Which public-works materials could the owner buy tax-free, and when did the contractor owe use tax?

Plain-English summary

Florida generally approved the public owner’s direct-purchase procedures, but not for materials fabricated by the contractor. Exempt owner purchases required owner-issued purchase orders and exemption documentation, direct vendor invoices and payment, owner title and liability at delivery, and owner risk of loss shown through insurance.

When the contractor manufactured or fabricated materials in its own plant or workshop, the owner could not use its governmental exemption. The contractor had to accrue use tax on the materials' fabricated cost under the cited rules.

What this means for you

Separate ordinary vendor purchases from contractor fabrication. The direct-purchase exemption depends on the owner being the real purchaser, while contractor-produced items require a fabricated-cost use-tax calculation.

Common questions

Q: Did the ruling approve every material in the contract as exempt? No. It excluded materials fabricated by the contractor.

Q: Who had to issue payment for an exempt direct purchase? The public owner had to pay the vendor directly.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code rr. 12A-1.038 and 12A-1.094 — direct purchase and public works
• Fla. Admin. Code rr. 12A-1.043 and 12A-1.051 — fabricated-cost use tax
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 02A-055

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of a public
works contract meet the legal requirements for Taxpayer
(the contractor) to avoid payment of tax on construction
materials used in the performance of the contract (direct
purchase by owner of the public work)?

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

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

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

3. The vendors invoice the owner directly.

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

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

6. The owner assumes risk of loss for the materials upon
   delivery, which his clearly established by the requirement
   in the controlling documents that the owner 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 owner rather than the contractor is in
   substance as well as form the purchaser of the materials.

However, it appears from the scope of work that Taxpayer

will fabricate some of the materials in its own plant or
workshop. The terms of Rule 12A-1.094(5), Florida
Administrative Code, prohibit the owner from using its
exemption on these materials fabricated by Taxpayer.
Taxpayer is required to accrue use tax on the fabricated
cost of these materials in accordance with Rule 12A1.051(10), Florida Administrative Code, and Rule 12A1.043(1), Florida Administrative Code.

Dec 31, 2002

Re: Technical Assistance Advisement 02A-055
Sales and Use Tax - Public Works Contract
Section: 212.08(6), F.S.
Rules: 12A-1.038, 12A-1.043, 12A-1.051, 12A-1.094, F.A.C.
Petitioner: XXX (herein "Taxpayer")
FEI: XX

Dear :

This letter is a response to your petition dated October 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

Taxpayer has provided a contract between itself and General
Contractor for steel fabrication and construction for a project
in Florida. The contract is dated August 6, 2002. The owner of
the project is an XXX, which holds a consumer's certificate of
exemption as a federal instrumentality.

The scope of work includes labor, materials, supervision,

equipment, tools, insurance, taxes and all other items necessary
to perform the work for structural steel/joist/metal decking.
It appears that the scope of work includes shop fabrication by
Taxpayer.

The contract states in section 1.1 that the contract documents
include the prime contract between the owner and the prime
contractor dated May 15, 2001.

The contract is a lump sum contract; payments to Taxpayer are
made in installments based on the percentage of completion of
the work, in accordance with section 3.2 of the contract.

Section 5 generally provides that insurance for the project will
be in accordance with Exhibit C, Owner Controlled Insurance
Program. Exhibit C specifically states that "[t]he Builder's
Risk shall be provided by the... XXX...."

A document entitled "Section 01330 - Owner Direct Purchasing"
was provided with your request. It is our understanding that it
is part of the prime contract and, therefore, part of the
subject contract as provided in section 1.1. This document has
a revision date of August 5, 2002.

Paragraph 3.0, A. of the Owner Direct Purchasing document states
that the owner may elect to purchase materials and equipment
directly from the suppliers, and that the owner will hold title
to all such materials. Other provisions of Paragraph 3.0 are as
follows:

All materials and equipment to be purchased directly by the
owner will be made on the owner's pre-printed serial numbered
purchase order form, which also contains the owner's tax exempt
certificate number. The purchase order forms will be provided
to the subcontractor (Taxpayer) for preparation. The purchase
order will be forwarded to the owner for review and approval of
the purchase order. After the approval process, the signed
purchase order is forwarded by the owner to the Construction
Manager (assumed to be the prime contractor) for submission to
the supplier.

The original invoice of the order is to be sent directly to the
owner by the supplier. Taxpayer is responsible for expediting
and delivery coordination, as well as verifying the invoice.

The owner will take title to and liability for the materials
upon delivery to the job site. Once Taxpayer has inspected the
materials and approved the invoices, the owner will make payment
for the materials directly to the supplier.

REQUESTED ADVISEMENT

Taxpayer requests advice whether the direct purchasing
procedures are sufficient to allow it to avoid payment of tax on
construction materials used in the performance of the contract.

LAW AND DISCUSSION

As a federal instrumentality, XXX qualifies for the exemption
pursuant to section 212.08(6), Florida Statutes, which states in
pertinent part as follows:

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), Florida Administrative Code, 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), Florida Statutes, 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
by that contractor 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, Florida
Administrative Code, which provides in pertinent part:

(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... (Emphasis Supplied)

Purchases by the federal government, including federal
government employees that are reimbursed for the purchase by the
federal government, are exempt from tax. The exemption
generally does not extend to purchases by contractors hired by
the federal government. Rule 12A-1.094(2) and (3), Florida
Administrative Code, 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,
Florida Administrative Code.

Under Rule 12A-1.094, Florida Administrative Code, 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, Florida Administrative Code, 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 from 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.

The terms of Section 01330 - Owner Direct Purchasing are
generally sufficient for the materials to be purchased exempt
from tax by the owner. However, it appears from the scope of
work that Taxpayer will fabricate some of the materials in its

own plant or workshop. The terms of Rule 12A-1.094(5), Florida
Administrative Code, prohibit the owner from using its exemption
on these materials fabricated by Taxpayer. Taxpayer is required
to accrue use tax on the fabricated cost of these materials in
accordance with Rule 12A-1.051(10), Florida Administrative Code,
and Rule 12A-1.043(1), Florida Administrative Code.

Rule 12A-1.051(10), Florida Administrative Code, provides:

Use tax on fabrication costs. Contractors may maintain
shops, plants, or similar facilities where they
manufacture, produce, compound, process, or fabricate items
for their own use in performing contracts. Contractors are
required to pay use tax on the fabricated cost of those
items. The elements that must be included in the taxable
cost of such items are set forth in Rule 12A-1.043, F.A.C.
In the case of real property contractors, the taxable cost
of an item manufactured, produced, compounded, processed,
or fabricated for use in performing a contract does not
include labor that occurs at the job site where the item
will be incorporated into a real property improvement or
transportation from the plant where an item was fabricated
to the job site. Examples of real property contractors who
are subject to tax under this subsection include cabinet
contractors who build custom cabinets in their shops,
roofing contractors who operate tile plants, or heating/air
conditioning/ventilation contractors who maintain sheet
metal shops for making ductwork. Real property contractors
that are required to remit use tax on fabricated items must
register as dealers for purposes of remitting such tax if
they are not already registered as dual operators.
(Emphasis Supplied)

Rule 12A-1.043(1), Florida Administrative Code, explains the
methodology for calculating use tax on fabricated cost, and it
states in pertinent part as follows:

(1)(a) Any person who manufactures, produces, compounds,
processes, or fabricates in any manner an article of
tangible personal property for his own use shall pay a tax
upon the cost of the property manufactured, produced,

compounded, processed, or fabricated without any deduction
therefrom on account of the cost of material used, labor or
service costs, or transportation charges.

(b) Elements of cost will include the following materials,
labor, service, or transportation costs that are
attributable to manufacturing, producing, compounding,
processing, or fabricating an article of tangible personal
property for one's own use and which are properly
chargeable to the cost of the product under generally
accepted cost accounting standards.

1. Material costs include the following:

a. All direct materials and related freight costs that are
physically observable as being identified to the finished
tangible personal property, that are consumed in producing
the property, or that become a component or ingredient of
the finished property. See paragraphs (c) and (d), below,
for calculating the tax on the cost of the finished product
when sales tax has or has not been paid on direct
materials.

b. Material handling and warehousing of direct materials and
goods in process.

c. Manufacturer's excise taxes on materials.

2. Labor costs include the following:

a. The total direct labor costs for employees or contract
labor that are allocable to the production of the finished
property, including the entire amount of payroll burden,
which includes but is not limited to overtime premium,
vacation and holiday pay, sick leave pay, shift
differential, payroll taxes, payments to a supplemental
unemployment benefit plan, and employee fringe benefits.

b. Compensation of officers, to the extent it is allocated
to production and not administrative functions.

c. Costs of service, engineering, design or other support
employees allocated to production.

3. Service costs include the costs of non-employee services
   that are allocated to the production of the tangible
   personal property, such as engineering, design or similar
   consulting or professional services.

(c) Direct materials on which the tax has been paid shall
not be included when computing the tax on the cost of items
of tangible personal property manufactured, produced,
compounded, processed, or fabricated....

Please note that the calculation of the use tax on the
fabricated costs of items used in this contract is the same
methodology that Taxpayer should be using to calculate its use
tax on the fabricated cost of items for any other contract.

CONCLUSION

The terms of Section 01330 - Owner Direct Purchasing are
generally sufficient for the materials to be purchased exempt
from tax by the owner. However, it appears from the scope of
work that Taxpayer will fabricate some of the materials in its
own plant or workshop. The terms of Rule 12A-1.094(5), Florida
Administrative Code, prohibit the owner from using its exemption
on these materials fabricated by Taxpayer. Taxpayer is required
to accrue use tax on the fabricated cost of these materials in
accordance with Rule 12A-1.051(10), Florida Administrative Code,
and Rule 12A-1.043(1), Florida Administrative Code.

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 #52513