Did a county's airport public-works agreement make the county the tax-exempt purchaser of construction materials?

Plain-English summary

The county's agreement did not establish tax-exempt direct purchases of public-works materials. The contractor procured and funded materials, handled delivery, invoiced the county for reimbursement, retained title until reimbursement, and bore delivery responsibility. The agreement also did not address builder's-risk insurance on the materials.

The Department required six points to appear clearly in the controlling documents: county-issued purchase orders carrying its exemption number; county title and liability at job-site delivery until incorporation; invoices sent directly from vendors to the county; direct county payment; county risk of loss or insured status; and no other terms undermining the county's status as purchaser in both substance and form.

The existing agreement did not clearly incorporate any of those six required provisions, so it was inadequate for exempt purchases.

What this means for you

Government reimbursement of a contractor is not the same as a government direct purchase. The written contract and actual transaction must make the government entity the buyer before materials become part of the real property.

Common questions

Q: Was the county's current procedure sufficient? No.

Q: Could the contractor present county purchase orders to vendors? Yes, but the county had to execute them and include its exemption number.

Q: Who had to pay vendors? The county directly.

Q: Who had to bear risk of loss before incorporation? The county, shown through insurance or equivalent contract terms.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• 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-022

Original ruling text

SUMMARY

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

ANSWER - Based on Facts Below: The procedures to meet the
legal requirement for the County to purchase the materials
tax exempt must be clearly contained in the controlling
documents, and they are as follows:

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.

6. 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.

The terms of the Agreement do not contain adequate

provisions to allow the County to purchase materials exempt
from tax. It is absolutely required that the terms of the
Agreement incorporate and clearly spell out all of the six
provisions set forth in the advisement. Currently, the
terms of the Agreement do not clearly incorporate any of
the six required provisions necessary for the County to
effectuate tax exempt purchases of materials to be
incorporated into the public work.

Apr 26, 2002

Re: Technical Assistance Advisement 02A-022
Public Works Contract
Section: 212.08, F.S.
Rule: 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
FEI: XX

Dear :

This letter is a response to your petition dated March 18, 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

County has entered into a Non-Exclusive Telecommunications, Data
Network, and Shared Airport Tenant Services Management Agreement
("Agreement") with XXX Inc. ("Contractor"). The Agreement calls
for Contractor to provide design, installation, maintenance,
repair, and management and operational support services for all
voice and data network infrastructure for County and the shared
airport tenant services customers at the County airport system

facilities.

Article 4 of the Agreement details the scope of services
provided by Contractor. Section 1B states that Contractor will
"[m]anage the turn-key installation of new voice, data and
network services...."

Article 7 of the Agreement details the procurement of material,
equipment and inventory, and states in pertinent part:

Except when the County requires the Contractor to provide
competitive bids, the Contractor will be required to
procure all parts, equipment, and software necessary to
perform the work under this Agreement. These items are to
be funded by the Contractor, and will be reimbursed and
paid when the [County] pays the invoice associated with the
[work] and or project management services. The Contractor
will maintain, in consideration for the payments of an
annual spare parts carrying charge... high use items "onhand" in order to complete routine [work].... Any
residual, excess, or left over material will become
property of the County upon termination of the
Agreement....

A. Spare Parts Inventory

The Contractor shall maintain a spare parts inventory... to
support both scheduled and non-scheduled maintenance and
repair, to ensure prompt repair of Equipment and [work]....

[County] will purchase when and as required during the term
of the Agreement all parts necessary for the ongoing
operation and maintenance of [project]. Upon termination
of this Agreement, [County] will purchase the Contractor's
remaining stocked spare parts inventory that the County
deems necessary to the ongoing operation of [project] at
the State of Florida contract or other agreed fixed price.

C. Purchasing Procedures

1. The Contractor will be required to sell to the County...

all parts and equipment necessary to perform the work under
this Agreement. The Contractor shall pass on to the County
any additional discounts offered by the equipment vendors
and invoice [County] for the actual price, net of discount
received for such equipment or parts by the Contractor.

2. At [County's] option, the Contractor shall provide to
   [County] a minimum of three (3) qualified bids, if
   available, for [County's] acquisition of specified parts,
   equipment, wiring, cables, materials, supplies, systems,
   sub-systems, or software necessary to provide the Services
   under this Agreement.

D. Deliveries and Shipping Costs

1. Deliveries of material will be scheduled and handled
   solely by the Contractor and [County] will provide loading
   dock facilities. The Contractor assumes all responsibility
   for the delivery of purchased items....

J. Title

Title to Equipment and/or parts shall pass to the County
upon the County's reimbursement to the Contractor of the
cost of the particular item.

Article 30 details insurance requirements. It requires the
contractor to obtain Workers' Compensations Insurance, Public
Liability Insurance, and Automobile Liability Insurance.
Builder's risk insurance on materials is not discussed.

REQUESTED ADVISEMENT

Advice is requested as to whether the terms of the subject
contract are sufficient to allow the County to purchase
materials exempt from tax.

LAW AND DISCUSSION

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....

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.

6. The remaining terms of the documents do not prevent the
   conclusion that the governmental entity rather than the
   contractor is in substance as well as form the purchaser of
   the materials.

CONCLUSION

The terms of the Agreement do not contain adequate provisions to
allow the County to purchase materials exempt from tax. It is
absolutely required that the terms of the Agreement incorporate
and clearly spell out all of the six provisions set forth in
this advisement. Currently, the terms of the Agreement do not
clearly incorporate any of the six required provisions necessary
for the County to effectuate tax exempt purchases of materials
to be incorporated into the public work.

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 #49470