Did a city's direct-purchase procedure exempt construction materials for a public library from Florida sales tax?

Plain-English summary

The city's construction-material purchases for the public library were exempt when made under the approved direct-purchase procedure. The city issued its own purchase orders bearing its exemption number, vendors invoiced the city, and the city paid them directly.

The city also took title and liability when materials reached the job site and bore the risk of loss before installation, supported by insurance naming the city to receive loss proceeds. Those facts made the city—not the contractor—the purchaser in both substance and form.

The ruling did not cover materials manufactured or fabricated by the contractor or subcontractors. For those items, the contractor remained the ultimate consumer and owed use tax on the full cost under the cited rules.

What this means for you

Government ownership of the finished project was not enough. The governmental unit had to control the actual material purchase, pay the vendor, take title, and bear preinstallation risk of loss under consistent contract and insurance documents.

Common questions

Q: Could the contractor prepare purchase requisitions? Yes, but the city had to approve and issue the actual purchase orders.

Q: Who had to pay the vendor? The city directly.

Q: Were contractor-fabricated materials included? No.

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption
• Fla. Admin. Code r. 12A-1.038(4) — sales directly to governmental units
• Fla. Admin. Code r. 12A-1.094 — public-works contracts
• Fla. Admin. Code r. 12A-1.051(10) — contractor-fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-033

Original ruling text

SUMMARY

QUESTION: Do the procedures set out in a city's Tax Exempt
Purchasing Procedures for Public Projects for purchase of
materials exempt from sales and use taxes for the
construction of a public library meet legal requirements
for claiming the city's exemption?

ANSWER - Based on Facts Below: 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; (5) the city takes title to the materials from
the vendor and assumes liability for the materials when
they are delivered to the job site; (6) the city assumes
risk of loss for the materials upon delivery which is
clearly established by the requirement in the controlling
documents that the city is named as the insured party to
receive proceeds in case of loss of the items purchased tax
exempt; and (7) the remaining terms of the documents do not
prevent the conclusion that the city rather than the
contractor is, in substance as well as form, the purchaser
of the materials, the procedures meet legal requirements
for the city to purchase the materials tax exempt.

Aug 30, 2002

Re: Technical Assistance Advisement 02A-033
XXX (hereinafter "City")
Sales and Use Tax - City Contract to Build a Public Library
Section 212.08(6), F.S.
Rules 12A-1.038(4), 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated July 2, 2002 and FAX of August 1, 2002. You asked

for a Technical Assistance Advisement that would confirm that
the model procedures and documents proposed in your letter and
documentation would qualify for tax-exempt purchases for the
construction of a public library (hereinafter "Project").

Facts

Your documents include the following:

1. AIA Document A101, Standard Form of Agreement between City
   and Contractor where the basis of payment is a Stipulated
   Sum, 1987 Edition (hereinafter "Agreement").

2. Exhibit M [to the Agreement] (hereinafter "Exhibit"),
   Direct Materials Acquisition by City.

3. Attachment 1 to Exhibit M, Sales Tax Exempt Purchasing
   Procedures for Public Projects (hereafter "Procedures").

4. Sample Purchase Order.

Article 2 of the Agreement makes the Exhibit and the Procedures
part of the Agreement.

Article 7 of the Agreement, Subsection 7.3, Other provisions,
states:

Wherever the Contract Documents or the Bid Documents
conflict with the [Exhibit] and the [Procedures], the
[Exhibit] and [Procedures] shall prevail.

Article 9 of the Agreement, Enumeration of Contract Documents,
Subsection 9.1.3, identifies the Exhibit and Procedures as
Supplementary Conditions to the Agreement. The Exhibit provides
that:

1. The term "(sub)contractor" shall mean the contractor
   and/or a subcontractor, as applicable.

2. Each contractor or subcontractor shall include
   applicable sales tax for all materials, supplies, and

equipment included in its bid.

3. The City may elect to purchase materials and equipment
   included in a contractor's bid directly from the
   supplier. Any materials so purchased will be called
   "City purchased materials" and be governed by the
   Procedures. The Procedures govern where
   inconsistencies exist between the Procedures and the
   Agreement.

4. The City will issue its own purchase orders directly
   to the vendor, which will contain the City's exemption
   certificate, issue and expiration date, and name and
   address. Subcontractors will select the suppliers from
   whom materials will be purchased for prices negotiated
   by the subcontractors.

5. Subcontractors will remain responsible for
   coordination of material purchases, protection,
   warranties, and installation.

6. Upon delivery to the job site, the contractor will
   have contractual obligations to inspect and accept
   delivery of materials pending incorporation into the
   project, will verify the delivery ticket in writing,
   and will furnish the invoice to the City.

7. Notwithstanding the transfer of the City purchased
   materials to the subcontractor, the City retains title
   to the materials.

8. The City shall purchase and maintain insurance on the
   materials, equipment, and supplies not yet
   incorporated into the project from the time that the
   City first takes title.

9. The materials suppliers may be required to carry a
   bond in the amount of 100% of the purchase price, the
   cost of which will be added to the purchase price.

10. If the state assesses any sales tax, penalties and/or

interest against the contractor or any of the
subcontractors or materials suppliers relating to the
direct acquisition of materials and/or equipment by
City, they will be reimbursed by the City to the
contractor.

The Procedures provide substantially what the Exhibit provides
plus what follows:

2. (Sub)contractors will select the suppliers from whom
   materials will be purchased.

3. Contractor shall provide the City with a list of all
   intended suppliers, vendors, and materialmen, as well as
   materials to be supplied, estimated quantities, and prices.

4. Contractor shall provide the City with a list of all
   intended Subcontractors, who will supply lists of all of
   their intended suppliers, vendors, and materialmen, as well
   as materials to be supplied, estimated quantities, and
   prices.

5. Upon request of the Contractor, the Subcontractor shall
   prepare a standard purchase order requisition form
   acceptable to the City to specifically identify the
   materials that the City, at its sole option, elected to
   purchase. This requisition form shall include:

6. Name, address, telephone number and contact person for
   material supplier;

7. Manufacturer or brand, model or specification number
   of the item;
8. The quantity needed as estimated by (sub)contractor;
9. The price quoted by the supplier for the materials or
   equipment identified;
10. Any sales tax associated with the price quote;
11. Delivery dates established by (sub)contractor;
12. Copy of written quote from vendor.

7. Upon receipt of a Requisition, City shall review the

Requisition and, if approved, issue its own purchase order
and forward it to the Subcontractor for verification prior
to its issuance to the supplier, with delivery to be made
to the Project location on an F.O.B. jobsite basis. The
purchase order shall provide the City's name, address,
exemption number, and issuance and expiration date, and
shall provide for insurance. It shall be accompanied by the
City's exemption certificate.

10. The Subcontractor is responsible for risk of loss of
    the materials due to its own actions or negligence.

15. Notwithstanding transfer of possession of the materials
    from the City to the (sub)contractor, the City shall retain
    title to the materials.

16. Such transfer of possession shall be deemed a bailment
    until the materials are incorporated into the project.

17. The City shall purchase and maintain insurance on the
    materials.

19. & 20. The subcontractor shall review invoices to be
    certain that the materials delivered are satisfactory and
    meet the specifications of the purchase order and shall
    advise the City of conforming invoices, for which the City
    shall pay directly to the supplier.

20. At the end of the project, credit is given to the City
    for refunds on surplus materials, and salvaged materials
    are the property of the City, removed from the Project site
    at the direction of the City.

The Sample Purchase Order that you provide conforms with the
requirements of the Exhibit and the Procedures.

The City and its contractors have not yet executed the
Agreement, and the sales tax exemption will not be available
until the Agreement is fully executed, incorporating the two
additional Exhibits into the Agreement. The conclusions set out
in this advisement are contingent on such executions.

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.

3. From the Requisition, 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. Although the City will take title to materials purchased
   pursuant to the Procedures 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 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.The City will carry 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 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-1.094(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 Agreement, Exhibit, and Procedures appear to satisfy the
foregoing requirements for exemption of transactions as sales to
a governmental entity. City will make direct purchases of
various construction materials. 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. City 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 City is the purchaser, all
purchases of materials that are made in accordance with the
Agreement 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.

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 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/
Control #: 50926