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

Plain-English summary

Florida concluded that a city could use its sales-tax exemption to purchase materials directly for a public-library construction project under the proposed procedures. The exemption was contingent on the city fully executing the agreement and incorporated exhibits and consistently acting as the real purchaser before the materials became part of the building.

The city proposed to let its contractor and subcontractors identify suppliers and prepare requisitions. The city would then decide whether to make each direct purchase, issue its own purchase order, pay the supplier, hold title, and insure the materials.

Seven features supported the exemption

The Department's summary identified these conditions:

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.
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, shown by documents naming it as the insured party entitled to insurance proceeds.
7. The remaining contract terms support the city as purchaser in substance as well as form.

Those features matched the direct-purchase factors in Rule 12A-1.094: direct purchase order, direct invoice, direct payment, passage of title, and government assumption of risk.

Contractor involvement did not defeat the result

The contractor could select suppliers, prepare requisitions, inspect deliveries, verify invoices, store and protect materials, and remain liable to the city for negligent loss. The city nevertheless retained legal and equitable title and paid for insurance. Under the full agreement, those contractor duties did not prevent the city from being the actual purchaser.

Execution and consistent documents mattered

At the time of the request, the agreement had not been executed and some blanks were unfilled. The Department said the exemption would not be available until the agreement was fully executed with the additional exhibits incorporated.

The purchasing procedures controlled if other bid or contract documents conflicted. The Department's conclusion depended on the documents, taken as a whole, not negating the city's direct purchase.

The advisement also excluded materials manufactured or fabricated by a contractor. In that situation, Florida treats the contractor as the ultimate consumer and imposes use tax on the full cost.

What this means for you

Florida cities and public agencies

An exemption certificate alone is not enough. Procurement records, payment, title, and insurance must all identify the government as the purchaser before installation.

Public-works contractors

You may coordinate purchasing and protect government-owned materials without necessarily becoming the purchaser. But buying or manufacturing the materials yourself generally makes you the taxable consumer.

Vendors selling construction materials

Keep the government's purchase order and exemption documentation, invoice the government directly, and receive payment from public funds. Contractor-issued paperwork or payment can undermine exempt treatment.

Common questions

Q: Were the city's proposed library-material purchases exempt?
A: Yes, if the city fully executed and followed the described agreements and remained the purchaser in substance and form.

Q: Could the contractor choose suppliers and inspect deliveries?
A: Yes. Those coordination duties did not defeat the exemption under the complete set of proposed terms.

Q: When did the city take title and liability?
A: When the materials were delivered to the job site, before they were incorporated into the project.

Q: How did the city show that it bore the risk of loss?
A: The documents required the city to maintain insurance and be the insured party entitled to proceeds for loss of the tax-exempt materials.

Q: Did the ruling cover contractor-fabricated materials?
A: No. It expressly said contractors that manufacture or fabricate their own materials remain subject to use tax on their full cost.

Citations and references

• Fla. Stat. § 212.08(6) — direct government-purchase exemption and exclusion for public-works materials sold to contractors
• Fla. Stat. § 213.22 — Technical Assistance Advisements
• Fla. Admin. Code r. 12A-1.038(4) — exemption documentation and direct payment by government
• Fla. Admin. Code r. 12A-1.094(2)-(5) — public-works materials and factors identifying the true purchaser
• Fla. Admin. Code r. 12A-1.051(10) — tax treatment of contractor-manufactured or fabricated articles

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 04A-063

Original ruling text

SUMMARY
QUESTION: Do the procedures set out in a city's Tax Exempt Purchasing Procedures for Public Projects for purchase
of materials exempt from sales and use taxes for the construction of a public library meet legal requirements for
claiming the city's exemption?
ANSWER - Based on Facts Below: Where (1) the city issues its own purchase orders directly to the vendors; (2) the
purchase orders include the city's consumer's certificate of exemption number; (3) the vendors invoice the city directly;
(4) the city issues its checks to the vendors directly; (5) the city takes title to the materials from the vendor and
assumes liability for the materials when they are delivered to the job site; (6) the city assumes risk of loss for the
materials upon delivery which is clearly established by the requirement in the controlling documents that the city is
named as the insured party to receive proceeds in case of loss of the items purchased tax exempt; and (7) the
remaining terms of the documents do not prevent the conclusion that the city rather than the contractor is, in
substance as well as form, the purchaser of the materials, the procedures meet legal requirements for the city to
purchase the materials tax exempt.

November 29, 2004

Re: Technical Assistance Advisement 04A-063
Sales and Use Tax - Public Works Contract
Section: 212.08, F.S.
Rule: 12A-1.094, F.A.C.
Petitioner: XXX (herein "City")
FEI: XX
Dear:
This letter is a response to your petition dated October 19, 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
Taxpayer’s petition includes the following documents related to a public works contract:

1. AIA Document A101, Standard Form of Agreement between City and Contractor where the basis of payment is a
   Stipulated Sum, 1997 Edition(FN 1) (hereinafter "Agreement").
2. Exhibit M [to the Agreement] (hereinafter "Exhibit"), Direct Materials Acquisition by City.

3. Attachment 1 to Exhibit M, Sales Tax Exempt Purchasing Procedures for Public Projects (hereafter "Procedures").

4. Sample Purchase Order.
   Article 1 of the Agreement makes the Exhibit and the Procedures part of the Agreement.
   Article 7 of the Agreement, Subsection 7.6, Other provisions, states:
   Wherever the Contract Documents or the Bid Documents conflict with the [Exhibit] and the [Procedures], the [Exhibit]
   and [Procedures] shall prevail.
   Article 8 of the Agreement, Enumeration of Contract Documents, Subsection 8.1.3, contains provisions to identify the
   Exhibit and Procedures as Supplementary Conditions to the Agreement. The Exhibit provides in summation that:
5. The term "(sub)contractor" shall mean the contractor and/or a subcontractor, as applicable.
6. Each contractor or subcontractor shall include applicable sales tax for all materials, supplies, and equipment
   included in its bid.
7. The City may elect to purchase materials and equipment included in a contractor's bid directly from the supplier.
   Any materials so purchased will be called "City purchased materials" and be governed by the Procedures. The
   Procedures govern where inconsistencies exist between the Procedures and the Agreement.
8. The City will issue its own purchase orders directly to the vendor, which will contain the City's exemption certificate,
   issue and expiration date, and name and address. (Sub)contractors will select the suppliers from whom materials will
   be purchased, for prices negotiated by the (sub)contractors.
9. (Sub)contractors will remain responsible for coordination of material purchases, protection, warranties, and
   installation.
10. Upon delivery to the job site, the contractor will have contractual obligations to inspect and accept delivery of
    materials pending incorporation into the project, will verify the delivery ticket in writing, and will furnish the invoice to
    the City.
11. Notwithstanding the transfer of the City purchased materials to the (sub)contractor, the City retains title to the
    materials.
12. The City shall purchase and maintain insurance on the materials, equipment, and supplies not yet incorporated into
    the project from the time that the City first takes title.
13. The materials suppliers may be required to carry a bond in the amount of 100% of the purchase price, the cost of
    which will be added to the purchase price.

10. If the state assesses any sales tax, penalties and/or interest against the contractor or any of the subcontractors or
materials suppliers relating to the direct acquisition of materials and/or equipment by City, such taxes or charges will
be reimbursed by the City to the contractor.
The Procedures provide substantially what the Exhibit provides, plus what follows, in pertinent summation that:

2. (Sub)contractors will select the suppliers from whom materials will be purchased.
3. Contractor shall provide the City with a list of all intended suppliers, vendors, and materialmen, as well as materials
   to be supplied, estimated quantities, and prices.
4. Contractor shall provide the City with a list of all intended Subcontractors, who will supply lists of all of their intended
   suppliers, vendors, and materialmen, as well as materials to be supplied, estimated quantities, and prices.
5. Upon request of the Contractor, the Subcontractor shall prepare a standard purchase order requisition form
   acceptable to the City to specifically identify the materials that the City, at its sole option, elected to purchase. This
   requisition form shall include:
   a. Name, address, telephone number and contact person for the material supplier;
   b. Manufacturer or brand, model, or specification number of the item;
   c. The quantity needed as estimated by (sub)contractor;
   d. The price quoted by the supplier for the materials identified;
   e. Any sales tax associated with the price quote;
   f. Delivery dates established by (sub)contractor;
   g. Copy of written quote from vendor.

7. Upon receipt of a Requisition, City shall review the Requisition and, if approved, issue its own purchase order and
   forward it to the Subcontractor for verification prior to its issuance to the supplier, with delivery to be made to the
   Project location on an F.O.B. job site basis. The purchase order shall provide the City's name, address, exemption
   number, and issuance and expiration date, and shall provide for insurance. It shall be accompanied by the City's
   exemption certificate.

10. The Subcontractor is responsible for risk of loss of the materials due to its own actions or negligence.

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

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

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

19. The subcontractor shall review invoices to be certain that the materials delivered are satisfactory and meet the
    specifications of the purchase order and shall advise the City of conforming invoices, for which the City shall pay
    directly to the supplier.
20. At the end of the project, credit is given to the City for refunds on surplus materials, and salvaged materials are the
    property of the City, removed from the Project site at the direction of the City.
    The Sample Purchase Order that you provide conforms to the requirements of the Exhibit and the Procedures.
    The City and its contractors have not yet executed the Agreement, and the sales tax exemption will not be available
    until the Agreement is fully executed, incorporating the two additional Exhibits into the Agreement. The conclusions
    set out in this advisement are contingent on such executions.
    To summarize:
21. The City may elect to purchase materials and equipment included in a contractor's bid directly from the supplier.
22. Contractor will select the suppliers from whom materials will be purchased.
23. From the Requisition, the City prepares a Purchase Order containing necessary exemption information and the
    signature of the City's authorized personnel and issues the purchase order directly to the supplier.
24. Although the City will take title to materials purchased pursuant to the Procedures upon delivery to the job site, the
    Contractor will have contractual obligations to inspect, accept delivery of, and store the materials pending
    incorporation into the project. Contractor will have the duty to safeguard, store, and protect the materials and will be
    liable to City for the performance of these duties while the materials are in its possession until returned to City through
    incorporation into the Project.
25. After verifying that delivery is in accordance with the purchase order, Contractor will forward approved invoices to
    City with appropriate documentation and City will process the invoices and issue payment directly to the supplier.
26. The City will carry insurance sufficient to cover City purchased materials.
    Law
    Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6), Florida Statutes, 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)
   Discussion, Analysis and Conclusion
   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), Florida Administrative Code, 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, 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, Florida Administrative
Code, 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 Agreement, Exhibit, and Procedures appear to satisfy the foregoing requirements for exemption of transactions
   as sales to a governmental entity. City will make direct purchases of various construction materials. Contractor will
   prepare, for City approval, requisitions for direct purchases. City will prepare detailed Purchase Orders, including its
   exemption documentation, and forward them to the vendor. After receiving the approved invoices from Contractor,
   City will pay the vendors directly. City will retain legal, and equitable, title to all materials it purchases, and it will be
   responsible for the cost of insurance on those materials under the Agreement.
   Based upon the conclusion that City is the purchaser, all purchases of materials that are made in accordance with the
   Agreement will be exempt from sales tax. It is necessary that a properly completed exemption certificate be extended
   at the time of purchase to each of the vendors.
   Please note that this response does not apply to a contractor that manufactures or fabricates its own materials as
   specified in Rule 12A-1.094(5), 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, 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
850/414-9838
Control #61889

FOOTNOTE 1. The Agreement is unexecuted, and spaces for inserting information are not filled out.