Could a city directly purchase materials tax-exempt for a nature park and storm-water public works project?

Plain-English summary

A Florida city planned a nature park and storm-water improvement project. Its contract included a procedure for the city to buy selected materials directly while the contractor chose vendors, negotiated prices, coordinated deliveries, inspected shipments, and verified invoices as the city's representative.

The Department approved the plan, provided the reviewed provisions appeared in the final contract and no other terms conflicted. The city retained the five functions that made it the true purchaser:

1. It issued purchase orders directly to vendors with its name, address, exemption number, and expiration date.
2. Vendors invoiced the city directly.
3. The city paid vendors directly by check.
4. Title passed to and remained with the city at F.O.B. job-site delivery.
5. The city purchased insurance covering the full value of the materials from the time it took title until incorporation.

The contractor could possess the materials and perform administrative tasks without becoming the purchaser. The transaction therefore qualified as an exempt direct sale to the city rather than a taxable purchase by a public works contractor.

The ruling excluded anything manufactured or fabricated by a contractor or subcontractor for installation. Those businesses remained the ultimate consumers of their fabricated articles and owed use tax on the full cost.

What this means for you

The government entity must control the actual purchase

A contractor can assist with vendor selection, pricing, delivery, inspection, and lien releases. The exemption depends on the city retaining purchase orders, invoices, payment, title, and economic risk.

F.O.B. job-site delivery established the title point

The approved documents made title pass to the city when materials reached the project site, before they became part of the completed public works.

Insurance is evidence of risk of loss

The city itself bought coverage for owner-purchased materials. That was central evidence that it bore loss or damage while the goods awaited installation.

Fabricated items cannot be routed through the program

The procedure covered vendor-purchased materials, not articles made by the contractor or its subcontractors for use in their construction work.

Common questions

Q: Did the city's direct-purchase procedure qualify?
A: Yes, if the final contract preserved the reviewed terms and contained no conflicts.

Q: Could the contractor negotiate vendor prices?
A: Yes. The city still had to issue the purchase order, receive the invoice, make payment, take title, and bear the risk of loss.

Q: Who insured the materials?
A: The city purchased and maintained insurance from the time it took title until the materials were incorporated into the project.

Q: Were contractor-fabricated materials exempt?
A: No. The ruling excluded contractor- and subcontractor-fabricated items from the governmental direct-purchase program.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-005

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 public works contract?
ANSWER:
The procedures and contract provided meet the legal requirement for the City to purchase
materials tax exempt for incorporation into a public works contract.
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.

January 27, 2009

XXX

Re:

Technical Assistance Advisement 09A-005
Sales and Use Tax – Public Works Contract
Section: 212.08(6), F.S.
Rules: 12A-1.038, 12A-1.094, F.A.C.
Petitioner: XXX

XXX:
This letter is a response to your petition dated September 8, 2008, for the Department's
issuance of a Technical Assistance Advisement ("TAA") concerning the above

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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 1211, Florida Administrative Code. This response to your request constitutes a TAA and is
issued to you under the authority of Section 213.22, F.S.
ISSUE
Whether the provisions contained in the Direct Purchase Procedure are sufficient to allow
City to take advantage of its tax-exempt status on the purchase of materials for use in a
public works contract.
PRESENTED FACTS
The petition states that you are anticipating entering into a contract for a Nature Park and
Storm Water Improvement Project. A contract has been drawn up to cover that project,
and you ask if the Direct Purchase Procedures outlined in said contract are sufficient to
allow City to use its consumer’s certificate of exemption to procure materials for
incorporation into the public works contract.
Attached to your request was “Exhibit M,” which will be a part of the final contract for
this project. That exhibit, entitled “Direct Materials Acquisition by City,” provides in
relevant part:
4.
The City will issue its own Purchase Orders directly to the vendor(s). The
City's Purchase Order shall include the City's name, address, and exemption
number with expiration date shown. The materials shall be purchased from the
vendors and suppliers selected by the (sub)contractor, for prices negotiated by the
(sub)contractor. The contractor will provide all the necessary information for
preparation of the purchase order by the City and will coordinate the purchase of
the materials in a timely manner so as not to negatively impact on the
performance of the construction activity of the project. . . .
6.
As City purchased materials are delivered to the job-site, the contractor as
City's representative, shall visually inspect all shipments from the vendors, and
approve the vendor's invoice for material delivered. The contractor shall assure
that each delivery of City purchased material is accompanied by documentation
adequate to identify the Purchase Order against which the purchase is made. This
documentation may consist of a delivery ticket from the vendor conforming to the
Purchase Order, together with such additional information as the City or
(sub)contractor may require. The contractor, as City's representative, shall verify
the accuracy of the delivery ticket. The vendor will then directly invoice the City.

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The City shall have the right to assign City personnel to verify and audit the
accuracy of all direct purchase documents.
7.
Notwithstanding the transfer of City purchased materials by the City to the
(sub)contractor’s possession, the City shall retain title to any and all City
purchased materials.
8.
The City shall purchase and maintain insurance pursuant to the
requirements set forth in the City and contractor's agreement which shall be
sufficient to protect against any loss of or damage to City purchased equipment,
materials or supplies. Such insurance shall cover the value of any City purchased
materials not yet incorporated into the project from the time the City first takes
title. . . .
“Attachment 1 to Exhibit M” further specifies, in part, that:

6.
After receipt of the Requisition Form, City shall prepare its Purchase
Orders for equipment, materials, or supplies which the City chooses to purchase
directly. Pursuant to the Purchase Order, the vendor will provide the required
quantities of material at the price established in the vendor's quote to the
(sub)contractor, less any sales tax associated with such price. Promptly upon
receipt of each Purchase Order, (sub)contractor shall verify the terms and
conditions of the Purchase Order prior to its issuance to vendor and in a manner to
assure proper and timely delivery of items. City's Purchasing Manager or his
designated representative shall be the approving authority for the City on
Purchase Orders in conjunction with City purchased materials. The Purchase
Order shall also require the delivery of the City purchased materials on the
delivery date provided by the (sub)contractor in the Requisition Form and shall
indicate F.O.B. job-site. The City Purchase Orders shall contain the City's
exemption certificate and must include the City's name, address, and exemption
number with expiration date shown. . . .
10.
As City purchased materials are delivered to the job-site, the contractor, as
City's representative, shall visually inspect all shipments from the vendors, and
approve the vendor's invoice for material delivered. The contractor shall assure
that each delivery of City purchased material is accompanied by documentation
adequate to identify the Purchase Order against which the purchase is made. This
documentation may consist of a delivery ticket from the vendor conforming to the
Purchase Order together with such additional information as the City or contractor
may require. The contractor, as City's representative shall verify the accuracy of

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the delivery ticket. The vendor will then directly invoice the City for payment.
The invoice shall be thereupon furnished to the City for processing and payment
in the manner as all other City invoices are processed. The City shall have the
right to assign City personnel to verify and audit the accuracy of all direct
purchase documents. . . .
14.
Notwithstanding the transfer of City purchased materials by the City to the
(sub)contractor’s possession, the City shall retain title to any and all City
purchased materials. . . .
16.
The City shall purchase and maintain insurance pursuant to the
requirements set forth in the City and contractor Agreement which shall be
sufficient to protect against any loss of or damage to City purchased equipment,
materials, or supplies. Such insurance shall cover the full value of any City
purchased materials not yet incorporated into the project from the time the City
first takes title. . . .
18.
In order to arrange for the prompt payment to the vendor, the contractor
shall provide to the City, a list indicating the acceptance of the goods or materials.
Upon receipt and verification of the appropriate documentation, the City shall
prepare a check drawn to the vendor based upon the receipt of data provided. This
check will be released, delivered, and remitted directly to the vendor. The
(sub)contractor agrees to assist the City to immediately obtain partial or final
release of lien waivers as appropriate. . . .
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 . . . .
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

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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 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

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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 12A1.051, F.A.C. . . . (Emphasis added)
   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

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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 12A1.094, 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
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.
   In this case, the procedures outlined in “Exhibit M” and “Attachment 1 to Exhibit M”
   clearly indicate that:

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1) Purchase orders shall be executed by the City;
2) Title shall pass to the City upon the merchandise arriving at the job site F.O.B.;
3) The suppliers shall be required to invoice the City directly;
4) Payments shall be made directly by City to vendors; and
5) The City has assumed all risk of damage or loss of the supplies, as is indicated by
City obtaining insurance on the supplies.

CONCLUSION
The procedures outlined in the documents provided are in compliance with the direct
purchase procedures set forth in Rule 12A-1.094(4), F.A.C. Provided that these
provisions are incorporated into the final contract for the project, and no other contract
provisions conflict, the City will be 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, 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

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the Department within 10 days of the date of this letter.

Sincerely,

Kama D. S. Monroe
Senior Attorney
Technical Assistance and Dispute Resolution
Control # 51023