. The Agreement provides for a guaranteed
maximum price ("GMP") that caps the cost of the Project to
School Board.

School Board is entitled to make purchases without paying

Florida sales and use tax under a consumer's certificate of
exemption. To take advantage of the School Board's exemption, an
Amendment was made to the Agreement, which provides for
incorporation of Exhibits E and F into the Agreement. Exhibit E
to the Agreement is entitled "Sales Tax Exemption Guidelines,"
("Guidelines") and sets forth the general outline of the
program. Exhibit F, "[School Board] Procedures" (the
"Procedures"), provides more detailed procedures for
implementation. The Procedures provide as follows:

1. The School Board 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 for purposes of making up their bids and
   will submit a list of supplies and suppliers with their
   bids.

3. Construction Manager or contractor shall furnish
   detailed Purchase Order Requisition Forms ("Requisitions")
   for all School Board purchased materials.

4. Upon receipt of a Requisition, School Board shall review
   the Requisition and, if approved, issue its own purchase
   order directly to the supplier, with delivery to be made to
   the Project location on an F.O.B. job site basis.

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

6. After verifying that delivery is in accordance with the
   purchase order, the contractor will forward approved

invoices to Construction Manager; School Board will process
the invoices and issue payment directly to the supplier.

7. The amount of builder's risk insurance to be carried
   under the Contract by the Construction Manager will be
   sufficient to cover School Board purchased materials.
   School Board is to be named as an additional insured on the
   builder's risk insurance.

The Guidelines and the Procedures are similar in most respects.
It is not necessary to address those instances in which the
Guidelines differ from the Procedures for purposes of this
advisement, because the Amendment provides that the Procedures
prevail over the Guidelines in case of conflict or
inconsistency.

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., entitled "Sales Made Directly to
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, F.A.C....

Discussion, Analysis and Conclusion

Rule 12A-1.038(4)(b), F.A.C., states that in order for a sale to
a state or local governmental entity to be tax exempt,
"[p]ayment for tax exempt purchases... must be made directly to
the selling 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.

The Procedures appear to satisfy the foregoing requirements for
exemption of transactions as sales to a governmental entity.
School Board will make direct purchases of various construction
materials. After receiving requisition forms from the
contractors, School Board will prepare purchase orders for
direct purchases. After receiving the approved invoices from
Construction Manager, School Board will pay the vendors
directly. School Board will retain legal, and equitable, title
to all materials it purchases, will be responsible for the cost
of builder's risk insurance on those materials as a reimbursable

cost under the Agreements, and will be a named insured party on
the builder's risk policy.

Based upon the conclusion that School Board is the purchaser,
all purchases of materials that are made in accordance with the
Procedures 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.

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 #49019