Could a Florida county buy materials for an airport public-address and emergency-annunciation project tax-exempt under its direct-purchase procedures?

Plain-English summary

Florida concluded that a county could use its government exemption to buy materials directly for an airport public-address and emergency-annunciation system. The county's supplementary contract conditions made it the purchaser before the materials became part of the public work.

The contractor could choose suppliers for bidding, submit detailed purchase requisitions, inspect deliveries, confirm invoices, and store and safeguard the goods as a bailee. The county, however, retained approval and the decisive purchasing responsibilities.

The county had to be the real purchaser

The Department's summary required:

1. County purchase orders issued directly to vendors.
2. The county's consumer's certificate of exemption number on each order and a copy of the certificate for the vendor.
3. Vendor invoices issued directly to the county.
4. County checks paid directly to vendors.
5. County title and liability beginning when materials were delivered F.O.B. to the job site.
6. County assumption of risk of loss, supported by county-purchased insurance or coverage making the county the insured party entitled to proceeds.
7. No other contract terms that made the contractor the purchaser in substance.

Because the supplementary conditions met those requirements, purchases made under them were exempt. The conditions had to become part of the county-contractor agreement, and each vendor needed a properly completed exemption certificate at the time of sale.

Contractor-fabricated materials were excluded

The ruling did not cover articles manufactured or fabricated by the contractor or subcontractors. Florida treated those businesses as the ultimate consumers and imposed use tax on the full cost of the fabricated articles.

What this means for you

Counties and airport authorities

Direct payment alone is not enough. Purchase orders, invoices, title, liability, delivery terms, and insurance must consistently establish the government as purchaser before installation.

Public-works contractors

You can help select vendors, prepare requisitions, inspect deliveries, and safeguard government-owned materials without becoming the purchaser. Buying or fabricating the materials yourself changes the result.

Vendors

Invoice the county, receive payment directly from it, and keep its exemption documentation. Contractor-issued orders or contractor payment can undermine exempt treatment.

Common questions

Q: Were the airport-project material purchases exempt?
A: Yes, when made under the described supplementary conditions.

Q: Could the contractor choose suppliers?
A: Yes. Supplier selection and requisition work did not make the contractor the purchaser under the full arrangement.

Q: When did the county take title and liability?
A: At delivery to the project site, before incorporation into the public work.

Q: Who bore the risk of loss?
A: The county, supported by insurance covering county-purchased materials.

Q: Did the exemption cover contractor-fabricated items?
A: No. The contractor or subcontractor owed use tax on the full cost of items it manufactured or fabricated.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-023

Original ruling text

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the airport enhancements meet
the legal requirements for the County to purchase the
materials tax exempt?

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

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

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

3. The vendors invoice the County directly.

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

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

6. The County assumes risk of loss for the materials upon
   delivery, which his clearly established by the requirement
   in the controlling documents that the County reimburse the
   contractor for premiums paid for insurance against loss or
   damage and the County is named as the insured party to
   receive proceeds in case of loss of the items purchased tax
   exempt.

7. The remaining terms of the documents do not prevent the
   conclusion that the County rather than the contractor is in
   substance as well as form the purchaser of the materials.

Mar 29, 2004

Re: Technical Assistance Advisement 04A-023
Sales and Use Tax - Public Works Contract
Section: 212.08(6), F.S.Rule: 12A-1.094, F.A.C.
Petitioner: XXX (herein "County")
FEI: XX

Dear :

This letter is a response to your petition dated March 5, 2004,
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

County is embarking on a project for the installation of a dual
use Public Address and Emergency Annunciation System at Airport.
According to County's petition, it has entered into an agreement
with Contractor for the project. However, only the Invitation
to Negotiate for the project was provided.

Section 2.12 contains the Supplementary Conditions for County
purchase of materials. The Supplementary Conditions contain the
following pertinent provisions:

1. County 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 for purposes of making up their bids and
   will submit a list of supplies and suppliers with their
   bids.

3. Contractor shall furnish detailed Purchase Order
   Requisition Forms ("Requisitions") for all County purchased

materials.

4. Upon receipt of a Requisition, County shall review the
   Requisition and, if approved, issue its own purchase order
   directly to the supplier, with delivery to be made to the
   Project location on an F.O.B. job site basis.

5. Contractor will have contractual obligations to inspect,
   accept delivery of, and store the materials pending
   incorporation into the project. The contractor's
   possession of the materials will constitute a bailment. The
   contractor, as bailee, will have the duty to safeguard,
   store and protect the materials while in its possession
   until returned to County through incorporation into the
   Project.

6. After verifying that delivery is in accordance with the
   purchase order, Contractor, on a monthly basis, will submit
   a list indicating acceptance of goods from suppliers and
   concurrence with County's issuance of payment to the
   supplier; County will process the invoices and issue
   payment directly to the supplier.

7. County will purchase and maintain insurance, which will
   be sufficient to cover County purchased materials.

REQUESTED ADVISEMENT

Advice is requested whether the procedures set forth in the
Supplementary Conditions are sufficient for County to take
advantage of its tax exempt status on the purchase of materials
to be used in the contract.

LAW

Sales to governmental units are exempt from sales tax pursuant
to section 212.08(6), F.S., which provides:

There are also exempt from the tax imposed by this chapter
sales made to the United States Government, a state, or any
county, municipality, or political subdivision of a state

when payment is made directly to the dealer by the
governmental entity.... This exemption does not include
sales of tangible personal property made to contractors
employed either directly or as agents of any such
government or political subdivision thereof when such
tangible personal property goes into or becomes a part of
public works owned by such government or political
subdivision....

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

By its terms, section 212.08(6), F.S., exempts only direct
purchases by governmental entities. The exemption does not apply
when a contractor, employed by a governmental entity, purchases
tangible personal property which is to be incorporated into
public works owned by the entity. Administrative guidelines
governing the taxability of materials purchased for public works
contracts, such as those involved in the instant situation, are
contained in Rule 12A-1.094, F.A.C., which provides:

(1) This rule shall govern the taxability of transactions
in which contractors manufacture or purchase supplies and
materials for use in public works....

(2) The purchase or manufacture of supplies or materials by
the contractor for incorporation into a public works
project is taxable to the contractor since he is the
ultimate consumer....

(3)(a) The purchase or manufacture of tangible personal
property for resale to a governmental body is exempt from
tax provided this exemption shall not include sales of
tangible personal property made to contractors employed
either directly or as agents of the United States
Government, a state, or any county, municipality, or
political subdivision of a state when such tangible

personal property goes into or becomes a part of public
works financed or owned by such governmental bodies or
political subdivisions.

(b) With regard to contracts with government entities, the
exemption in subsection (3)(a) is appropriate only where
the levy would otherwise fall on the government itself, or
on an agency or instrumentality so closely connected with
that government that the two cannot realistically be viewed
as separate entities, at least insofar as the activity
being taxed is concerned. A finding of exempt status,
however, requires something more than the implication of
traditional agency notions, so that to resist a state's
taxing power, a private taxpayer must actually stand in the
government's shoes as a principal, rather than as a
contractor employed either directly or as the government's
agent. A contractor will not be deemed to actually stand in
the government's shoes if the contractor has a substantial
independent role in making purchases. Accordingly, the fact
that title passes directly to the government and payment is
made with government funds, in and of itself, cannot
characterize the transaction as an exempt purchase if the
purchasing entity, in its role as a purchaser, is
sufficiently distinct from the government.

(4) The exemption in subsection (3)(a) is a general
exemption for sales made to the government.... A
determination of whether a particular transaction is
properly characterized as an exempt sale to a government
entity or a taxable sale to a contractor shall be based on
the substance of the transaction, rather than the form in
which the transaction is cast. The Executive Director...
will determine whether the substance of a particular
transaction is governed by subsection (2)(a) or is a sale
to a governmental body as provided by subsection (3) of
this rule based on all of the facts and circumstances
surrounding the transaction as a whole. The Executive
Director... will give special consideration to factors
which govern the status of the tangible personal property
prior to its affixation to real property. Such factors
include provisions which govern bidding, indemnification,

inspection, acceptance, delivery, payment, storage, and
assumption of the risk of damage or loss for the tangible
personal property prior to its affixation to real property.
Assumption of the risk of damage or loss is a paramount
consideration. A party may be deemed to have assumed the
risk of loss if the party either: bears the economic burden
of posting a bond or obtaining insurance covering damage or
loss; or enjoys the economic benefit of the proceeds of
such bond or insurance. Other factors that may be
considered by the Executive Director... include whether:
the contractor is authorized to make purchases in its own
name; the contractor is jointly or severally liable to the
vendor for payment: purchases are not subject to prior
approval by the government; vendors are not informed that
the government is the only party with an independent
interest in the purchase; and whether the contractors are
formally denominated as purchasing agents for the
government. Sales made pursuant to so called "cost-plus",
"fixed-fee", "lump sum", and "guaranteed price" contracts
are taxable sales to the contractor unless it can be
demonstrated to the satisfaction of the Executive
Director... that such sales are, in substance, tax exempt
sales to the government.

(5) Contractors who manufacture materials for incorporation
into public works shall be liable for tax in the manner
provided in Rule 12A-1.051, F.A.C....

DISCUSSION, ANALYSIS AND CONCLUSION

Rule 12A-1.038(4)(b), F.A.C., states that in order for a sale to
a state or local governmental entity to be tax exempt,
"[p]ayment for tax exempt purchases... must be made directly to
the selling dealer by the... political subdivision of a
state...." Rule 12A-1.094(2) and (3), F.A.C., state that the
purchase of materials for public works contracts is taxable to
the contractor as the ultimate consumer where the contractor is
deemed to be the purchaser. If the purchaser of the materials
is the governmental entity, however, the transaction is exempt.
For there to be an exempt transaction, the governmental entity
must directly purchase, hold title to, and assume the risk of

loss of the tangible personal property prior to its
incorporation into realty, and satisfy various factors contained
in Rule 12A-1.094, F.A.C.

Under Rule 12A-1.094, F.A.C., the Department will also give
special consideration to several factors (bidding,
indemnification, inspection, acceptance, delivery, payment, and
storage) which govern the status of tangible personal property
prior to its affixation to real property when determining
whether the sale is to the tax exempt entity or to a contractor.
However, the assumption of risk of damage or loss during the
time that the building materials are physically stored at the
job site prior to their installation or incorporation into the
project is a paramount consideration. The governmental entity
must assume all risk of loss or damage for the tangible personal
property during that period. To establish that it has assumed
that risk, the governmental entity should purchase, or be the
insured party under, insurance on the building materials.

To summarize, the conditions that must be met to satisfy the
requirements of Rule 12A-1.094, F.A.C., and establish that the
governmental entity rather than the contractor is the purchaser
of materials, include:

1. The governmental entity must execute the purchase orders
   for the tangible personal property involved in the
   contract, which must include the governmental entity's
   consumer's certificate of exemption number. The contractor
   may present the governmental entity's purchase orders to
   the vendors of the tangible personal property;

2. The governmental entity must acquire title to and assume
   liability for the tangible personal property at the point
   in time when it is delivered to the job site up until the
   time it is incorporated as real property;

3. Vendors must directly invoice the governmental entity
   for supplies;

4. The governmental entity must directly pay the vendors
   for the tangible personal property; and

5. The governmental entity must assume all risk of loss or
damage for the tangible personal property involved in the
contract, as indicated by the entity's acquisition of, or
inclusion as the insured party under, insurance on the
building materials.

The Supplementary Conditions 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 legal, and equitable, title to all materials it
purchases, will purchase and maintain builder's risk insurance
on those materials it purchases.

Based upon the conclusion that County is the purchaser, all
purchases of materials that are made in accordance with the
Supplementary Conditions will be exempt from sales tax.
However, it is necessary that a properly completed exemption
certificate be extended at the time of purchase to each of the
vendors. The Supplementary Conditions will need to be included
as part of the Agreement between County and Contractor.

Please note that this response does not apply to a contractor
that manufactures or fabricates its own materials as specified
in Rule 12A-1.094(5), F.A.C. Under the rule, the contractor and
subcontractors, not the government entity, are deemed to be the
ultimate consumers of the articles of tangible personal property
they manufacture or fabricate to perform their contracts. As
such, the contractor and subcontractors are subject to use tax
on the full cost of the manufactured or fabricated articles, as
detailed in Rule 12A-1.051(10), F.A.C.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the department
only under the facts and circumstances described in the request
for this advice, as specified in Section 213.22, F.S. Our
response is predicated upon those facts and the specific

situation summarized above. You are advised that subsequent
statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice
is based may subject similar future transactions to a different
treatment from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution

Control #59169