Can a Florida public-works contractor separate manufacturing from installation so a government can buy materials tax-exempt?

Plain-English summary

Florida approved a structure in which public agencies could buy construction materials tax-exempt from a separate manufacturer while a related contractor performed only the installation. The key was that the installing contractor would never own or fabricate the materials and the government would be the real purchaser before the materials became part of the public work.

The request involved three redacted businesses:

• A heavy-construction contractor that used subcontractors and third-party suppliers.
• A pipe-lining contractor that both fabricated resin-filled liners and installed them.
• A proposed separate company that would take over the plant manufacturing operations.

The companies proposed giving government customers the option to purchase materials directly from the new manufacturer or unrelated suppliers. The construction and pipe-lining contractors would limit their roles to installation.

Government purchases had to be direct in substance

Section 212.08(6) exempted direct sales to government but excluded materials sold to a contractor for incorporation into public works. Rule 12A-1.094 therefore focused on who was actually the purchaser, not merely how the documents labeled the transaction.

The Department listed five required features:

1. The government issues the purchase order directly to the vendor and includes its consumer's certificate of exemption number.
2. The vendor invoices the government directly.
3. The government pays the vendor directly from public funds.
4. The government takes title when the vendor sells or delivers the materials.
5. The government bears the risk of loss, shown by purchasing insurance or being the insured party entitled to the proceeds.

If the construction contracts contained those terms and no conflicting provisions negated the direct purchase, the construction contractor would have no tax liability for the materials.

Separating manufacturing from installation changed the result

The pipe-lining contractor previously fabricated liners and then installed them. Florida treated a public-works contractor that both obtains or manufactures materials and installs them as the ultimate consumer, making the contractor liable for tax.

The Department said the installer could spin off manufacturing to the separate related company. A government could then buy the finished materials directly from that manufacturer while the original contractor performed only installation. The decisive point was that the installer never entered the materials' chain of ownership.

The advisement expressly did not protect a contractor that manufactured or fabricated its own materials. Such a contractor remained subject to use tax on the full cost under Rules 12A-1.094(5) and 12A-1.051(10).

What this means for you

Public-works contractors

A government exemption does not automatically flow through to its contractor. If the contractor buys, owns, or manufactures materials that it installs, Florida treats the contractor as the taxable consumer.

Manufacturers related to installers

Common ownership did not by itself prevent an exempt direct sale. The manufacturer and installer had to perform genuinely separate roles, with the government buying from the manufacturer and the installer staying outside the ownership chain.

Government procurement teams

Purchase orders, invoices, checks, title terms, and insurance must consistently show the government as purchaser. A conflicting contract term can undermine the exemption even if a purchase order uses exemption language.

Common questions

Q: Can a related manufacturer sell materials tax-exempt directly to a government?
A: Yes, under this advisement, when the government is the actual direct purchaser and the related installer never owns or fabricates the materials.

Q: What documents must be issued directly to the government?
A: The government must issue the purchase order, receive the vendor invoice, and pay the vendor directly.

Q: Who must carry the risk before installation?
A: The government must bear the risk of loss, supported by insurance coverage or entitlement to the insurance proceeds.

Q: What if the installing contractor manufactures the materials?
A: The exemption described here does not apply. The ruling says the contractor is then the ultimate consumer and owes use tax on the manufactured or fabricated articles.

Citations and references

• Fla. Stat. § 212.08(6) — exemption for direct government purchases; exclusion for public-works materials sold to contractors
• Fla. Stat. § 212.02(14)(c) — component parts converted into tangible personal property for sale
• Fla. Stat. § 213.22 — Technical Assistance Advisements
• Fla. Admin. Code r. 12A-1.038(4) — government exemption documentation and direct payment
• Fla. Admin. Code r. 12A-1.094(2)-(5) — public-works materials, direct-purchase criteria, and contractor manufacturing
• Fla. Admin. Code r. 12A-1.051(10) — use tax on contractor-manufactured or fabricated articles

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-062

Original ruling text

SUMMARY
QUESTION: Can a manufacturer set up a separate company as a contractor for construction of public works?
ANSWER - Based of Facts Below: Yes, it is possible for a contractor to spin off its manufacturing operations to a
related company to allow governmental agencies to take advantage of their tax exempt status in public works
contracts. The circumstances that cause a contractor to be liable for the tax on materials occur when a contractor that
installs materials also purchases the materials. In other words, when the installing contractor is at some point in the
chain of ownership of the materials, the tax attaches. If contractor continues its installation operations, and another
entity takes over the manufacturing operations, the governmental agencies can take advantage of their tax exempt
status by purchasing the materials directly from the manufacturing company.

November 29, 2004

Re: Technical Assistance Advisement 04A-062
Sales and Use Tax - Public Works Contracts
Section: 212.08(6), F.S.
Rules: 12A-1.051, 12A-1.094, F.A.C.
Petitioners: XXX (herein "Taxpayer C")
XXX (herein "Taxpayer L")
XXX (herein "Taxpayer M")
FEI: XX, XX, XX, respectively
Dear:
This letter is a response to your petition dated July 23, 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, Florida
Administrative Code. This response to your request constitutes a TAA and is issued to you under the authority of s.
213.22, Florida Statutes.
FACTS
The petition sets forth the following relevant facts:
[Taxpayer C] is a heavy construction contractor engaged in construction of roads, water transmission facilities,
wastewater collection facilities, water and wastewater treatment plants and marine construction. [Taxpayer C] typically
functions as the general contractor on a project, utilizing subcontractors and third party materials suppliers who
provide the materials that go into the projects. [Taxpayer C] bids upon public works projects, and enters into contracts
with governmental entities to perform these contracts.

[Taxpayer L] repairs and lines underground pipes via a "cured in place pipelining" method. It purchases felt tubing
(also referred to as "bags" or "liners") from third party suppliers. Then, at its facility in Florida, it impregnates the lining
with a special resin that will render the lining impermeable. The "wetted" lining is then stored in refrigerated storage
units until it is installed in the pipes on site. The lining is installed by hydrostatic pressure that inverts the resin filled
liner tube to allow it to conform to the walls of existing pipe and create a structurally sound, joint-less pipe. Then
heated water is circulated through the pipe until the lining is cured in place. In rare instances involving very large jobs
(projected to constitute less than 1% of [Taxpayer L's] work), the lining is impregnated with the resin on the job site
immediately prior to installation of the lining. In a prior audit, the Department concluded that [Taxpayer L's] work at the
plant entailed "fabrication" of materials used in real property contracts, and that the direct materials and labor used in
this fabrication process were taxable. The Department also concluded that on-site labor for the large jobs was not
taxable, but direct materials used by [Taxpayer L] to perform what the Department classified as real property
improvements were taxable.
Both [Taxpayer C] and [Taxpayer L] pay Florida tax on materials that they manufacture or purchase and supply to
Florida governmental agencies under public works contracts. Because of the payment of tax in such situations, both
companies have been at a competitive disadvantage to companies that are able to take advantage of the sales and
use tax exemption for direct purchases made by governmental entities.
In order to improve their competitive positions, [Taxpayer C] proposes to alter its manner of doing business to allow
governmental entities to enter into direct-purchase arrangements with unrelated, third-party materials suppliers who
supply materials used in projects for which [Taxpayer C] has a contractual relationship with the governmental entity.
And, [Taxpayer L] proposes to move its existing fabrication activities into a newly created, separate legal entity,
[Taxpayer M. Taxpayer M] will register for Florida sales and use tax purposes. [Taxpayer M] will purchase from third
party suppliers the linings and the chemicals required to process or "fabricate" the linings and render them ready for
installation. [Taxpayer M] will either directly employ the personnel at the plant or enter into a bona fide contractual
arrangement with [Taxpayer L] to utilize its employees in the manufacturing process. [Taxpayer M] will either own the
plant and plant equipment, or arrange to lease the plant from the owner.
In bids for future public works contracts, [Taxpayer C] and [Taxpayer L] will give governmental entities the option to
purchase materials and equipment directly from [Taxpayer M] or third party suppliers, in which event, neither
[Taxpayer C] nor [Taxpayer L] will ever take title to or fabricate any of the materials that go into that public works
contract. Instead, their roles will be limited to installation of materials that are sold by [Taxpayer M] or some other third
party supplier to the governmental entity. While [Taxpayer L] will continue to perform limited fabrication labor on the
job-site for the very large projects described above, it proposes to perform that wetting process on lines and with resin
that has previously been sold directly to the governmental entity. And, the employees who perform this wetting
function on the job site will not be the same employees as those who perform that fabrication activity in the plant.
The public works contracts will specify that whenever the governmental entity elects to purchase materials directly
from [Taxpayer M] or a third party supplier:

1. The governmental entity will directly issue [Taxpayer M] or third party supplier purchaser orders with the

governmental entity's consumer['s] certificate of exemption number;

2. The governmental entity will acquire title to the purchased material or equipment and assume all risk of loss or
   damage at the point in time it is delivered to the job site until the time it is incorporated as real property;
3. [Taxpayer M] or third party supplier will issue any invoices directly to the governmental entity; and
4. The governmental entity will directly pay [Taxpayer M] or the third party supplier.
   Furthermore, [Taxpayer M] will not perform repairs, alterations, improvements or construction on real property.
   REQUESTED ADVISEMENT
   The petition poses the following questions:
5. Under the factual scenario described above, would the direct sale of materials and equipment from third party
   suppliers to governmental entities qualify as exempt under Section 212.08(6), Florida Statutes, even though
   [Taxpayer C] serves as a contractor on the project?
6. Under the factual scenario described above, would the purchase of liners and resin by [Taxpayer M] be non-taxable
   under Section 212.02(14)(c), Florida Statutes, as the purchase and use of component parts converted into articles of
   tangible personal property for sale?
7. Under the factual scenario described above, would the direct sale of materials from [Taxpayer M] to governmental
   entities qualify as exempt under Section 212.08(6), Florida Statutes, even though a related entity, [Taxpayer L], was
   responsible under contract for installation of those liners?
   LAW AND DISCUSSION
   Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6), Florida Statutes, 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....
   (Emphasis Supplied)
   Rule 12A-1.038(4), Florida Administrative Code, contains guidelines for claiming and documenting the exemption.
   Governmental entities must obtain a consumer's certificate of exemption from the Department of Revenue. Vendors
   are required to obtain for their records proper documentation of the exempt status of the sale.

By its terms, Section 212.08(6), Florida Statutes, 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, Florida Administrative Code, 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 contracts....
(2) The purchase or manufacture of supplies or materials by a public works contractor, when such supplies or
materials are purchased for the purpose of going into or becoming part of public works, whether the purchase or
manufacture occurs inside or outside Florida, is taxable to the public works contractor if the public works contractor
also installs such supplies or materials, since the public works contractor is the ultimate consumer of such supplies or
materials. Public works contractors that purchase or manufacture such supplies and materials in Florida are liable for
sales tax or use tax on such purchases and manufacturing costs. A public works contractor that purchases supplies or
materials that may be sold as tangible personal property or may be incorporated into a public works project may
purchase such supplies or materials without tax by issuing a copy of the contractor’s Annual Resale Certificate and
accrue and remit tax upon withdrawing such supplies or materials from inventory to go into or become a part of public
works. Public works contractors that purchase or manufacture such materials outside the State of Florida are liable for
use tax, subject to credit for any sales or use tax lawfully imposed and paid in the state of purchase or manufacture.
(3) The purchase or manufacture of tangible personal property for resale to a governmental entity is exempt from tax,
provided this exemption shall not include sales of tangible personal property made to, or the manufacture of tangible
personal property by, public works contractors when such tangible personal property goes into or becomes a part of
public works.
(4)(a) The exemption in Section 212.08(6), F.S., is a general exemption for sales made directly to the government. A
determination whether a particular transaction is properly characterized as an exempt sale to a governmental entity or
a taxable sale to or use by 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 a taxable sale to or use by a contractor or an
exempt direct sale to a governmental entity based on all of the facts and circumstances surrounding the transaction as
a whole.
(b) The following criteria that govern the status of the tangible personal property prior to its affixation to real property
will be considered in determining whether a governmental entity rather than a contractor is the purchaser of materials:

1. Direct Purchase Order. The governmental entity must issue its purchase order directly to the vendor supplying the
   materials the contractor will use and provide the vendor with a copy of the governmental entity's Florida Consumer's
   [Certificate] of Exemption.
2. Direct Invoice. The vendor's invoice must be issued to the governmental entity, rather than to the contractor.

3. Direct Payment. The governmental entity must make payment directly to the vendor from public funds.

4. Passage of Title. The governmental entity must take title to the tangible personal property from the vendor at the
   time of purchase or delivery by the vendor.
5. Assumption of the Risk of Loss. Assumption of the risk of damage or loss by the governmental entity at the time of
   purchase is a paramount consideration. A governmental entity will be deemed to have assumed the risk of loss if the
   governmental entity bears the economic burden of obtaining insurance covering damage or loss or directly enjoys the
   economic benefit of the proceeds of such insurance.
   (c) Sales 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 direct
   sales to the government.
   (5) Contractors that manufacture materials for incorporation into public works shall be liable for tax in the manner
   provided in subsection (10) of Rule 12A-1.051, F.A.C.... (Emphasis Supplied)
   Rule 12A-1.038(4)(b), Florida Administrative Code, 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 12A1.094, Florida Administrative Code.
   Rule 12A-1.094(4), Florida Administrative Code, which sets forth the criteria that govern the status of the tangible
   personal property prior to its affixation to real property, will be considered in determining whether a governmental
   entity rather than a contractor is the purchaser of materials. These criteria include direct purchase order, direct
   invoice, direct payment, passage of title, and assumption of risk of loss. 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:
6. 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.
   When Taxpayer C sets up its construction contracts with governmental agencies, if the contracts contain all of the
   provisions set forth in Rule 12A-1.094(4)(b), Florida Administrative Code, for the direct purchase of materials from
   third party suppliers by the governmental agency, and there are no conflicting provisions in those contracts to negate
   the governmental direct purchase, then Taxpayer C will have no tax liability with respect to those materials.
   With respect to Taxpayer L and Taxpayer M, it is possible for Taxpayer L to spin off its manufacturing operations to a
   related company (Taxpayer M) to allow governmental agencies to take advantage of their tax exempt status in public
   works contracts. The circumstances that cause a contractor to be liable for the tax on materials occur when a
   contractor that installs materials also purchases the materials. In other words, when the installing contractor is at some
   point in the chain of ownership of the materials, the tax attaches. If Taxpayer L continues its installation operations,
   and Taxpayer M takes over the manufacturing operations, the governmental agencies can take advantage of their tax
   exempt status by purchasing the materials directly from Taxpayer M.
   As you are aware, this response does not apply to a contractor that manufactures or fabricates its own materials, as
   specified in Rule 12A-1.094(5), Florida Administrative Code. 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), Florida Administrative
   Code.
   This response constitutes a Technical Assistance Advisement under Section 213.22, Florida Statutes, 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, Florida Statutes. 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, Florida Statutes, and are subject to disclosure to the public under the conditions of s. 213.22, Florida
   Statutes. 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 # 60971