Could a Florida city buy materials tax-exempt under its proposed direct-purchase procedure for a real-property construction project?

Plain-English summary

A Florida city used a direct-purchase program for materials going into two large construction projects. The city issued purchase orders directly to vendors with its exemption certificate, received the invoices, paid vendors by city check, took title when materials reached the job site, and assumed the risk of loss. The contractor received, inspected, and stored the materials, while a city project manager verified deliveries. The city was also named as an insured party under the builder's risk coverage.

Florida concluded that the procedure and contract satisfied the direct-purchase requirements in Rule 12A-1.094. Because the city was the purchaser in substance, the sales qualified for the governmental exemption under section 212.08(6).

The ruling emphasized five factors: the government must issue the purchase order, receive the invoice, pay the vendor directly from public funds, take title before incorporation into the real property, and assume the risk of loss. Risk while materials are stored at the job site was described as a paramount consideration; insurance covering the materials helped establish that the city bore that risk.

The approval did not extend to materials manufactured or fabricated by a contractor or subcontractor. For those articles, the fabricating contractor remained the ultimate consumer and owed use tax on the full cost under the cited rules.

What this means for you

The government must be the real purchaser

Florida looks at the substance of the transaction. The exemption applies when the governmental entity—not merely the contractor acting under a government contract—actually orders, pays for, owns, and bears the loss on the materials.

Preserve the five direct-purchase elements

The reviewed structure kept the purchase order, invoice, payment, passage of title, and risk of loss with the city. Contract documents and actual performance should consistently reflect those roles.

Job-site custody can remain with the contractor

The contractor could receive, inspect, and store the supplies at the job site without defeating the exemption because title and risk remained with the city and a city project manager verified deliveries.

Fabricated materials are treated differently

Contractor- or subcontractor-fabricated articles cannot be placed in the governmental direct-purchase program described in the ruling. The fabricator is treated as the consumer and is subject to use tax on the articles' full cost.

Common questions

Q: Did the city's proposed purchases qualify for the sales-tax exemption?
A: Yes. The Department found that the procedures and contract made the city the direct purchaser of the materials.

Q: What facts supported the exemption?
A: The city issued purchase orders, received invoices, paid vendors, took title at delivery, and assumed risk of loss while the materials awaited incorporation into the project.

Q: Could the contractor receive and store the materials?
A: Yes under the reviewed facts. The contractor handled the materials at the job site, but the city held title, bore the risk, and used a project manager to verify delivery.

Q: Were contractor-fabricated materials exempt under this program?
A: No. The ruling says contractor and subcontractor fabrication remained taxable to the fabricator as the ultimate consumer.

Citations and references

• Fla. Stat. § 212.08(6) (direct government purchases exempt; contractor purchases for public works excluded)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)
• Fla. Admin. Code r. 12A-1.038(4) (direct payment and government-purchase documentation)
• Fla. Admin. Code r. 12A-1.094(1)-(5) (public-works materials and direct-purchase criteria)
• Fla. Admin. Code r. 12A-1.051(10) (tax treatment of contractor-manufactured materials)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-021

Original ruling text

SUMMARY
QUESTION:
Are the procedures and contract provided sufficient to allow City to take advantage of its tax
exempt status on the purchase of materials for use in a real property construction contract?
ANSWER:
The procedures and contract provided meet the legal requirement for the City to purchase
materials tax exempt for incorporation into real property construction.
The City is directly issuing the purchase order to the suppliers, is receiving the invoice directly
from the suppliers, and is directly paying said suppliers. The title to the property is passing
directly to the City at the time of delivery and the City is assuming the risk of loss.
August 8, 2008
XXX
Re:

Technical Assistance Advisement 08A-021
Sales and Use Tax – Public Works Contracts Section 212.08(6), F.S. (Florida Statutes)
Rule 12A-1.094, F.A.C. (Florida Administrative Code)
Petitioner: XXX (herein “City”)
FEI: XXX, and XXX

Dear XXX:
This letter is a response to your petition dated June 4, 2008, for the Department's issuance of a
Technical Assistance Advisement ("TAA") concerning the above referenced parties and matter.
This petition is a follow up to LTA XXX which was issued to you last year. 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 procedures and contract provided are sufficient to allow City to take advantage
of its tax exempt status on the purchase of materials for use in a real property construction
contract.

Technical Assistance Advisement
Page 2 of 7
PRESENTED FACTS
Your letter provides in part:
The “City” has elected to purchase supplies and materials directly from suppliers on a
couple of large projects in our City . . . The following are the procedures the “City” is
currently using for our contracts:

1. The “City” issues Purchase Orders direct to the vendors with the City’s Certificate
   of Sales Tax Exemption.
2. The vendors invoice the “City” directly.
3. The “City” issues checks directly to the vendors in payment of the invoices.
4. Supplies or materials are delivered to the job site, received, inspected, and stored
   by contractor. City takes title of materials or supplies upon delivery to the job site
   and assumes all liability and risk of loss; however, the subcontractors remain
   liable for any negligence in meeting any of their obligations.
5. Builder’s Risk Insurance has been obtained for each project naming the
   Contractor and the “City” as the insured parties (see attached).
6. The “City” has a Project Manager on site to verify delivery of materials or
   supplies.
   Attached to the letter quoted above were copies of an insurance policy showing “City” has been
   included as additional insured under the Builder’s risk policy for the XXX project, hereinafter
   “project.” In addition, City has also obtained liability insurance on the job site.
   Finally, you included a copy of the contract for the project which includes the flowing provisions
   governing the direct purchase of material by City:
   (1) “City” issues Purchase Orders direct to the suppliers with the City’s Certificate of Sales
   Tax Exemption.
   (2) The suppliers invoice “City” direct.
   (3) “City” issues checks direct to the suppliers in payment of the invoices.
   (4) Supplies of materials are delivered to the jobsite, received, inspected, and stored by
   contractor. City takes title of materials or supplies upon delivery to the job site and
   assumes all risk of loss; however, the subcontractors remain liable for any negligence in
   meeting any of their obligations.
   (5) Builder’s Risk Insurance for the project is maintained by Contractor and names the
   Contractor and the “City” as the insured parties.

Technical Assistance Advisement
Page 3 of 7

(6) The “City” has a Project Manager on site to verify delivery of materials or supplies.
LAW AND DISCUSSION
Sales to governmental units are exempt from sales tax pursuant to Section 212.08(6), F.S., 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), F.A.C., 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), F.S., 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,
F.A.C., 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

Technical Assistance Advisement
Page 4 of 7
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

Technical Assistance Advisement
Page 5 of 7
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)
Rule 12A-1.038(4)(b), F.A.C., 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), F.A.C.,
state that purchases of materials for public works contracts are 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, F.A.C.
Rule 12A-1.094(4), F.A.C., 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

Technical Assistance Advisement
Page 6 of 7

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
   The procedures outlined in City's correspondence are in compliance with the direct purchase
   procedures set forth in Rule 12A-1.094(4), F.A.C. Since these provisions are incorporated into
   the contract for the project, and no other contract provisions conflict, the City is able to take
   advantage of its tax exempt status for the purchase of materials to be incorporated into the
   project.
   Please be advised that, as specified in Rule 12A-1.094(5), F.A.C., contractors, including
   subcontractors, that manufacture or fabricate their own materials for installation in the project
   cannot be included in a governmental entity's direct purchase program. 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 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 10 days of the date of
   this letter.
   Sincerely,

Kama D.S. Monroe

Technical Assistance Advisement
Page 7 of 7
Senior Attorney
Technical Assistance and Dispute Resolution
Control #46536