Could a city buy construction materials tax-free for a public library when contractors selected suppliers and handled the materials?

Plain-English summary

Florida concluded that the city could purchase specified public-library construction materials tax-free if its direct-purchase exhibit and procedures were incorporated into the construction agreement and followed. The documents made the city—not the contractor—the purchaser in both form and substance.

The contractor and subcontractors could select suppliers, negotiate prices, prepare requisitions, inspect deliveries, protect and store materials, and install them. Those responsibilities did not defeat the exemption because the city retained the essential purchasing role.

Five core purchaser requirements

The Department summarized the required structure as follows:

1. The city executed purchase orders containing its consumer's certificate of exemption number.
2. The city took title and liability when the materials were delivered to the job site and retained them until incorporation into the real property.
3. Vendors invoiced the city directly.
4. The city paid vendors directly.
5. The city bore all risk of loss or damage before incorporation, shown by purchasing insurance or being the insured party entitled to the proceeds.

The purchase orders also went directly to suppliers, and the city provided a properly completed exemption certificate at the time of each purchase.

Risk of loss was paramount

Rule 12A-1.094 required the Department to consider the entire transaction, including bidding, indemnification, inspection, acceptance, delivery, payment, storage, title, and purchasing authority. The ruling called pre-installation risk of loss a paramount consideration.

Here, the city paid for insurance covering its materials. The contractor remained liable for loss caused by its own actions or negligence and had safeguarding duties, but the overall documents placed the ownership risk and insurance benefit with the city.

Contractor-made materials remained taxable

The ruling expressly excluded materials that a contractor or subcontractor manufactured or fabricated itself. For those articles, the contractor or subcontractor was the ultimate consumer and owed use tax on the full cost under the cited rules.

What this means for you

Municipalities and public-works departments

Build the direct-purchase terms into the controlling contract before purchases begin. Issue and approve the purchase orders, give vendors the exemption documentation, pay them directly, and insure the materials in the government's name.

Contractors and subcontractors

Administrative involvement does not necessarily make the contractor the purchaser, but buying in the contractor's own name, becoming liable to vendors, or controlling purchases without government approval can undermine the exemption.

Procurement and accounting teams

Retain the agreement, incorporated procedures, requisitions, city purchase orders, exemption certificates, vendor invoices, city checks, delivery records, title terms, and insurance evidence.

Common questions

Q: Could the contractor choose suppliers?
A: Yes. The reviewed process allowed contractor selection and price negotiation, while the city retained approval and issued its own purchase orders.

Q: Was direct city payment enough by itself?
A: No. The Department analyzed the transaction as a whole, with special emphasis on title and risk of loss.

Q: Could the contractor inspect and store the materials?
A: Yes, under the submitted documents, while the city retained title and the principal risk of loss.

Q: Did the exemption cover contractor-fabricated items?
A: No. The ruling treated the contractor or subcontractor as the taxable ultimate consumer of those items.

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption and contractor exclusion
• Fla. Admin. Code r. 12A-1.038(4) — exemption certificate and vendor documentation
• Fla. Admin. Code r. 12A-1.094 — public-works material purchases
• Fla. Admin. Code r. 12A-1.051(10) — contractor-manufactured or fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-002

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.

Jan 16, 2004

Re: Technical Assistance Advisement 04A-002
Sales and Use Tax - Public Works Contracts
Sections 212.08(6), F.S.
Rules 12A-1.038, and 12A-1.094, F.A.C.
Petitioner: XXX

Dear :

This is in response to your letter dated October 24, 2003, for
the Department's issuance of a Technical Assistance Advisement

("TAA") concerning the above referenced party and matter. Your
letter has been carefully examined, and the Department finds it
to be in compliance with the requisite criteria set forth in
Chapter 12-11, Florida Administrative Code (F.A.C.). This
response to your request constitutes a TAA and is issued to you
under the authority of section 213.22, Florida Statutes (F.S.).

FACTS

Taxpayer's petition includes the following documents related to
a generic public works contract:

1. An uncompleted copy of 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").

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, allows the incorporation of supplementary and
other conditions. No supplementary or other conditions are
specified in the contract provided for review.

The Exhibit provides in substance the following:

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. (Sub)contractors will select the suppliers from
   whom materials will be purchased, for prices negotiated by
   the (sub)contractors.

5. (Sub)contractors 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 (sub)contractor, 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,
such taxes or charges 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 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.

4. 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.

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:

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

b. Manufacturer or brand, model or specification
number of the item;

c. The quantity needed as estimated by
(sub)contractor;

d. The price quoted by the supplier for the materials
or equipment identified;

e. Any sales tax associated with the price quote;

f. Delivery dates established by (sub)contractor;

g. 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. job site 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.

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

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

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

18. & 19. 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.

19. 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.

To summarize, if the Exhibit and Procedures are incorporated
into the Agreement:

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), Florida Statutes (F.S.), which provides in
pertinent part:

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 (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 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.
...

DISCUSSION, ANALYSIS, 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.

If the Exhibit and Procedures are incorporated into the
Agreement, the documents 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 if the Exhibit and Procedures are incorporated into
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 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., which 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 fifteen (15) days of the date
of this letter.

Sincerely,

Debra Gifford, CPA
Tax Law Specialist
Technical Assistance & Dispute Resolution

Control # 57494