Did a school board's proposed direct-purchase program exempt materials used in a Florida construction-manager public works contract?

Plain-English summary

A Florida school board planned a construction project managed by a construction manager. The manager would identify materials, coordinate purchases, verify deliveries and invoices, and physically safeguard the goods. The school board wanted to buy selected items directly under its consumer's certificate of exemption.

The Department approved the program, provided the reviewed provisions appeared in the final contract and no other terms conflicted. The documents kept all five decisive purchase functions with the school board:

1. Board staff would issue purchase orders to vendors with the exemption instructions.
2. Vendors would invoice the school board.
3. The school board would pay suppliers directly.
4. Title would vest in the board at F.O.B. job-site delivery and remain there before incorporation.
5. The board would be an additional insured under coverage protecting the full value of the materials from the time it took title.

Possession by the construction manager was expressly a bailment. The school board was the bailor and owner; the manager was the bailee responsible for storing and protecting the materials until they became part of the project. That physical custody did not turn the manager into the purchaser.

The ruling also maintained the standard public-works limit: contractor- or subcontractor-manufactured items could not enter the government direct-purchase program. The fabricating business remained the ultimate consumer and owed use tax on its full cost.

What this means for you

Construction-management duties can coexist with a government purchase

The construction manager may assemble lists, review vendor invoices, inspect deliveries, and hold materials. The exemption can still work if the government entity retains the legally and economically important purchase functions.

Title should pass before installation

The school board's purchase orders made title vest at job-site delivery, before the materials were incorporated into the real property. The board continued to own them while the construction manager held them.

Document the bailment and insurance structure

The contract described the manager as bailee and required coverage naming the school board as an additional insured. Those provisions supported both ownership and the board's assumption of loss.

Fabrication by the contractor changes the result

Vendor-purchased materials could qualify, but articles manufactured or fabricated by the construction manager, contractor, or subcontractors could not be made exempt through this procedure.

Common questions

Q: Did the school board's procedure qualify?
A: Yes, subject to incorporating the reviewed provisions into the final contract and avoiding conflicting terms.

Q: Could the construction manager hold the materials?
A: Yes. The contract treated that possession as a bailment, with the board retaining title and the manager responsible for safeguarding the goods.

Q: Who paid the suppliers?
A: The school board processed the invoices and sent payment directly to the suppliers.

Q: Were contractor-fabricated materials exempt?
A: No. The ruling excluded contractor- and subcontractor-fabricated items from the direct-purchase program and treated the fabricator as the taxable consumer.

Citations and references

• Fla. Stat. § 212.08(6) (direct 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 material purchases 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-013

Original ruling text

SUMMARY
QUESTION:
Are the procedures and contract provided sufficient to allow School Board 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 School Board to
purchase materials tax exempt for incorporation into a public works contract.
The School Board 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 School Board at the time of delivery and the School
Board is assuming the risk of loss.
March 26, 2009
XXX
Re:

Technical Assistance Advisement 09A-013
Sales and Use Tax – Public Works Contract
Section: 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.038, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner: XXX

Dear Mr. XXX:
This letter is a response to your petition dated January 27, 2009, 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 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 contract provided are sufficient to allow XXX
XXX to take advantage of its tax-exempt status on the purchase of materials for use in a
public works contract.

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PRESENTED FACTS
The petition states that you are anticipating entering into a contract for a XXX
construction 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 XXX XXX
to use its consumer’s certificate of exemption to procure materials for

incorporation into the public works contract.
Attached to your request was “Exhibit A,” which will be a part of the final contract for
this project. That exhibit provides in relevant part:

1. The Construction Manager will prepare a specific listing of all materials,
   equipment, and supplies to be purchased directly by the XXX XXX XXX XXX.
2. XXX staff will use the listing to issue purchase orders to specified vendors for
   material, equipment, or supplies. All purchase orders will have instructions
   regarding the sales tax exemption. Purchase orders will advise the vendor that the
   XXX is the purchaser in which title will vest upon delivery.
3. The purchase order will contain specific delivery instructions including
   location of job site. A copy of the purchase order will be forwarded to the
   Construction Manager.
4. Vendors will submit invoices to the XXX. XXX staff will consult with the
   Construction Manager to confirm delivery and quantity prior to recommending
   payment of all invoices. The Construction Manager will return confirmed
   invoices to the XXX with receiving slips. The XXX will then process the invoices
   for direct payment to the vendors.
5. The Construction Manager will purchase and maintain adequate insurance
   through an appropriate policy, or rider to an existing policy, to cover the risk of
   loss or damage to all items purchased through this procedure once delivered to the
   site. . . .
6. In the event of a conflict between the above guidelines and the XXX
   Procedures identified as Exhibit B, the XXX Procedures shall prevail.

“Exhibit B” further specifies, in part, that:

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5. After receipt of the Purchase Order Requisition Form, XXX shall prepare its
   Purchase Orders for equipment, materials, or supplies which the XXX chooses to
   purchase directly, pursuant to the quantities of material at the price established in
   the vendor’s quote, less any sales tax associated with such price. The XXX and
   the Director of Finance or their designated representatives shall be the approving
   authority for the XXX on Purchase Orders in conjunction with XXX purchased
   materials. The Purchase Order shall also require the delivery of the XXX
   purchased materials to the project site on the delivery dates and shall indicate
   F.O.B. jobsite. . . .
6. In order to arrange for the prompt payment to the supplier, the Construction
   Manager shall provide the XXX, a list indicating the acceptance of the goods or
   materials in accordance with the established monthly copy of the applicable
   Purchase Order, invoices, delivery tickets, written acceptance of the delivered
   items, and such other documentation as maybe reasonably required by the XXX.
   Bi-monthly, the Construction Manager shall review invoices submitted by all
   suppliers of XXX purchased materials delivered to the project site during that
   month and either concur or object to the XXX’s issuance of payment to the
   suppliers, based upon the Construction Manager’s records of materials delivered
   to the site and any defects in such materials. If the vendor’s invoices properly
   reflect equipment, materials, and/or supplies ordered on a XXX Purchase Order
   for the project and received in good condition, the Construction Manager will sign
   the invoice, indicating approval for payment and then forward the invoices to the
   Director of Facilities for review and written approval. Then the invoices are
   furnished to the Finance Department of the XXX for processing and payment in
   the manner as all other XXX invoices are processed. Upon receipt and
   verification of the appropriate documentation, the XXX shall prepare a check
   drawn to the supplier based upon the receipt of data provided. This check will be
   released, delivered and remitted directly to the supplier. The XXX shall have the
   right to assign XXX personnel to verify and audit the accuracy of all direct
   purchase documents. . . .
7. Notwithstanding the transfer of XXX purchased materials by the XXX to the
   Construction Manager’s possession, the XXX shall retain title to any and all XXX
   purchased materials. The XXX will take title to the owner-purchased materials
   prior to their incorporation into the project.
8. The transfer of possession of XXX purchased materials from the XXX to the
   Construction Manager shall constitute a bailment for the mutual benefit of the
   XXX and the, Construction Manger. The XXX shall be considered the bailor and
   the Construction Manager the bailee of the XXX purchased materials. XXX
   purchased materials shall be

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considered returned to the XXX for purposes of its bailment at such time as they
are incorporated into the project. Bailee shall have the duty to safeguard, store and
protect all XXX materials.

15. The insurance purchased and maintained by the Construction Manager
    pursuant to the applicable article of the Owner and Construction Manager
    Agreement shall be sufficient to protect against any, loss of or damage to XXX
    purchased equipment, materials or supplies. Such insurance shall cover the full
    value of any XXX purchased materials not yet incorporated into the project from
    the time the XXX first takes title. The XXX shall be named as an Additional
    Insured Party on such policies of insurance.
    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
    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 .
    ...

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(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

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2. and provide the vendor with a copy of the governmental entity's Florida
   Consumer's [Certificate] of Exemption.
3. Direct Invoice. The vendor's invoice must be issued to the governmental
   entity, rather than to the contractor.
4. Direct Payment. The governmental entity must make payment directly to
   the vendor from public funds.
5. 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.
6. 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
   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

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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 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 A” and “Exhibit B” clearly indicate that:
   1.
   2.
   3.
   4.
   5.

Purchase orders shall be executed by the XXX;
Title shall pass to the XXX upon the merchandise arriving at the job site F.O.B.;
The suppliers shall be required to invoice the XXX directly;
Payments shall be made directly by XXX to vendors; and
The XXX has assumed all risk of damage or loss of the supplies, as is indicated
by XXX being named as an insured party on the insurance covering 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 XXX will be able to take advantage of its tax-exempt status for
the purchase of materials to be incorporated into the project.

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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 Section 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 10 days of the date of this letter.

Sincerely,

Kama D. S. Monroe
Senior Attorney
Technical Assistance and Dispute Resolution
Control # 59439