Were a city's country-club direct purchases exempt, and were a nonprofit manager's loan repayments taxable commercial rent?

Plain-English summary

Florida reached two results: compliant city direct purchases were exempt, and the nonprofit manager's loan repayments were not taxable commercial rent.

For materials, the city had to follow the stated procedures strictly: issue purchase orders and exemption documentation, receive invoices, pay vendors, take title and liability, bear risk of loss, and remain the purchaser in substance and form.

Management agreement was not a lease

The nonprofit lacked the control and possessory rights expected of a tenant. The city reviewed financial reports and approved the business plan, while the agreement focused on management services rather than granting a leasehold. Loan repayments were operational proceeds returned to the city, not payment for occupancy.

What this means for you

Public owners should analyze procurement and operational agreements separately. A management relationship can avoid rental characterization when the owner retains meaningful control, but every direct material purchase must still follow the exemption procedure.

Common questions

Q: Were all project purchases automatically exempt?
A: No. Purchases outside the stated procedures were taxable.

Q: Why was the nonprofit not a tenant?
A: The city retained oversight and control inconsistent with a lease or license.

Q: What were the loan repayments?
A: Operational proceeds returned to the city, not rent.

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption
• Fla. Admin. Code rr. 12A-1.038(4) and 12A-1.094 — direct purchases and public works
• Fla. Stat. § 212.031 — historical commercial real-property rental tax
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-032

Original ruling text

SUMMARY

QUESTION 1: Do the procedures for the purchase of materials
set out in the contract for the renovation of a country
club meet the legal requirements for the City to purchase
the materials tax exempt?

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

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 and the School Board
   will supply a copy of the Consumer's Certificate of
   Exemption to the vendor.
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 his clearly established by the
   requirement in the controlling documents that the City
   reimburse the contractor for premiums paid for
   insurance against loss or damage and the City 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 City rather than the
   contractor is in substance as well as form the
   purchaser of the materials.

QUESTION 2: Are payments made pursuant to a Management
Agreement nontaxable payments made under a management
contract, or instead are the payments taxable payments made
for the lease, rental or license to use the City's
property?

ANSWER - Based on Facts Below: The loan repayments made to

the City by the Nonprofit are not payments made under any
lease or license arrangement, but instead are operational
proceeds returned to the City. Under these facts, the
amounts paid pursuant to Management Agreement is not within
the reach of s. 212.031, F.S., and consequently are not
taxable.

Jul 10, 2003

Re: Technical Assistance Advisement 03A-032
Sales and Use Tax
Public Works Contract Exempt Purchasing Procedures Whether
a contract creates a lease or license of real property or
is a management agreement
Sections 212.031 and 212.08(6), F.S.
Rules 12A-1.038(4) and 12A-1.094, F.A.C

Dear :

This is in response to your request dated March 25, 2003, to the
Office of the Attorney General for a technical assistance
advisement inquiring whether a city may purchase, exempt from
tax, supplies and materials for the improvement of city owned
property, where such property is being managed by a private
company. The Office of the Attorney General has forwarded your
petition to this office for a response. Your original request
has been supplemented with additional correspondence and
documentation to outline the transaction at issue. As
supplemented, the Department finds your request to be in
compliance with the requisite criteria set forth in Chapter 1211, 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

City owns a parcel of land and buildings that are used as a
country club. The City has decided to improve and renovate the
existing facilities. The City has entered into a management

agreement with a nonprofit corporation ("Nonprofit"), under
which Nonprofit agreed to manage, operate and maintain the
country club. The Management Agreement contains the following
provisions:

1. Nonprofit is required to submit numerous budgets and reports
   to the City for approval and to meet detailed reporting
   obligations specified by the Management Agreement. Nonprofit
   must supply monthly financial reports and annual audited
   financial statements to the City. The City is entitled to
   conduct its own financial audits of operations. Nonprofit's
   business plan and capital plan must be submitted annually to the
   City. The City must approve any amendments to these plans.
   Nonprofit must supervise all of its personnel such that these
   individuals meet certain standards of conduct established by the
   City.

2. Nonprofit must repay certain loans made by the City for
   capital improvements at the country club. Nonprofit is expected
   to generate such funds from operating revenues. All capital
   improvements made are the property of the City.

3. The Management Agreement may be terminated at any time prior
   to the stated expiration date by either party, without cause,
   provided a written notice is given in advance of the
   cancellation date (e.g., advance notice of 60 or 90 days).

4. In general, Nonprofit does not have the right to assign its
   interest in the Management Agreement.

Nonprofit entered into an operating agreement ["Operating
Agreement"] with another company, Operator, whereby Operator
assumes "responsibility for the design and architectural
renovations of the [country club], programing [sic] of space,
oversight of construction, marketing, management, food and
beverage operations, repair and maintenance, hiring and firing
of staff and any and all other services typically provided in
the normal course of country club operation." Under the
Operating Agreement, Nonprofit, has subcontracted many of its
obligations with respect to the country club to Operator. For
example, Operator must prepare, on behalf of Nonprofit, all of

the reports and plans required to be furnished to the City by
Nonprofit. As consideration for allowing Operator to operate
the Country Club, the Operator receives a percentage of the
gross revenues from the country club operations.

Operator has commenced the construction phase of the rebuilding
of the country club. Operator has entered into a construction
agreement with a general contractor ("Contractor") and several
subcontractors. The construction agreement indicates that the
City is obligated to directly purchase certain materials used to
fulfill the project.

Contractor has developed Sales Tax Exempt Purchasing Procedures
for Public Projects (the "Procedures") intended to permit
governmental entities to enjoy sales tax savings by purchasing
construction materials for their projects directly from
suppliers. The Procedures contain the following provisions:

1. A governmental entity may elect to purchase materials,
   supplies and equipment included in a subcontractor's bid
   directly from the supplier. Such items are referred to as
   "Owner/Public Entity-Purchased Materials," and the
   governmental entity will hold full title to all such
   materials.

2. Subcontractors will select the suppliers from whom
   materials will be purchased and will submit a list of
   materials and suppliers with their bids for consideration
   as Owner/Public Entity-Purchased Materials. The cost of
   the materials and applicable sales tax will be included in
   the bids. If a public entity elects to purchase any
   materials directly, the subcontract amount will be reduced
   by the cost of, and sales tax related to, those materials.

3. Subcontractors will furnish Taxpayer with detailed
   Purchase Order Requisition Forms ("Requisitions") for all
   Owner/Public Entity-Purchased Materials.

4. Upon receipt of a Requisition, the governmental entity
   will review the Requisition and, if approved, issue its own
   purchase order directly to the supplier, with delivery to

be F.O.B. job site. The purchase order must contain or be
accompanied by the governmental entity's consumer's
certificate of exemption and must include the governmental
entity's exemption number, issue date, and expiration date.

5. Although the governmental entity will take title to
   Owner/Public Entity-Purchased Materials upon delivery to
   the job site, subcontractors will be obligated to inspect,
   accept delivery of, and store the materials pending
   incorporation into the project and will remain liable for
   their negligence in meeting any of those obligations.

6. After verifying that delivery is in accordance with the
   purchase order, subcontractors will forward approved
   invoices to Taxpayer, who will deliver them to the
   governmental entity. The governmental entity will process
   the invoices and issue payment directly to the suppliers.

7. The governmental entity is required to purchase and
   maintain builder's risk insurance sufficient to cover the
   value of any Owner/Public Entity-Purchased Materials from
   the time the governmental entity takes title through the
   time the materials are incorporated into the project.

It must also be noted that this advisement is based on an
assumption that the Procedures are the controlling terms of the
applicable agreements between City, Nonprofit, Operator and
Contractor. In any case in which any amendments were, or are,
to be made to such agreements that would show, upon review of
the contract documents as a whole, other terms that are
inconsistent in any material respect with the terms of the
Procedures and that supersede them, this advisement shall not
apply.

REQUESTED ADVISEMENT

You request advice whether the City may purchase materials,
supplies and equipment for the country club exempt from tax
under the facts and circumstances outlined above. This
advisement also will address whether the payments made to the
City under the Management Agreement are nontaxable payments made

under a management contract, or instead are taxable payments
made for the lease, rental or license to use the City's
property.

LAW AND ANALYSIS

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. A determination 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 department
shall adopt rules that give special consideration to
factors that govern the status of the tangible personal
property before its affixation to real property. In
developing these rules, assumption of the risk of damage or
loss is of paramount consideration in the determination....

Rule 12A-1.038(4), F.A.C., entitled "Sales Made Directly to
Governmental Units," contains guidelines for claiming the
exemption. Governmental entities must obtain a consumer's
certificate of exemption from the Department. Vendors are
required to obtain proper documentation of the exempt status of
the sale for their records. 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 the
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 the contract
involved in the instant case, 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(5) or (6), F.A.C....

Rule 12A-1.38(4), F.A.C., states that in order for a sale to a
state or local governmental entity to be tax exempt,
"[p]ayment... 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 the tangible personal property;

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 for
future purchases by the City. Under such Procedures, the
governmental entity will make direct purchases of various
construction materials. After receiving requisition forms from
the subcontractors, the governmental entity will prepare
purchase orders for direct purchases. After receiving the
approved invoices from the contractors, the governmental entity
will pay the vendors directly. The governmental entity will
retain legal, and equitable, title to all materials it purchases
and will be responsible for paying for builder's risk insurance
on those materials. The governmental entity will receive any
insurance proceeds related to the loss or destruction of those
materials.

Based upon the conclusion that the governmental entity is the
purchaser, all purchases of materials, supplies and equipment

that are made by the City in accordance with the Procedures will
be exempt from sales tax. As required by the Procedures, a
properly completed exemption certificate must 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. The exemption will not extend to
materials, supplies and equipment that previously were ordered
if the Procedures were not followed in the ordering process.

Please note that the tax-exempt purchasing procedures will not
extend 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 12A1.051(5), F.A.C.

Another issue that should be addressed is whether the payments
made by the Nonprofit to City under the Management Agreement are
payments pursuant to management contracts which are not taxable
or whether the payments are pursuant to leases of, or licenses
to use, the City's real property, which are taxable.

Section 212.031, F.S.), imposes a tax on renting, leasing,
letting, or granting a license to use real property. Section
212.031(1)(a), F.S. provides, in pertinent part:

It is declared to be the legislative intent that every
person is exercising a taxable privilege who engages in the
business of renting, leasing, letting, or granting a
license for the use of any real property...

In this instance, it must be determined whether the Management
Agreement creates either a lease of, or a license to use, real
property. In determining whether a particular agreement creates
a lease of, or license to use, real property, the Department
looks at the essential characteristics of the agreement. In
this instance, the Management Agreement, unlike a typical lease,

does not call for the conveyance of a present estate in realty.
However, in the case of a license; the conveyance of a present
estate in realty is not required. Unlike a lessee or a licensee,
Nonprofit, as the manager of the country club, does not have the
right to assign its interest therein. Generally, a lease or a
license is for a specified term. Although the Management
Agreement does specify a term, it also states that it is
terminable at the will of the either party. Cancellation of the
Management Agreement can be accomplished at any time prior to
the expiration of the stated term, without cause, provided a
party gives written notice to the other party a specified period
in advance of the cancellation date. Such a cancellation
arrangement is typical in a management agreement. That is, an
operator can be terminated if his performance does not meet the
expectations of the service recipient. Although a lease or
license could, in theory, be a tenancy at will, such an
arrangement is atypical in the case of a commercial transaction.
That is, it is highly unusual that a tenant would enter into a
lease that was terminable at the will of the lessor and at the
same time invest money and efforts in a venture entered into for
economic gain.

The Management Agreement itself appears to evidence an intention
to create a management agreement. The Management Agreement does
not use the terms "lease" or license, nor does it otherwise
evidence any intention to create either a lease or license. The
details specified in the Management Agreement pertain to the
types of services the Nonprofit is expected to perform on behalf
of the City, and does not discuss, in any detail, the premises
upon which such services are to be conducted. Unlike a lease or
license arrangement, Nonprofit does not have full control over
the manner in which it conducts its activities relating to the
management and operation of the country club. Nonprofit, either
directly or through its agent, is required to prepare
significant financial reports of the operations of the country
club for review and approval by the City. Also, the business
plan of Nonprofit is subject to City review and approval. Such
a strict oversight and control is not ordinarily present in the
case of a lease or license arrangement.

Based on the specific terms and conditions of the Management

Agreement, The Department concludes that the Nonprofit is denied
the requisite control and direction of business operations and
the sufficient possessory rights to the premises to achieve the
tenancy status of either a licensee or lessee. The operational
constraints are particularly incompatible to either tenancy.

CONCLUSION

All purchases of materials, supplies and equipment that are made
by the City in strict accordance with the Procedures will be
exempt from sales tax. Any purchases that are not made, or that
have not been made,, in accordance with such Procedures, will be
taxable.

The loan repayments made to the City by the Nonprofit are not
payments made under any lease or license arrangement, but
instead are operational proceeds returned to the City. Under
these facts, the amounts paid pursuant to Management Agreement
is not within the reach of s. 212.031, F.S., and consequently
are not taxable.

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 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 section 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

Ruth Ann Smith
Senior Attorney
Office of the General Counsel
(850) 488-0712

Control # 55734
Enclosure.: Rule 12A-1.038