Could a county buy public-works construction materials tax-free under its proposed direct-purchase procedures?

Plain-English summary

The county's construction-material purchases could qualify as exempt direct government purchases, but only after specified contract changes. Florida looks to the substance of the transaction to decide whether the government or the public-works contractor is the actual purchaser.

Required direct-purchase elements

The controlling documents had to establish all of the following:

1. The county issued its own purchase order directly to each vendor, included its Consumer's Certificate of Exemption number, and supplied the certificate.
2. The vendor invoiced the county directly.
3. The county paid the vendor directly from public funds.
4. The county took title and assumed liability when the materials were delivered to the job site.
5. The county assumed the risk of loss before the materials were incorporated into the project, shown through the county's insurance cost or status as the insured party entitled to proceeds.
6. The remaining contract terms supported the county being the purchaser in substance as well as form.

The contractor could select vendors, prepare requisitions, inspect deliveries, and handle and store the materials. Those functions did not defeat the exemption when the county itself remained the purchaser under the controlling documents.

Two changes were necessary

The proposed exhibit initially assigned post-acceptance risk of loss to the contractor, while another provision required county insurance. The Department required the exhibit to be amended so the county assumed risk of loss before incorporation.

The direct-purchase program also had to be limited to materials that actually became part of the public work. Materials merely consumed during construction did not qualify.

With those changes, purchases made under the exhibit could be exempt, provided a properly completed exemption certificate was given to each vendor at purchase.

Contractor fabrication remained taxable

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

What this means for you

A government name on paperwork is not enough. Public-works exemption procedures must consistently show direct government ordering, invoicing, payment, title, liability, and risk of loss before incorporation. Conflicting contract clauses should be corrected before purchases occur, and the exemption should not be applied to consumables or contractor-fabricated items covered by different rules.

Common questions

Q: Was the contract acceptable exactly as submitted?
A: No. It needed changes assigning risk of loss to the county and limiting direct purchases to incorporated materials.

Q: Could the contractor select vendors and inspect deliveries?
A: Yes. Those administrative roles did not prevent the county from being the purchaser when the direct-purchase requirements were satisfied.

Q: Were materials consumed during construction exempt?
A: Not under this direct-purchase ruling unless they were actually incorporated into the public work.

Q: Were contractor-fabricated materials covered?
A: No. The ruling treated the contractor or subcontractor as the taxable ultimate consumer of those articles.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-012

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 County to purchase the materials tax exempt?

ANSWER - Based on Facts Below: The procedures meet the legal requirement for the County to purchase the

materials tax exempt as long as the controlling documents provide:

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

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

a copy of the Consumer's Certificate of Exemption to the vendor.

3. The vendors invoice the County directly.

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

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

delivered to the job site.

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

exempt.

7. The remaining terms of the documents do not prevent the conclusion that the County rather than the contractor is in

substance as well as form the purchaser of the materials.

February 23, 2005

Re: Technical Assistance Advisement 05A-012
Sales and Use Tax - Public Works Contract
Section: 212.08, F.S.

Rule: 12A-1.094, F.A.C.

Petitioner: XXX (herein "County")

FEI: XX

Dear :

This letter is a response to your petition dated January 4, 2005, for the Department's issuance of a Technical

Assistance Advisement ("TAA") concerning the above referenced party and matter. Your petition has been carefully

examined and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, F.A.C.

This response to your request constitutes a TAA and is issued to you under the authority of s. 213.22, F.S.

FACTS

County has entered into a contract with Construction Manager for the development of the XXX (herein "Project"). The
contract incorporates Exhibit J by reference. Exhibit J contains provisions for County to directly purchase materials for

incorporation into the project. Relevant provisions of Exhibit J are as follows:

Under Section 1.1, "County reserves the right to require Contractor to assign some or all of its subcontracts or other
agreements with material suppliers directly to County...." This section also states that the terms of Exhibit J take
precedence over other conditions and terms of the contract documents in the event that any inconsistencies or

conflicts exist.

According to Section 1.2, materials suppliers will be selected by Contractor. Contractor will included the price for all
construction materials, including sales tax and other taxes normally due on such materials and equipment, in the lump

sum price of its bid. Any items purchased directly by County will be administered using deductive Change Orders.

Section 1.3 requires Contractor to provide “a list of all intended suppliers, vendors, and material men for consideration
as [Owner Direct Purchases].... The Contractor shall submit price quotes from the vendors, as well as a description of

the materials to be supplied, estimated quantities and prices."

Under Section 1.4, if requested by County, Contractor will prepare a Purchasing Requisition Request Form. The
requisition form must include complete information to identify and contact the vendor, as well as complete information
regarding the items to be purchased. The Contractor will deliver the purchase requisition to the County, and the

County will issue the purchase order directly to the vendor of the items to be purchased.

According to Section 1.5, County will prepare a Purchase Order for all materials County chooses to directly purchase.

County will send the Purchase Order directly to the Vendor and a copy to the Contractor.

According to Section 1.6, Contractor will issue to County deductive change orders reflecting the full value of all Owner
Direct Purchases, plus associated sales tax and other savings to Contractor in the cost of Payment and Performance

Bonds associated with the materials.

Under Section 1.7, Contractor is fully responsible for all matters relating to the procurement of Owner Direct
Purchases, including but not limited to, "assuring the correct quantities, placing the order in a timely manner, and
assuring coordination of purchases, providing and obtaining all warranties and guarantees required by the Contract
Documents, inspection and acceptance of goods at the time of delivery, risk of loss, and damage or any other loss
following acceptance of the items[,]" coordinating "delivery schedules, sequence of delivery, loading orientation, and
other arrangements normally required by Contractor for the particular materials furnished." Contractor is also

responsible for unloading, handling and storing the materials prior to installation.

As noted, Section 1.7 charges Contractor with risk of loss and damage or any other loss following acceptance of the
materials. This provision is inconsistent with the requirements of Rule 12A-1.094(4), Florida Administrative Code,
which requires the governmental entity to assume risk of loss of its purchases, and with Section 1.14 of Exhibit J,

which states that County will purchase and maintain insurance to guard against loss of its materials.

Section 1.8 requires Contractor to visually inspect the materials when they arrive at the job site, verify that all
necessary documentation accompanies the delivery and conforms to the purchase order, and forward the invoice to

County for payment.

Section 1.12 states that "County shall retain legal and equitable title to any and all [Owner Direct Purchases]" even
though the materials are in the possession of Contractor. According to Section 1.13, the transfer of the materials by

County to Contractor will constitute a bailment.

As noted, Section 1.14 requires County to "purchase and maintain insurance sufficient to protect against any loss of or
damage to [Owner Direct Purchases]" from the time County takes title to the materials until such materials are

"incorporated into the Project or consumed in the process of completing the Project."

Rule 12A-1.094, Florida Administrative Code, limits direct purchase of materials to materials that are actually affixed to
the public work. Materials that are consumed in the process of the completing the public work, but that do not actually

become incorporated into the public work, are excluded from the exemption.

According to Section 1.17, upon receipt of the appropriate documentation, County will prepare and issue a check in

payment of materials purchased directly to the supplier of the materials.

To summarize:

1. The County will purchase materials and equipment included in a Contractor's bid directly from the supplier, as

directed by the Contractor.

2. Contractor will select the suppliers from whom materials will be purchased.

3. Contractor shall furnish County with detailed Purchasing Requisition Request Forms for all materials.

4. County will prepare and issue a purchase order directly to the supplier, with delivery of materials to be made to the

Project location.

5. Although County will take title to materials purchased pursuant to Exhibit J 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's possession of the materials will constitute a bailment. Contractor, as bailee,
   will have the duty to safeguard, store, and protect the materials while in its possession until returned to County

through incorporation into the Project.

6. After verifying that delivery is in accordance with the purchase order, Contractor will forward approved invoices to

County with appropriate documentation, and County will process the invoices and issue payment directly to the

supplier.

7. County will carry insurance sufficient to cover Owner Direct Purchases.

REQUESTED ADVISEMENT

Advice is requested whether the procedures set forth in Exhibit J are sufficient for County to take advantage of its tax

exempt status to purchase materials incorporated into the Project exempt from tax.

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]Jayment 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.

CONCLUSION

Exhibit J would satisfy the foregoing requirements for exemption of transactions as sales to a governmental entity, if

certain changes are made. Section 1.7 must be amended to reflect that County assumes risk of loss of building
materials prior to their incorporation into the project. The direct purchase program must be limited only to those
materials that are incorporated into the public work; materials that are consumed in the process, but do not become
incorporated into the public work, will not qualify. Assuming that these changes are made, Exhibit J otherwise appears
to meet the criteria required for County to utilize its tax exempt status in the purchase of building materials for
incorporation into the public work. County will make direct purchases of various construction materials. After receiving
requisition forms from the Contractor, County will prepare and issue purchase orders for direct purchases. After
receiving the approved invoices from Contractor, County will pay the vendors directly. County will hold 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 County is the purchaser, all purchases of materials and equipment to be incorporated
into the public work that are made in accordance with Exhibit J will be exempt from sales tax (if the suggested
changes are made). However, it is necessary that a properly completed exemption certificate be extended at the time
of purchase to each of the vendors. A suggested format for an exemption certificate is provided in Rule 12A-1.038,

Florida Administrative Code.

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, 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

850/414-9838

Control #12022