Did a city's direct-purchase documents make construction materials for a road-extension project exempt from Florida sales tax?

Plain-English summary

A city proposed to buy construction materials directly for a road-extension project. Its contract, exhibit, and purchasing procedures did not establish an exempt government purchase.

The contract controlled if the documents conflicted. That contract established only the city's purchase orders. It insured materials only until delivery to the project, not while they remained at the jobsite before installation, and it did not address the other required elements.

The exhibit and procedures supplied more detail: city purchase orders and exemption documentation, direct city payment, retained title, and insurance. But they still did not expressly require vendors to invoice the city directly, and they could not cure the controlling contract's gaps.

What this means for you

A public-works direct-purchase program must work in substance and in the controlling documents. Florida examined five elements: direct government purchase order, direct vendor invoice, direct government payment, passage of title, and government risk of loss. A document hierarchy that leaves those protections only in a subordinate exhibit can defeat the exemption.

Contractor- or subcontractor-fabricated materials also remain outside a direct-purchase program; the fabricator is the taxable consumer of those items.

Common questions

Did the city's purchase order prove an exempt purchase? No. It was the only required element established by the controlling contract.

Why was the insurance clause insufficient? It covered materials only until jobsite delivery, rather than through the storage period before incorporation into real property.

Did the procedures require direct vendor invoices to the city? No.

Citations and references

• Fla. Stat. § 212.08(6) (governmental-entity sales-tax exemption)
• Fla. Admin. Code rr. 12A-1.038 and 12A-1.094 (government purchases and public-works materials)
• Fla. Admin. Code r. 12A-1.051(10) (contractor-fabricated materials)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-009

Original ruling text

TAA SUMMARY
QUESTION: Do the contract, exhibit, and procedures for the purchase of materials set out in the
contract for the construction of public works meet the legal requirements for the City to purchase
the materials tax exempt?
ANSWER: The Contract, Exhibit, and Procedures do not satisfy the foregoing requirements for
exemption of transactions as sales to a governmental entity. According to the Contract, which is
controlling, the only criterion that is met is that City will issue its own purchase order. The
insurance provision in the Contract is not sufficient, because it does not require City to continue
insuring the materials after their delivery to the jobsite. None of the other relevant criteria are
discussed in the Contract.
The Exhibit and Procedures require that City will make direct purchases of various construction
materials. Contractor will prepare, for City approval, requisitions for direct purchases. City will
prepare detailed Purchase Orders, including its exemption documentation, and forward them to the
vendor. After receiving the approved invoices from Contractor, City will pay the vendors directly.
City 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 Agreement. However, neither the Exhibit nor the
Procedures expressly state or require that vendors will directly invoice City for the materials.

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. The governmental entity must directly pay the vendors for the tangible personal property;
   and
4. 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.
   However, the controlling documents do not state that the vendors must directly invoice the City for
   materials.
   April 22, 2008

Technical Assistance Advisement
Page 2

XXX

Re:

Technical Assistance Advisement 08A-009
Sales and Use Tax – Public Works Contract
Section: 212.08(6), F.S.
Rule: 12A-1.094, F.A.C.
XXX
FEI: XXX

XXX:
This letter is a response to your petition dated January 2, 2008, 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
Taxpayer’s petition includes the following documents related to a public works contract for a road
extension project:

1. Owner/Construction Manager-at-Risk Contract (hereinafter "Contract").
2. Exhibit M [to the Agreement] (hereinafter "Exhibit"), Direct Materials Acquisition by
   City.
3. Attachment 1 to Exhibit M, Sales Tax Exempt Purchasing Procedures for Public
   Projects (hereafter "Procedures").

Article 2.2 of the Contract states that if there is any discrepancy between it and any other
documents, then the terms of the Contract take priority.
Article 8 of the Contract, Subsection 8.8, provides that the City may wish to “purchase directly
various construction materials, supplies and equipment that may be part of [the] contract” using its
own purchase order, and that City is “responsible for insuring all materials, supplies and equipment
purchased through any [City] direct purchase orders until the materials, supplies and/or equipment
are delivered to the Project.” No other criteria relevant to effecting a tax exempt purchase by City
are included in the Contract.

Technical Assistance Advisement
Page 3

The Exhibit provides in summation that:
1.
The term "(sub)contractor" shall mean the contractor and/or a subcontractor, as
applicable.

2. Each contractor or subcontractor shall include applicable sales tax for all materials,
   supplies, and equipment included in its bid.
3. The City may elect to purchase materials and equipment included in a contractor's bid
   directly from the supplier. Any materials so purchased will be called "City purchased
   materials" and be governed by the Procedures. The Procedures govern where
   inconsistencies exist between the Procedures and the Agreement.
4. The City will issue its own purchase orders directly to the vendor, which will contain
   the City's exemption certificate, issue and expiration date, and name and address.
   (Sub)contractors will select the suppliers from whom materials will be purchased, for prices
   negotiated by the (sub)contractors.
   5.
   (Sub)contractors will remain responsible for coordination of material purchases,
   protection, warranties, and installation.
5. Upon delivery to the job site, the contractor will have contractual obligations to inspect
   and accept delivery of materials pending incorporation into the project, will verify the
   delivery ticket in writing, and will furnish the invoice to the City. City will process and pay
   the invoices.
6. Notwithstanding the transfer of the City purchased materials to the (sub)contractor, the
   City retains title to the materials.
7. The City shall purchase and maintain insurance on the materials, equipment, and
   supplies not yet incorporated into the project from the time that the City first takes title.
8. The materials suppliers may be required to carry a bond in the amount of 100% of the
   purchase price, the cost of which will be added to the purchase price.
9. If the state assesses any sales tax, penalties and/or interest against the contractor or any
   of the subcontractors or materials suppliers relating to the direct acquisition of materials
   and/or equipment by City, such taxes or charges will be reimbursed by the City to the
   contractor.

Technical Assistance Advisement
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The Procedures provide substantially what the Exhibit provides, plus what follows, in pertinent
summation:

2. (Sub)contractors will select the suppliers from whom materials will be purchased.
3. Contractor shall provide the City with a list of all intended suppliers, vendors, and
   materialmen, as well as materials to be supplied, estimated quantities, and prices.
4. Upon request of the Contractor, the Subcontractor shall prepare a standard purchase order
   requisition form acceptable to the City to specifically identify the materials that the City, at
   its sole option, elected to purchase. This requisition form shall include:
   a. Name, address, telephone number, and contact person for the material supplier;
   b. Manufacturer or brand, model, or specification number of the item;
   c. The quantity needed as estimated by (sub)contractor;
   d. The price quoted by the supplier for the materials identified;
   e. Any sales tax associated with the price quote;
   f. Delivery dates established by (sub)contractor;
   g. Copy of written quote from vendor.

6. Upon receipt of a Requisition, City shall prepare its own purchase order and forward it to
   the Subcontractor for verification prior to its issuance to the supplier, with delivery to be
   made to the Project location on an F.O.B. job site basis. The purchase order shall provide
   the City's name, address, exemption number, and issuance and expiration date, and shall
   provide for insurance. It shall be accompanied by the City's exemption certificate.

9. The Subcontractor is responsible for risk of loss of the materials due to its own actions or
   negligence.

14. and 15. Notwithstanding transfer of possession of the materials from the City to the
    (sub)contractor, the City shall retain title to the materials. Such transfer of possession shall
    be deemed a bailment until the materials are incorporated into the project.
15. The City shall purchase and maintain insurance on the materials.

Technical Assistance Advisement
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19. The (sub)contractor shall review invoices to be certain that the materials delivered are
    satisfactory and meet the specifications of the purchase order and shall advise the City of
    conforming invoices, for which the City shall pay directly to the supplier.
20. At the end of the project, credit is given to the City for refunds on surplus materials, and
    salvaged materials are the property of the City, removed from the Project site at the
    direction of the City.

Requested Advisement
Advice is requested whether the Contract and Exhibits are sufficient to allow City to take
advantage of its tax exempt status in the purchase of materials for incorporation into the project.
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 . . . .

Technical Assistance Advisement
Page 6

(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.

Technical Assistance Advisement
Page 7

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

Technical Assistance Advisement
Page 8

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,
Florida Administrative Code, 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 Contract, Exhibit, and Procedures do not satisfy the foregoing requirements for exemption of
   transactions as sales to a governmental entity. According to the Contract, which is controlling, the
   only criterion that is met is that City will issue its own purchase order. The insurance provision in
   the Contract is not sufficient, because it does not require City to continue insuring the materials
   after their delivery to the jobsite. None of the other relevant criteria are discussed in the Contract.
   The Exhibit and Procedures require that City will make direct purchases of various construction
   materials. Contractor will prepare, for City approval, requisitions for direct purchases. City will
   prepare detailed Purchase Orders, including its exemption documentation, and forward them to the
   vendor. After receiving the approved invoices from Contractor, City will pay the vendors directly.
   City 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 Agreement. However, neither the Exhibit nor the
   Procedures expressly state or require that vendors will directly invoice City for the materials.
   Please note a contractor that manufactures or fabricates its own materials as specified in Rule 12A1.094(5), Florida Administrative Code, does not qualify for inclusion in direct purchase programs.
   Under the rule, the contractor and subcontractors, not the government entity, are deemed to be the

Technical Assistance Advisement
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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, F.S., 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, F.S. 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, F.S., and are subject to disclosure to the public under the conditions of
s. 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,

Sara D. Faulkenberry
Senior Tax Specialist
Technical Assistance and Dispute Resolution
850/488-7758
Control #39853