Could a county buy courthouse-construction materials tax-free under its owner-direct purchase procedure?

Plain-English summary

The county could buy qualifying courthouse-expansion materials tax-free under the proposed direct-purchase procedure. The county had to issue its own purchase orders and exemption documentation, receive vendor invoices, pay vendors directly, take title and liability at job-site delivery, and bear the insured risk of loss.

Those steps made the county the purchaser in substance as well as form. The ruling did not extend the exemption to materials a contractor or subcontractor manufactured or fabricated for the job; those parties owed use tax on full fabricated cost.

What this means for you

Putting a government name on a purchase is not enough. The government entity must actually control the order and payment and assume ownership and risk under the governing documents.

Common questions

Q: Could the contractor pay vendors and seek reimbursement? No. The county had to issue payment directly to the vendors.

Q: When did the county take title and liability? When the materials were delivered to the job site.

Q: Were contractor-fabricated materials exempt? No. The contractor or subcontractor owed use tax on full fabricated cost.

Citations and references

• Fla. Stat. § 212.08(6) — governmental purchases
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.038, and 12A-1.094 — direct government purchases and public works
• Fla. Admin. Code r. 12A-1.051(10) — fabricated-cost use tax
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-050

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 County to
purchase the materials tax exempt?

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

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

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

3. The vendors invoice the County directly.

4. The County issues its checks to the vendors directly.

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

6. The County assumes risk of loss for the materials upon
   delivery, which his clearly established by the
   requirement in the controlling documents that the
   County reimburse the contractor for premiums paid for
   insurance against loss or damage and the County 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 County rather than the
   contractor is in substance as well as form the
   purchaser of the materials.

Nov 20, 2002

Re: Technical Assistance Advisement 02A-050
Sales and Use Tax - Public Works Contract
Section 212.08(6), F.S.
Rules: 12A-1.001(9), 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
FEI: XX

Dear :

This letter is a response to your petition dated September 19,
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

Your letter provides that County is preparing to expand its
South County Courthouse. Among other things, the contract
between County and the Contractor will include Special Condition
9, entitled "Sale and Use Tax Exemption for County Furnished
Materials." The purpose of this Special Condition is to allow
County to take advantage of sales tax savings by purchasing
certain materials used in the performance of the contract.

Under Special Condition 9.1, County will "... make direct
purchases of all materials and equipment purchased for, or to be
incorporated into the Project, as requested by the
Contractor...."(FN 1)

Special Condition 9.1.1 requires Contractor to provide County a
list of vendors, prices of materials to be supplied by such
vendors, and descriptions and estimated quantities of the
materials, and for the Contractor to prepare a requisition on

the County_s requisition form. The requisition form must
include complete information to identify and contact the vendor,
as well as complete information regarding the items to be
purchased. The Contractor will deliver the purchase requisition
to the County, and the County will issue the purchase order
directly to the vendor of the items to be purchased.

According to Special Condition 9.1.4, when County directly
purchases materials and equipment, Contractor will reduce the
contract amount and the penal sum of its public construction
bond by 1.06 times the cost of the materials and equipment
purchased directly by County.

According to Special Conditions 9.1.5, Contractor is fully
responsible for all matters relating to the receipt of countyfurnished materials, including but not limited to, overseeing
that the correct materials in the correct amounts are received
timely with appropriate warranties; and for inspecting and
accepting the goods; and for unloading, handling, and storing
the materials until installed.

According to Special Condition 9.1.6, Contractor is to visually
inspect the materials when they arrive at the job site, verify
that all necessary documentation accompanies the delivery and
conforms with the purchase order, and forward the invoice to
County for payment.

Special Condition 9.1.7 requires Contractor to verify that the
materials conform to plans and specifications and to determine
before installation that such materials are not defective. This
section also makes Contractor liable to County for any failure
to carry out this obligation.

Special Condition 9.1.8 requires Contractor to maintain records
of the use of the materials and report same to County.

According to Special Condition 9.1.9, the Contractor is required
to manage and enforce warranties on the materials.

According to Special Condition 9.1.10, County takes possession
of the materials, then immediately transfers the possession of

the county-furnished materials to the Contractor. This transfer
is described as a bailment until such time as those materials
are returned to County by being incorporated into the project.

Special Condition 9.1.3 provides that County assumes risk of
loss of the materials it purchases pursuant to its sales and use
tax exemption. According to Special Condition 9.1.11, County
will purchase builder's risk insurance on the materials against
loss or damage, thereby retaining risk of loss of the materials.

According to Special Condition 9.1.12, County is not liable for
delays in the Project attributable to delivery delays or
defective materials.

According to Special Condition 9.1.13, Contractor reviews
invoices for materials delivered to the construction site on a
monthly basis and advises County whether it concurs with or
objects to the payment of the invoices based on its own records
of actual deliveries and of defects detected in the materials.

According to Special Condition 9.1.14, Contractor must provide
to County, within 15 days of delivery, a list indicating
acceptance of the goods or materials. The list must include
copies of the purchase orders and relevant documentation. Upon
receipt of the appropriate documentation, County pays the vendor
directly by check.

To summarize:

1. The County will purchase materials and equipment
   included in a Contractor's bid directly from the supplier,
   as directed by the Contractor.

2. Contractor will select the suppliers from whom materials
   will be purchased.

3. Contractor shall furnish County with detailed Purchase
   Order Requisition Forms for all materials.

4. County will prepare and issue a purchase order directly
   to the supplier, with delivery of materials to be made to

the Project location.

5. Although County will take title to materials purchased
   pursuant to the Attachment 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's
   possession of the materials will constitute a bailment.
   Contractor, as bailee, will have the duty to safeguard,
   store, and protect the materials while in its possession
   until returned to County through incorporation into the
   Project.

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

7. County will carry insurance sufficient to cover County
   purchased materials.

REQUESTED ADVISEMENT

You request advice whether the terms of the subject contract are
sufficient to allow the County to purchase construction
materials exempt from tax.

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

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.

CONCLUSION

The Special Condition appears to satisfy the foregoing
requirements for exemption of transactions as sales to a
governmental entity. County will make direct purchases of
various construction materials. After receiving requisition
forms from the Contractor, County will prepare and issue
purchase orders for direct purchases. After receiving the
approved invoices from Contractor, County will pay the vendors
directly. County will hold 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 County is the purchaser, all
purchases of materials and equipment to be incorporated into the
public work that are made in accordance with the Special
Condition 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. A
suggested format for an exemption certificate is provided in
Rule 12A-1.038, F.A.C., a copy of which is enclosed.

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 #52039
Enclosure

FOOTNOTE 1. The exemption applies only to materials and
equipment that are incorporated into the public work. The
quoted phrase should be amended to reflect that County will only
directly purchase materials and equipment that will be
incorporated into the project.