Did an exempt organization's direct-purchase agreement qualify its construction materials for Florida's sales-tax exemption?

Plain-English summary

A tax-exempt organization planned to buy materials directly for a new facility being built by a contractor. Florida found the proposed procedures insufficient to make those material purchases exempt.

The direct-purchase agreement was not clearly incorporated into the construction contract, whose terms controlled the tax result. Even if it had been incorporated, the agreement did not clearly identify the exempt organization as the party issuing purchase orders, did not require vendors to invoice the organization directly, and appeared to delay the organization's acceptance of title until after delivery and inspection.

The plan did satisfy two elements: the organization would pay vendors directly and would be an additional insured under the contractor's builder's-risk policy, supporting its assumption of risk before incorporation. Those points did not cure the missing or unclear requirements.

What this means for you

An exempt organization's direct-payment arrangement is only one part of the analysis. The controlling construction contract should clearly establish the organization as purchaser at every stage: order, invoice, payment, delivery, title, and pre-installation risk of loss.

Common questions

Did direct payment to vendors make the purchases exempt? No. Direct payment was required but was not sufficient by itself.

Why did contract incorporation matter? Florida looked to the controlling construction contract to decide who was actually purchasing the materials.

What was unclear about the purchase process? The agreement did not clearly say whether the organization or contractor issued purchase orders and did not require vendors to invoice the organization directly.

What was wrong with the title provision? The organization appeared to accept title only after delivery and a conformity determination, creating a lapse between delivery and title acceptance.

Did the insurance provision help? Yes. Naming the organization as an additional insured supported its assumption of risk, but it did not resolve the other defects.

Citations and references

• Fla. Stat. § 212.08(7)(p) (qualifying nonprofit purchases of tangible personal property)
• Fla. Stat. § 212.08 (sales-tax exemptions)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-001

Original ruling text

SUMMARY

QUESTION:
Do the Direct Purchase Agreement for the purchase of materials set out in the contract for the
construction of the facility meet the legal requirements for the Exempt Organization to purchase the
materials tax exempt?
ANSWER:
The procedures do not meet the legal requirement for the Exempt Organization to purchase the
materials tax exempt.
It is not clear that the Direct Purchase Agreement are incorporated into the construction contract.
The terms of the construction contract are controlling in determining the taxability of the materials.
Even if incorporated into the construction contract, the terms of the Direct Purchase Agreement are
not specific on all of the necessary elements for Exempt Organization to make tax exempt
purchases of the materials for use in the project. It is not clear from the language of the Direct
Purchase Agreement whether Contractor or Exempt Organization is the party issuing the purchase
orders. The Direct Purchase Agreement does not require that vendors issue their invoices directly
to Exempt Organization. There appears to be a time lapse between the delivery of the materials to
the job site and Exempt Organization’s acceptance of title.
The Direct Purchase Agreement does meet the requirements that Exempt Organization issue the
payment directly to the vendors, and that Exempt Organization assume risk of loss of the materials
prior to their incorporation into the project as an additional named party on the Contractor’s
builders risk insurance policy.
January 9, 2008

XXX
XXX
XXX
Re:

Technical Assistance Advisement 08A-001
Sales and Use Tax – Construction Contract/Exempt Organization
Section: 212.08, F.S.
Petitioner: XXX
FEI: XXX

Technical Assistance Advisement
Page 2

Dear XXX:
This letter is a response to your petition dated August 20, 2007, for the Department’s issuance of a
Technical Assistance Advisement (“TAA”) concerning the above referenced parties 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.
ISSUE
Whether the Direct Purchase Agreement is sufficient to allow a tax-exempt organization to take
advantage of its tax exempt status on the purchase of materials for use in a real property
construction contract.
PRESENTED FACTS
The petition sets forth the following information:
[Organization S] is America’s leading XXX academy.
[Organization S’s] three-year
fellowship program is an in-depth course of instruction and performance that prepares
outstanding graduates of conservatories and universities for musical leadership in orchestras
and ensembles around the world. [Organization S] is developing and constructing a state-

of-the-art educational, performance and Internet2 facility. [Organization S’s] new facility
will be located on land owned by [City], a Florida municipal corporation, subject to a XXXyear ground lease pursuant to which the City has leased to [Organization S], for nominal
rent, land upon which [Organization S] will build its new facility. The lease has XXX
XXX-year automatic extensions.
[Organization N] was formed by [Organization S] to participate in the development of the
new facility described above, on behalf of [Organization S. Organization S] is the sole
member of [Organization N. Organization N] and [Organization S] have entered into an
operating agreement that sets forth their understanding concerning the operations of
[Organization N].
[Organization N] has contracted with [Contractor], a XXX limited liability company, to
develop the new facility. [Project Manager] has been hired by [Organization N] as project
Manager. [Organization N] and the “Contractor” have established procedures (the

Technical Assistance Advisement
Page 3

“Procedures”) whereby [Organization N] may purchase materials and equipment included
in any subcontractor’s scope of work directly from the supplier of the materials or
equipment in order to achieve sales tax savings. . . . If [Organization N] elects to implement
the direct purchase procedures, it must notify the Contractor, in writing, and the following
terms will govern. . . .
•
•
•
•
•

•

The Contractor will require its subcontractors to itemize materials and equipment
included in their subcontracts and to provide the purchase price and the sales tax
applicable to the purchase of such materials and equipment.
If [Organization N] elects to make direct purchase of any materials or equipment, it
will notify Contractor. The Contractor will prepare a purchase order for
[Organization N] for the materials and equipment.
Upon delivery of the materials and equipment to the facility site, the subcontractor
will inspect the equipment and materials and accompanying invoices to determine
that they conform to [Organization N’s] purchase order.
[Organization N] will accept and take title to the materials and equipment after
being advised by the Contractor that they conform to the purchase order.
The Contractor will forward approved invoices and associated back-up
documentation for the materials and equipment to [Organization N], and
[Organization N] will process these invoices and issue payment directly to the
supplier.
The Contractor will maintain builder’s risk insurance (paid for by [Organization N]
through its contract with Contractor) on the materials and equipment purchased
directly by [Organization N], naming [Organization N] as an additional insured.

Enclosed with the request is a document entitled “Direct Purchase Agreement.” The document
does not indicate that it is incorporated into the contract between Organization N and Contractor.
The pertinent terms of the agreement are as follows:
•
•
•
•
•

The Direct Purchase Agreement is unclear whether Organization N or Contractor will issue
the purchase order for the materials.
The Direct Purchase Agreement does not specify that the vendor of the materials will issue
its invoice(s) directly to Organization N.
Organization N will issue payment directly to the vendor.
Organization N will accept title to the materials after delivery and upon determination that
the materials conform to the purchase order.
Contractor will maintain builder’s risk insurance and name Organization N as an additional
insured.

LAW AND DISCUSSION

Technical Assistance Advisement
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Nonprofit institutions that qualify under section 501(c)(3) of the Internal Revenue Code may
structure construction contracts in order to take advantage of tax exemptions available to them. If
the organization elects to take advantage of tax exemptions in a construction contract, certain
elements are required in order to legally effect the exemption. These elements must be followed
for the exempt organization to receive its exemption.
Pursuant to section 212.08(7)(p), Florida Statutes, sales tax does not apply to the purchase, by an
organization exempt from income tax under I.R.C. Section 501(c)(3), of tangible personal property,
including building materials, where payment is made directly to the vendor by the exempt
organization and such purchases will be used to carry out the exempt organization's customary
nonprofit activities. Further, the exempt organization is required to present the vendor with a
properly completed exemption certificate at the time of purchase in order to establish the taxexempt status of the transaction.
In those instances where the tax exempt entity makes purchases of tangible personal property in the
tax exempt entity's own name, using its own purchase orders, and making direct payment to the
vendor of the materials, and provided that the tax exempt entity is invoiced directly for the
purchases, no sales tax is due on such purchases.
Notwithstanding the previous paragraph, even if the tax exempt entity has structured a contract as
described above, the tax exempt entity must assume all risk of damage or loss for the building
materials from the time of purchase and prior to their installation or incorporation into the project
in order for the sale of building materials to be deemed a sale to the tax exempt entity and, thus, to
be tax exempt. Further, the Department will also give special consideration to several factors
(bidding, indemnification, inspection, acceptance, delivery, payment, and storage) that govern the
status of tangible personal property prior to its affixation to real property when determining
whether the sale of such property is to the tax exempt entity or instead to a contractor. However,
the assumption of risk of damage or loss is the paramount consideration. The assumption of risk
would include the period of time that the building materials are physically stored at the job site
prior to their installation or incorporation into the project. The tax exempt entity will be deemed to
have assumed the risk of damage or loss if the tax exempt entity either bears the economic burden
of posting a bond or obtaining insurance covering damage or loss, or enjoys the economic benefit
of the proceeds of such bond or insurance. If the tax exempt entity does not assume the risk of
damage or loss, the contractor will be construed to be the ultimate or final consumer of the building
materials it uses and will be liable for the applicable tax.
In order to make a determination that the exempt entity is the final consumer of the building
materials, the construction contract must include the following provisions:
1.
The Exempt Organization must issue the purchase orders in its own name along with a copy
of its Consumer’s Certificate of Exemption.

Technical Assistance Advisement
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2.
Materials must be delivered to Exempt Organization at the job site, and title of materials
must be transferred to Exempt Organization.
3.

The Exempt Organization must be billed directly by the selling vendor.

4.

Payment for the materials must be made directly by the Exempt Organization.

5.
The Exempt Organization must bear all risk of loss or damage to materials from the time of
purchase and prior to their installation into the project.

CONCLUSION
Organization N’s procedures are not sufficient for it to take advantage of its tax exempt status for
the purchase of building materials for Contractor’s use in the construction project. It is not clear
that the procedures are incorporated into the construction contract. The terms of the construction
contract are controlling in determining the taxability of the materials.
Even if incorporated into the construction contract, the terms of the Direct Purchase Agreement are
not specific on all of the necessary elements for Organization N to make tax exempt purchases of
the materials for use in the project. It is not clear from the language of the Direct Purchase
Agreement whether Contractor or Organization N is the party issuing the purchase orders. The
Direct Purchase Agreement does not require that vendors issue their invoices directly to
Organization N. There appears to be a time lapse between the delivery of the materials to the job
site and Organization N’s acceptance of title.
The Direct Purchase Agreement does meet the requirements that Organization N issue the payment
directly to the vendors, and that Organization N assume risk of loss of the materials prior to their
incorporation into the project as an additional named party on the Contractor’s builders risk
insurance policy.

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

Technical Assistance Advisement
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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 10 days of the date of this
letter.

Sincerely,

Sara D. Faulkenberry
Senior Tax Specialist
Technical Assistance and Dispute Resolution

Control #35071