Could a Florida county buy materials for an infrastructure-development project tax-exempt under its owner-direct-purchase contract procedures?

Plain-English summary

Florida concluded that a county could directly purchase selected materials tax-exempt for an Infrastructure Development Project. The county's Section 00810 procedures consistently made it the purchaser even though the construction manager and subcontractors coordinated the work.

The guaranteed maximum price initially included material cost and tax. Each county direct purchase produced a deductive change order removing the material price and associated tax; the manager could neither keep the savings nor use direct purchases to avoid responsibility for exceeding the guaranteed maximum price.

The county controlled ownership and payment

The reviewed procedures provided that:

1. Subcontractors selected suppliers and submitted detailed requisitions.
2. The county approved each purchase and issued its own purchase order with exemption documentation.
3. Vendors invoiced the county, and the county paid them directly after inspection and verification.
4. The county retained title to the materials.
5. Subcontractor possession was a bailment for unloading, handling, storage, and installation.
6. Builder's-risk insurance covered materials intended for the project, including items stored off-site or in transit.

The county was an additional insured under the relevant policies and bore the economic risk required by the public-works rule. Subcontractors remained responsible for negligent damage and defective-material inspection.

The assessment-reimbursement clause did not change purchaser status

The contract said the county would reimburse the manager for tax, penalties, interest, and specified legal or administrative costs if the Department assessed a direct purchase. The agreement also said that reimbursement was not a cost of work. In the context of the full purchasing structure, the Department still found the county to be the purchaser.

Contractor-fabricated articles remained taxable

The exemption did not apply to articles manufactured or fabricated by the manager or subcontractors. They were the ultimate consumers and owed use tax on the full cost of those articles.

What this means for you

Counties and infrastructure agencies

Coordinate the procurement, price-reduction, title, payment, insurance, and assessment-risk provisions. Coverage for off-site and in-transit materials strengthens the government's risk-of-loss position.

Construction managers and subcontractors

Administrative control over supplier selection, requisitions, inspection, storage, and installation can coexist with a government direct purchase when the county retains approval, title, payment, and insured risk.

Government contract teams

Reimbursement language should be read with the entire agreement. Here it did not convert the manager into the purchaser, but the conclusion was fact-specific.

Common questions

Q: Were the county's infrastructure material purchases exempt?
A: Yes, when made under the reviewed agreement and Section 00810.

Q: Did insurance cover materials away from the job site?
A: Yes. The cited builder's-risk provisions covered off-site stored and in-transit materials and equipment.

Q: Could the manager keep the tax savings?
A: No. The guaranteed maximum price was reduced, and the manager was not entitled to the savings.

Q: Did the reimbursement clause defeat the exemption?
A: No under the full facts reviewed.

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

Citations and references

• Fla. Stat. § 212.08(6) — direct government-purchase exemption and contractor exclusion
• Fla. Admin. Code r. 12A-1.038(4) — government exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works purchaser, title, payment, and risk-of-loss factors
• Fla. Admin. Code r. 12A-1.051(10) — contractor-manufactured or fabricated articles
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-017

Original ruling text

SUMMARY

Question: Do the procedures set out in a county's contract
for the construction of a public works project that
incorporates specifications for the purchase of materials
exempt from sales and use taxes meet legal requirements for
claiming the county's exemption?

ANSWER - Based on Facts Below: Where (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; (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 is
clearly established by the requirement in the controlling
documents that the county will purchase insurance for the
materials, as well as the county 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 county
rather than the contractor is, in substance as well as
form, the purchaser of the materials, the procedures meet
legal requirements for the county to purchase the materials
tax exempt.

Mar 10, 2004

Re: Technical Assistance Advisement 04A-017
Sales and Use Tax - Public Works Contract
Sections 212.08(6), F.S.
Rule 12A-1.094, F.A.C.
XXX ("County")

Dear :

This is in response to your letter dated December 19, 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.).

Advisement Requested

You have requested our advisement concerning whether purchases
by the County to be incorporated into a public works project
qualify as tax exempt purchases.

Discussion of Facts

With your December letter, you have provided a copy of the
contract between the County and the Construction Manager
("Manager") for an Infrastructure Development Project
("Project"). In addition to stipulating the responsibilities
and specifications for the Project, the contract also provides
that the County may choose to purchase directly some of the
materials and equipment that will be incorporated into the
Project. The County may purchase the materials and equipment so
that the items may be purchased tax exempt, thus saving money
for the County. In regards to purchases by the County, the
contract for the Project provides the following:

Section 3.9.1 provides that, unless otherwise specified,
the Manager will provide and pay for all labor, materials,
and equipment, including construction equipment and
machinery, tools, utilities and other costs and services
necessary to execute and complete the Project.

Section 3.10.1 provides that the Manager acknowledges that
the materials and supplies necessary for completion of the
Project are subject to sales tax, unless otherwise
specifically exempt. The sales tax will be included in the
initial guaranteed maximum price of the contract, as well
as the guaranteed maximum price of the contract.

Section 3.11.1 provides that the County may choose to
directly purchase some supplies, goods, materials, and
equipment that will be used in the Project. The Manager
will help the County purchase the items in a timely manner,
so that the County may take full advantage of purchasing
the items tax exempt.

Section 3.11.2 provides that the Manager will carry sales
tax on all supplies, materials, and equipment purchased as
part of the work. Additionally, the Manager will direct
the Subcontractors to do the same. When the County chooses
to directly purchase items, then the procedures set forth
in Section 00810 of the Specifications will be followed.
Should the Florida Department of Revenue ("the Department")
assess either the Manager or a Subcontractor sales tax,
penalties, and/or interest on any direct purchase by the
County, the County will reimburse the Manager for any tax,
penalties, interest, and/or legal and administrative fees
directly resulting from such an assessment. Such
reimbursement will not be considered a cost of work.

Section 3.11.3 provides that the guaranteed maximum price
for the Project will be reduced by the actual cost of any
items purchased directly by the County. The cost reduction
will include the sales tax that would have been paid had
the County not purchased the items directly. Additionally,
this section provides for how the cost will be reduced and
that the Manager is not entitled to any savings in the
guaranteed maximum price, and also cannot avoid exceeding
the guaranteed maximum price, because of County direct
purchases.

Section 00810 of the Specifications provides the following:

Part 1.01 provides that sales tax, as well as other
applicable taxes, have been included in the Manager's and
Subcontractors' bid for materials, supplies, and equipment.
The County reserves the right to directly purchase
construction equipment, materials, or supplies included in
the bid and/or contract in accordance with Section 00810.

Part 2.01 provides that items purchased directly by the
County will be referred to as County purchased materials.
The responsibilities of the County, Manager, and
Subcontractors regarding the County purchased materials
will be governed by the terms and conditions of the
procedures in Section 00810. Subcontractors will select the
material suppliers and include the price of construction
materials, including applicable taxes, in the bids. County
direct purchases will be administered through a deductive
change order to the subcontract, reducing the subcontract
by the amount of the County purchases, including any sales
tax that would have applied.

Part 3.01 provides the procedures for direct purchases by
the County. Pertinent procedures are as follows:

B) Subcontractors will prepare a purchase order requisition
form specifically identifying materials the County has
elected to purchase directly. The form will provide the
information concerning the supplier, the item to be
purchased, the quantity to be purchased, the price quoted
by the supplier, the sales tax associated with the price
quote, and delivery dates.

D) The County will prepare its own purchase order for the
materials it has elected to purchase directly after
receiving the requisition form from the Subcontractor.
The County's purchase order will contain or be accompanied
by its Consumer's Certificate of Exemption. The County's
purchase order will include the County's name, address, and
exemption number with issue and expiration dates. The
vendor or supplier will provide the merchandise pursuant to
the County's purchase order. The Subcontractor will verify
the terms and conditions of the purchase order before the
order is issued to the supplier. The County, however, is
the approving authority for materials directly purchased by
the County.

G) The Subcontractor is responsible for all matters
relating to the receipt of the County purchased materials,

including loss or damage due to the negligence of the
Subcontractor. The Subcontractor will provide all services
through installation for unloading, handling, and storage
of County purchased materials.

H) The Subcontractor and Manager will inspect all County
purchased materials as the material is delivered by the
supplier and approve the invoice. The Subcontractor will
ensure that sufficient documentation to identify the
materials will accompany the County purchased materials.
The Manager will verify the County purchased materials in
writing; the Subcontractor will then forward the invoice to
the County for payment.

I) The Subcontractor will insure that the County purchased
materials are as specified and are not patently defective.
Defective materials will not be used, and the Subcontractor
will notify the vendor and the County of any defective or
non-conforming County purchased materials. The
Subcontractor is responsible for all damages should the
Subcontractor fail to perform the inspection and
incorporates the materials.

M) The County will retain title to any and all County
purchased materials.

N) The transfer of possession of the County purchased
materials to the Subcontractor will be a bailment. The
County is the bailor and the Subcontractor is the bailee.
The County purchased materials will be considered returned
to the County when incorporated into the Project or
consumed in the process of completing the Project.

O) The County will purchase and maintain insurance as set
forth in the contract for the Project. The insurance will
be sufficient to protect against any loss of or damage to
County purchased materials and will cover the value of any
County purchased materials not yet incorporated into the
Project from the time the County takes title.

Q) The Subcontractor will provide a monthly list to the

County indicating the acceptance of County purchased
materials, including the documentation concerning the
materials that will be required by the County. The County
will issue payment directly to the supplier after receiving
and verifying the documentation.

R) Any refund for surplus materials returned at the end of
the project to the suppliers will be credited to the
Subcontractor's agreement. Salvage materials are the
property of the County.

Section 7.9 of the contract between the County and the Manager
stipulates the insurance responsibilities of the parties.
Sections 7.9.1 through 7.9.6 provide the Manager's
responsibilities to provide liability insurance for the Project
for items such as bodily injury, workmen's compensation,
occupational sickness, or death. Section 7.9.2 provides that
the County be named an additional insured party under each
policy. Sections 7.9.8 through 7.9.13 provide additional
responsibilities of the Manager to provide insurance for the
Project. The additional responsibilities include builders risk
insurance for the materials and equipment incorporated in the
Project, as well as materials and equipment intended to be
permanently used or incorporated in the Project. Section
7.9.8(4) provides that deductibles for the builders risk
insurance purchased by the Manager will be charged to the cost
of work against an allowance account and that the insurance will
cover off site stored and in transit materials and equipment.

Section 7.9.7 provides the County's responsibilities to provide
insurance and states the following: "The [County] shall be
responsible for purchasing and maintaining the [County]'s usual
liability insurance."

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....

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 or suppliers 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, as that term is referred
to in Section 212.08(6), F.S....

(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. The exception
in subsection (2)(a) is a specific exception for sales to
contractors. 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 or the Executive Director's designee in the
responsible program 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 or the Executive Director's designee in

the responsible program 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 or the
Executive Director's designee in the responsible program
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 "costplus", "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 or the Executive Director's designee in the
responsible program 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)

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.

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 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.

Conclusion

The contract and Section 00810, Supplementary Conditions - Owner
Purchases, appear 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
contractors, County will prepare purchase orders for direct
purchases. After receiving the approved invoices from
Contractor, County will pay the vendors directly. County will
retain 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 that are made in accordance with the
Agreement will be exempt from sales tax. However, it is
necessary that a copy of the County's Consumer's Certificate of
Exemption 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 # 58077