Did a school board's owner-direct-purchase procedures qualify construction materials for Florida's government sales-tax exemption?

Plain-English summary

The school board's owner-direct-purchase procedures qualified its construction-material purchases for Florida's government sales-tax exemption. The procedures made the board, rather than the construction manager or contractor, the purchaser in substance as well as form.

The project was a new K-8 school under a guaranteed-maximum-price construction contract. Amendments added detailed direct-purchasing procedures that satisfied the Department's five main factors:

1. Direct purchase order: the board issued its own purchase order to the supplier, including its Consumer's Certificate of Exemption number, after reviewing contractor worksheets.
2. Direct invoice: the vendor invoiced the board rather than the contractor.
3. Direct payment: the board paid the supplier directly.
4. Title and liability: the board took legal and equitable title and assumed liability when materials were delivered to the job site.
5. Risk of loss: the board bore the builder's-risk insurance cost and was a named insured for the purchased materials.

Contractors could select suppliers, prepare purchase worksheets, inspect deliveries, and store materials before incorporation. Those administrative functions did not prevent the board from being the purchaser under the controlling procedures.

Purchases made in accordance with the procedures were exempt, but the board had to provide each vendor a properly completed exemption certificate at the time of purchase.

Contractor fabrication was not covered

The ruling did not apply when a contractor or subcontractor manufactured or fabricated its own materials. Under the cited rules, the contractor or subcontractor was the ultimate consumer and owed use tax on the full cost of those fabricated articles.

What this means for you

Public entities using direct-purchase programs should make every document and payment step consistent with government ownership. Direct payment alone is not enough; purchase orders, invoices, title, liability, risk of loss, insurance, and exemption documentation all need to support the public entity as purchaser.

Common questions

Q: Could contractors choose suppliers and handle deliveries?
A: Yes. The board still qualified as purchaser because it controlled and documented the actual purchase, payment, title, and risk of loss.

Q: Was a vendor exemption certificate required?
A: Yes, a properly completed certificate had to be provided at purchase.

Q: Were contractor-fabricated materials exempt under this TAA?
A: No. The contractor or subcontractor owed use tax on full fabricated cost.

Citations and references

• Fla. Stat. § 212.08(6) — direct government purchases
• Fla. Admin. Code r. 12A-1.038(4) — exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works purchaser factors
• Fla. Admin. Code r. 12A-1.051(10) — contractor-fabricated materials

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-004

Original ruling text

SUMMARY
QUESTION: Do the procedures for the purchase of materials set out in the contract for the construction of public
works meet the legal requirements for the School Board to purchase the materials tax exempt?
ANSWER - Based on Facts Below: The procedures meet the legal requirement for the School Board to purchase the
materials tax exempt as long as the controlling documents provide:

1. The School Board issues its own purchase orders directly to the vendors.
2. The purchase orders include the School Board's Consumer's Certificate of Exemption number and the School
   Board will supply a copy of the Consumer's Certificate of Exemption to the vendor.
3. The vendors invoice the School Board directly.
4. The School Board issues its checks to the vendors directly.
5. The School Board takes title to the materials from the vendor and assumes liability for the materials when they are
   delivered to the job site.
6. The School Board assumes risk of loss for the materials upon delivery, which his clearly established by the
   requirement in the controlling documents that the School Board reimburse the contractor for premiums paid for
   insurance against loss or damage and the School Board 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 School Board rather than the
   contractor is in substance as well as form the purchaser of the materials.

January 20, 2005
Re: Technical Assistance Advisement 05A-004
Public Works Contract
Section: 212.08, F.S.
Rules: 12A-1.038, 12A-1.051, 12A-1.094, F.A.C.
Petitioner: XXX (herein "School Board")
FEI: XX
Dear
This letter is a response to your petition dated November 27, 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
On October 7, 2004, the School Board and Construction Manager entered into a Standard Form Contract between
School Board and Construction Manager (the "Agreement"), pursuant to which Construction Manager was engaged to
construct a new K-8 school (the "Project"). Under the Agreement, Construction Manager is required to pay
enumerated costs of the Project, including the cost of materials and builder's risk insurance on those materials. School
Board is required to reimburse Construction Manager for the enumerated costs, plus pay certain fees. The Agreement
provides for a guaranteed maximum price ("GMP") that caps the cost of the Project to School Board.
School Board is entitled to make purchases without paying Florida sales and use tax under a consumer's certificate of
exemption. To take advantage of the School Board's exemption, three Amendments were made to the Agreement,
each of which provides for incorporation of Exhibit F into the Agreement. Exhibit F to the Amendment(s), which is
entitled "Owner Direct Purchasing Procedures" (the "Procedures"), provides detailed procedures for the direct
purchasing program. The Procedures provide as follows:

1. The School Board 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. Construction Manager or Contractor shall furnish detailed Purchase Order Worksheets ("Worksheets") for all
   School Board purchased materials.
4. Upon receipt of a Worksheet, School Board shall review the Worksheet and, if approved, issue its own purchase
   order directly to the supplier.
5. Although School Board will take title to materials purchased pursuant to the Procedures upon delivery to the job
   site, the Construction Manager and contractor will have contractual obligations to inspect, accept delivery of, and store
   the materials pending incorporation into the project.
6. After verifying that delivery is in accordance with the purchase order, the contractor will forward approved invoices
   to Construction Manager; School Board will process the invoices and issue payment directly to the supplier.
7. The School Board will purchase builder's risk insurance sufficient to cover School Board 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, 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 Procedures appear to satisfy the foregoing requirements for exemption of transactions as sales to a
   governmental entity. School Board will make direct purchases of various construction materials. After receiving
   requisition forms from the contractors, School Board will prepare purchase orders for direct purchases. After receiving
   the approved invoices from Construction Manager, School Board will pay the vendors directly. School Board will retain
   legal, and equitable, title to all materials it purchases, will be responsible for the cost of builder's risk insurance on
   those materials as a reimbursable cost under the Agreements, and will be a named insured party on the builder's risk
   policy.
   Based upon the conclusion that School Board is the purchaser, all purchases of materials that are made in
   accordance with the Procedures 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.
   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, 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 #62244