Did a government owner's sales-tax recovery agreement support exempt direct purchases for a design-build project?

Plain-English summary

An exempt government owner used a stipulated-sum design-build contract and a sales-tax recovery agreement to purchase selected major systems or construction elements directly. The design-builder identified suppliers and supplied quotes or invoices, while the owner prepared orders and checks.

Florida approved the purchases because the owner was the purchaser in substance. It issued purchase orders, received direct vendor invoices, paid with its own funds, retained legal and equitable title, and bought builder's-risk insurance covering the materials.

The answer depended on no other contract provision overriding the submitted terms. It also excluded contractor-manufactured or fabricated items; contractors remained taxable consumers of those items and owed use tax on fabricated cost.

What this means for you

A tax-recovery label alone does not create exemption. The government owner must actually control the purchase, title, payment, and economic risk before materials become real property.

Common questions

Who issued purchase orders and paid vendors? The exempt owner.

Who held title? The owner retained legal and equitable title to the direct-purchased materials.

How was risk of loss handled? The owner maintained builder's-risk insurance sufficient to protect the materials.

Could another contract clause change the result? Yes. The ruling was conditioned on no provision overriding the submitted agreement and exhibits.

Were contractor-fabricated materials covered? No. Those remained taxable to the contractor on full fabricated cost.

Citations and references

• Fla. Stat. § 212.08(6) (direct governmental purchases and contractor exclusion)
• Fla. Admin. Code rr. 12A-1.038(4), 12A-1.094(2)-(5) (exemption documentation and public-works criteria)
• Fla. Admin. Code r. 12A-1.051(10) (fabricated materials referenced in the ruling)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06A-027

Original ruling text

SUMMARY
QUESTION: Are the terms and conditions proposed by the Taxpayer to be included into public works contracts with
contractors sufficient to allow the Taxpayer to purchase materials which are incorporated by the contractors into public
works projects exempt from sales tax?
ANSWER - Based on the Facts Below: Based on the proposed terms and conditions, the sales tax recovery
agreement, and the exhibits provided by the Taxpayer, the legal incidence of sales tax on purchases of tangible
personal property that will be incorporated into public works projects would be directly upon the Taxpayer. Such
purchases would be exempt from sales tax as long as no other provisions in any contract would serve to override any
of the proposed terms and conditions, the sales tax recovery agreement, or the exhibits provided by the Taxpayer with
this request for a Technical Assistance Advisement. This response is not applicable to any contractor that uses its
own materials in the manufacture or fabrication of tangible personal property which is incorporated into the Taxpayer’s
public works project.

September 15, 2006

Re: Technical Assistance Advisement 06A-027
Sales and Use Tax - Public Works Contracts
Statute: Section 212.08(6), F.S.
Rules: 12A-1.038(4), 12A-1.094, F.A.C.
Petitioner: XXX
Dear :
This letter is in response to your petition dated December 9, 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 (F.A.C.). This response to your request constitutes a TAA and is issued to you under the
authority of s. 213.22, Florida Statutes (F.S.).
FACTS
Your letter provides that XXX is preparing to construct an office building (herein "Project"). It has engaged in a
contract with a contractor (herein "Designer-Builder"). The request for a Technical Assistance Advisement contained
the following documents:

1. A copy of XXX's Consumer's Certificate of Exemption.
2. An Agreement letter (herein "Sales Tax Recovery Agreement") between XXX and Designer-Builder.

3. AIA Document A141 - 2004, Standard Form of Agreement between Owner and Design-builder (herein Standard
Form), where the basis of payment is a stipulated sum.

4. AIA Document #A141 - 2004 Exhibit A, Terms and Conditions, which identifies the responsibilities of each party.
5. Supplement to Agreement and to Terms and Conditions, which adds, modifies or deletes from either.
   The contract between XXX and Designer-Builder provides that XXX reserves the right to purchase certain major
   systems or elements of the construction directly and supply those items to Designer-Builder for use in the project. In
   exercising that right, XXX has entered into a Sales Tax Recovery Agreement with Designer-Builder. The agreement
   provides the guidelines that XXX proposes to incorporate into agreements with suppliers and vendors for the
   purchase of direct materials used by the contractors operating under public works contracts with XXX. Condition 3. of
   the Sales Tax Recovery Agreement states that XXX shall prepare purchase orders for items of material that XXX will
   purchase directly. Condition 2. of the Sales Tax Recovery Agreement provides that the Designer-Builder will provide a
   list of all intended suppliers for owner-purchased materials in excess of $10,000.00. Designer-Builder will provide to
   XXX price quotes or actual invoices from vendors for the cost of the materials that will be purchased by XXX.
   Condition 15. of the Sales Tax Recovery Agreement provides that XXX will prepare a check drawn to the supplier and
   delivered and remitted directly to the supplier. Condition 10. of the Sales Tax Recovery Agreement provides that XXX
   shall retain legal and equitable title to any and all owner-furnished materials. Condition 12. of the Sales Tax Recovery
   Agreement provides that XXX shall purchase and maintain Builder's Risk insurance sufficient to protect against any
   loss of or damage to owner-furnished materials.
   REQUESTED ADVISEMENT
   You request advice whether the terms of the subject contract are sufficient to allow XXX to purchase construction
   materials 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, the entity must obtain a Consumer's Certificate of Exemption issued by the Department and
   payment for tax exempt purchases must be made directly to the selling dealer by the government entity. In this case,
   the XXX currently holds a valid Certificate of Exemption and will make payments directly to the registered vendor. If
   these requirements are met, the conditions of this rule will have been met.
   Rule 12A-1.094(2) and (3), Florida Administrative Code, state that the purchase of materials and supplies for public
   works contracts is taxable to the contractor as the ultimate consumer where the contractor is deemed to be the
   purchaser of such materials and supplies that will ultimately go into or become part of public works.
   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.
   XXX has entered into a Sales Tax Recovery Agreement with Designer-Builder which states that XXX will execute
   purchase orders for the tangible personal property it wishes to direct purchase; vendors invoices will be issued directly
   to XXX; XXX will make direct payment to vendors with XXX's funds; XXX will take title to the direct purchased
   materials and supplies at the time of purchase; and XXX will purchase Builders Risk insurance sufficient to protect
   against any loss of or damage to the direct purchased materials. XXX has met the requirements of this section of rule
   so long as it is the direct purchaser of tangible personal property from a vendor who is not responsible for its
   installation.
   CONCLUSION
   The Sales Tax Recovery Agreement, Exhibit, and Terms and Conditions appear to satisfy the foregoing requirements
   for exemption of transactions as sales to a governmental entity. XXX will make direct purchases of various
   construction materials. Contractor will prepare, for XXX approval, requisitions for direct purchases. XXX will prepare
   detailed Purchase Orders, including its exemption documentation, and forward them to the vendor. After receiving the
   approved invoices from Contractor, XXX will pay the vendors directly. XXX 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 Sales Tax
   Recovery Agreement.
   Based upon the conclusion that XXX is the purchaser, all purchases of materials that are made in accordance with the
   Sales Tax Recovery 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), 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 Article 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 Article
213.22, F.S. Our response is predicated on 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 than 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 Article 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,
Ron Gay
Tax Law Specialist
Technical Assistance and Dispute Resolution
Record ID: XXX