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

Plain-English summary

The Florida Department of Revenue concluded that the county's proposed direct-purchase procedures would let it buy materials for a public-works project without sales tax. The county—not its contractor—had to be the purchaser in substance as well as on paper.

Florida's government exemption covered direct sales to a county when the governmental entity paid the dealer. It did not cover materials sold to a contractor and incorporated into government-owned public works. The ruling therefore examined who issued the order, received the invoice, paid, held title, and bore the economic risk before installation.

The county's procedures met the five direct-purchase criteria

The contract documents provided that:

1. The county would issue purchase orders for selected materials, using its consumer's certificate of exemption number.
2. Vendors would invoice the county directly.
3. The county would pay vendors directly from public funds.
4. The county would hold legal and equitable title to the materials before they became part of the real property.
5. The county would bear the risk of loss and be named as an additional insured under the relevant insurance coverage.

Those provisions supported the conclusion that the county was the actual purchaser. Materials bought in accordance with those procedures were exempt, provided a properly completed exemption certificate was given to each vendor and no other contract term changed the substance of the arrangement.

Risk of loss was especially important

The ruling called assumption of loss or damage while materials were stored at the job site a paramount consideration. The county could establish that risk by buying the insurance or being the insured party entitled to its economic benefit.

Contractor-fabricated materials remained taxable

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

What this means for you

Counties and other governmental entities

An exemption certificate alone is not enough. The purchasing documents and actual conduct should consistently show that the government placed the order, owed the vendor, paid the bill, owned the materials, and bore the pre-installation risk.

Public-works contractors

You may prepare requisitions and present the government's purchase order to a vendor, but the government must remain the real buyer. A contractor purchase does not become exempt merely because the materials will end up in government property.

Contract and accounting teams

Review the construction agreement, purchase orders, invoices, payment records, title provisions, bailment terms, and insurance together. A conflicting document can undermine direct-purchase treatment even if the main procedure is labeled tax-exempt.

Common questions

Q: Could the contractor prepare the purchase requisition?
A: Yes. The contractor could prepare and deliver the requisition, but the county had to decide what to buy and issue the purchase order.

Q: Who had to receive the vendor invoice and make payment?
A: The county had to be invoiced directly and pay the vendor directly.

Q: When did the county need to take title?
A: Before incorporation into the real property; the described documents gave the county title while the materials were in the contractor's possession.

Q: Could the contractor carry the insurance?
A: The described policy could be maintained by the contractor because it named the county as an additional insured and protected the county-purchased materials.

Q: Did the exemption cover contractor-fabricated items?
A: No. The ruling expressly excluded contractor- or subcontractor-manufactured materials from its approval.

Citations and references

• Fla. Stat. § 212.08(6) — direct government-purchase exemption and exclusion for contractor purchases incorporated into public works
• Fla. Admin. Code r. 12A-1.038(4) — direct payment and exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works contractor taxability and the direct-order, invoice, payment, title, and risk-of-loss criteria
• Fla. Admin. Code r. 12A-1.051(10) — tax treatment of contractor-manufactured or fabricated materials

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 05A-035

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 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 from 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.

August 25, 2005

Re: Technical Assistance Advisement 05A-035
Sales and Use Tax - Public Works Contracts
Sections: 212.08, F.S.
Rules: 12A-1.094, F.A.C.
Petitioner: XXX(herein "County")
FEI: XX
Dear:
This letter is a response to your petition dated June 3, 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, 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
County has awarded a contract for the construction of a XXX (hereinafter "Project"). County has drafted procedures
for county-direct purchases of materials (Section 00810), which are part of the contract documents with the
Contractor. Construction of the Project begins in August 2005.
Section 00810 contains the following pertinent provisions:
Subsection 2.01 specifically lists items that County is contemplating directly purchasing. Relevant provisions of
Section 00810 are as follows:
Under Subsection 3.01 A, Contractor (or Subcontractor) 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. County will
prepare a Purchase Order for all materials County chooses to directly purchase.
Subsection 3.01 C 1. provides that Contractor will "insure and/or direct the applicable Sub-contractors, suppliers
and/or vendors to directly invoice" County for items County intends to directly purchase.
Subsections 3.01 G and H provide that County retains legal and equitable title to any and all county-furnished
materials even though the materials are in the possession of Contractor, and that the transfer of the materials by
County to Contractor will constitute a bailment.
Subsection 3.01 I requires Contractor to "purchase and maintain insurance pursuant to the requirements set forth in
the [County] and Contractor Agreement which shall be sufficient to protect against any loss or damage to [County]
purchased equipment, materials, or supplies" from the time County takes title to the materials until such materials are
incorporated into the Project. The "insurance [policy] shall name the [County] as an additional insured party."
According to Subsection 3.01 K, 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.
REQUESTED ADVISEMENT
Advice is requested whether the procedures set forth in Section 00810 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 and Analysis
   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 from 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
   Section 00810 appears to satisfy the foregoing requirements for exemption of transactions as sales to a governmental
   entity. County will prepare purchase orders for direct purchases. Vendors, suppliers, and subcontractors, as
   applicable, will directly invoice County for County-purchased materials. County will pay the vendors directly. County
   will retain legal, and equitable, title to all materials it purchases. County will be a named insured party on the builder's
   risk policy.
   Based upon the conclusion that County is the purchaser, all purchases of materials that are made in accordance with
   the Section 00810 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. This response is predicated on the assumption
   that the remaining terms of the documents do not prevent the conclusion that the County rather than Contractor is in
   substance as well as form the purchaser of the materials.
   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
Control #14901