Could a Florida city buy materials for a public-library construction project tax-exempt under its proposed direct-purchase procedures?

Plain-English summary

Florida concluded that a city could purchase construction materials for a public-library project tax-exempt if its special purchasing conditions made the city—not the contractor—the true purchaser. The library association could help administer the purchases as the city's purchasing agent, but the controlling documents and actual transactions had to establish the city's direct ownership and payment.

The project involved a city-owned library and related parking facilities. The city had state grant funds, a bridge loan, a city grant, and authority for general-obligation bonds, while a nonprofit library association had contracted for construction management and deposited project funds with the city.

The city had to control each direct purchase

The Department identified these required features:

1. The city issues its own purchase orders directly to vendors.
2. Each purchase order includes the city's consumer's certificate of exemption number, and the vendor receives a copy of the certificate.
3. Vendors invoice the city directly.
4. The city pays vendors directly by issuing its own checks.
5. The city takes title and assumes liability when materials are delivered to the job site.
6. The city bears the risk of loss after delivery, supported by insurance under which the city is the insured party entitled to proceeds.
7. The remaining contract terms support the city as purchaser in substance as well as form.

The contractor could select suppliers, prepare requisitions, inspect deliveries, and safeguard the materials as a bailee. Those tasks did not defeat the exemption if the city retained the decisive purchasing, ownership, payment, and risk-of-loss responsibilities.

Documents and funding had to match the claimed exemption

The special conditions had to be part of the city-contractor agreement and take precedence over conflicting terms. The Department also noted that the payment account had to be city-owned. A properly completed exemption certificate had to be given to each vendor at the time of purchase.

The nonprofit library association could use the same direct-purchase procedures for its own exempt purchases. But the advisement did not cover a contractor or subcontractor that manufactured or fabricated its own materials; Florida treated that business as the ultimate consumer and imposed use tax on the full cost of those articles.

What this means for you

Florida cities and public agencies

An exemption certificate alone is not enough. Purchase orders, invoices, checks, title terms, and insurance must consistently show the government entity as the purchaser before the materials are incorporated into the public work.

Public-works contractors

A contractor may help choose vendors, requisition goods, inspect deliveries, and hold materials for installation. It should not become the purchaser, pay the vendor, own the materials, or bear the decisive risk of loss if the government is claiming the direct-purchase exemption.

Vendors and procurement teams

Keep the government's purchase order and exemption certificate, invoice the government directly, and receive payment from the government. Conflicting paperwork can undermine the exemption.

Common questions

Q: Were the city's proposed library-material purchases exempt?
A: Yes, if the controlling documents and actual transactions met all of the Department's direct-purchase conditions.

Q: Could the library association act as purchasing agent?
A: Yes, but the purchase orders, payment account, title, and other controlling terms still had to establish the city as the actual purchaser when the city claimed the exemption.

Q: When did the city have to take title and liability?
A: At delivery to the job site, before the materials were incorporated into real property.

Q: How did the city show that it bore the risk of loss?
A: The controlling documents had to make the city the insured party entitled to proceeds for loss or damage to city-purchased materials.

Q: Did the ruling cover materials fabricated by the contractor?
A: No. The contractor or subcontractor was the taxable ultimate consumer of articles it manufactured or fabricated for the project.

Citations and references

• Fla. Stat. § 212.08(6) — exemption for direct government purchases and exclusion for public-works materials sold to contractors
• Fla. Admin. Code r. 12A-1.038(4) — government exemption documentation and direct payment
• Fla. Admin. Code r. 12A-1.094 — public-works materials and factors identifying the true purchaser
• Fla. Admin. Code r. 12A-1.051(10) — use tax on contractor-manufactured or fabricated articles
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-030

Original ruling text

SUMMARY

QUESTION: Do the procedures for the purchase of materials
set out in the contract for the construction of the public
work 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 Consumer's
   Certificate of Exemption number and the City 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.

Apr 22, 2004

Re: Technical Assistance Advisement 04A-030
Sales and Use Tax - Public Works Contract
Section: 212.08(6), F.S.

Rules: 12A-1.051, 12A-1.094, F.A.C.
Petitioner: XXX (herein "City")
FEI: XX

Dear :

This letter is a response to your petition dated March 11, 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

Your petition sets forth the following facts:

[City] has received a Grant from the State of Florida for
the construction of the Library in the amount of $500,000
(State Aid to Libraries Grant Funding). Under the Grant,
the City is the eligible political subdivision and the
single library administrative unit and the [Library
Association] is the designated governing body to provide
library services.... The City will own the land and the
library building. The City has entered into contracts with
the [Library Association], [County] and the Community
Redevelopment Agency in order to facilitate the
construction of a parking garage to be used by the County
for its courthouse, the City... and by the Library
Association. The Library Association, under [the]
agreements, is required to build the library to be owned by
the City. After a Certificate of Occupancy is obtained, the
Library [Association] will lease the land and building for
99 years and the Library Association may purchase the
library and the lands after 20 years....

The Library Association has entered into a Construction
Management Contract for the construction of the Library.
Under the contract with the City, the Library Association

is to deposit all sums it has raised with the City.... In
addition, the City has provided a bridge loan that will be
repaid by the Library [Association] in the amount of
$800,000....

The City shall provide a grant to the Library [Association]
of up to $2.5 million for library construction. (The CRA
will pay to the City $666,000 of the $2.5 million []
grant[.])[] The funds are to be deposited with the City...
in the City's Library Building Fund to be used for Library
construction....

In addition, the City has, by referendum, the authority to
issue $1,000,000.00 in general obligation bonds for
fixtures and furnishings. The only financing for the
project will be financings by the City.... All other funds
coming from the Library Association or the Community
Redevelopment Agency, are not funds obtained by financing.

The Library Association, Inc. was created in 1939 and is a
501(c)(3) not-for-profit organization.

City wishes to impose Special Conditions on the construction
agreement in order to make direct purchases of the materials to
be incorporated into the public work to affect a tax savings on
the cost of the project. City desires to have the Library
Association act as its purchasing agent. To this end, City has
drawn up Special Conditions that contain the following
provisions:

1. City shall make direct purchases of all materials and
   equipment purchased for, or to be incorporated into the
   Project, as requested by Contractor and agreed upon by City
   in the form of a change order. The provision states that
   the purchases will be made through the City's formally
   denominated Purchasing Agent, which is identified as the
   Library Association.

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 City purchased
   materials to the Library Association.

4. Upon receipt of a Requisition, the Library Association
   shall issue a purchase order directly to the vendor. Such
   Purchase Order shall include a copy of City's Consumer's
   Certificate of Exemption. It is not clear whether the
   purchase order will be City's purchase order or Library
   Association's purchase order.

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 will have the duty to safeguard, store and
   protect the materials while in its possession until
   returned to City through incorporation into the Project.

6. After verifying that delivery is in accordance with the
   purchase order, Contractor will submit a list indicating
   acceptance of goods from suppliers and concurrence with
   Library Association's issuance of payment to the supplier;
   the Library Association will process the invoices and issue
   payment directly to the supplier from an account.(FN 1)

7. City or Contractor will purchase and maintain insurance,
   which will be sufficient to cover City purchased materials.

REQUESTED ADVISEMENT

Advice is requested whether the procedures set forth in the
Special Conditions are sufficient for City 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. The
Special Conditions on this contract must clearly indicate that,
if Contractor is the purchaser of the builder's risk insurance,
City is specifically named as the insured party with respect to
the City purchased 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 Special Conditions appear to satisfy the foregoing
requirements for exemption of transactions as sales to a
governmental entity. City or the Library Association will make
direct purchases of various construction materials. After
receiving requisition forms from the contractors, City or the
Library Association will prepare purchase orders for direct
purchases. After receiving the approved invoices from
Contractor, City or the Library Association will pay the vendors
directly. City will retain legal, and equitable, title to all
materials it purchases, will purchase and maintain builder's
risk insurance on those materials it purchases (or be named as
the insured party on Contractor purchased insurance).

Based upon the conclusion that City is the purchaser, all
purchases of materials that are made in accordance with the
Special 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
Special Conditions will need to be included as part of the
Agreement between City and Contractor, and the Special
Conditions must take precedence over conflicting terms in the
Agreement. It should be noted that Library Association, as a
501(c)(3) organization, could follow these same procedures to
directly purchase the materials for incorporation into the
project.

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 #59281

__________

FOOTNOTE 1. The Special Conditions should indicate that the
account from which payment is made is a City-owned account.