Did a city's proposed direct-purchase procedure allow it to buy construction materials tax-exempt for a Florida public works project?

Plain-English summary

A city planned a public works project and wanted to use its Florida consumer's certificate of exemption to buy the construction materials directly. Its contract documents assigned the contractor a coordinating and inspection role, but placed the purchase transaction itself in the city's hands.

Florida approved the proposed procedure, subject to two conditions: the reviewed provisions had to appear in the final contract, and no other provision could conflict with them. The decisive facts matched the five direct-purchase criteria in Rule 12A-1.094:

1. The city would issue each purchase order directly to the vendor and include its exemption information.
2. The vendor would invoice the city directly.
3. The city would pay the vendor directly from public funds.
4. Title would pass directly to the city when the materials arrived at the job site, F.O.B.
5. The city would bear the risk of loss and obtain insurance covering the materials before incorporation into the project.

Because the city was the purchaser in substance, the material sales qualified for the governmental exemption under section 212.08(6). The contractor could select vendors, negotiate prices, coordinate deliveries, inspect shipments as the city's representative, and verify documents without becoming the purchaser.

The Department also stated an important limit: materials manufactured or fabricated by the contractor or a subcontractor could not be placed in the direct-purchase program. For those items, the fabricating contractor remained the ultimate consumer and owed use tax on the full cost under the cited rules.

What this means for you

Contract language must match the real transaction

Florida decides whether a purchase is an exempt government sale or a taxable contractor purchase from the transaction's substance. A government name on paperwork is not enough if the contractor actually buys, pays for, owns, or bears the loss on the materials.

Keep the five functions with the government entity

The safest structure keeps the purchase order, invoice, payment, passage of title, and risk of loss with the city or other exempt governmental entity. The entity should also supply the vendor with its current exemption documentation.

Risk of loss is especially important

The ruling calls assumption of loss while materials sit at the job site a paramount consideration. The government can show that assumption by buying the insurance or being the insured party that receives the policy's economic benefit.

Contractor fabrication is outside the program

A direct-purchase arrangement cannot convert contractor-manufactured or subcontractor-fabricated items into exempt government purchases. The ruling treats those contractors as the consumers of what they manufacture for installation.

Common questions

Q: Can a Florida city buy materials tax-exempt for a public works contract?
A: Yes, when the city is the direct purchaser in substance and satisfies the required purchase-order, invoice, payment, title, and risk-of-loss criteria.

Q: May the contractor choose suppliers and negotiate prices?
A: Under the reviewed procedure, yes. The contractor could perform those coordinating tasks while the city still issued the purchase order, received the invoice, paid the vendor, owned the materials, and bore the risk.

Q: When did title pass to the city?
A: The documents provided that title passed when the merchandise arrived at the job site F.O.B., before incorporation into the real property.

Q: Are contractor-fabricated materials covered?
A: No. The ruling expressly excludes materials manufactured or fabricated by contractors or subcontractors from the governmental direct-purchase program.

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) (documentation and direct-payment rules for government purchases)
• 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 09A-016

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.
April 3, 2009
XXX
Re:

Technical Assistance Advisement 09A-016
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 XXX:
This letter is a response to your petition dated February 9, 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 12-11, 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 XXX Project. A contract has
been drawn up to cover that project, and you ask if the Direct Purchase Procedures outlined in said

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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. . . .
5. 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. The City shall have the right to
   assign City personnel to verify and audit the accuracy of all direct purchase documents.
6. 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.
7. 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:
8. 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

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(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 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. . . .
11. 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. . . .
12. 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. . . .
13. 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 . . . .

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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, Subsection 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 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

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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 12A-1.051, 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 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

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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 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:
   1.
   2.
   3.
   4.
   5.

Purchase orders shall be executed by the City;
Title shall pass to the City upon the merchandise arriving at the job site F.O.B.;
The suppliers shall be required to invoice the City directly;
Payments shall be made directly by City to vendors; and
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 12A1.051(10), F.A.C.

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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 # 59188