Did a governmental authority's proposed direct-purchase procedure exempt construction materials used in a public-works project?

Plain-English summary

The governmental authority proposed buying construction materials directly for a public-works project. It would issue purchase orders, pay vendors from its own funds, take title on delivery, assume risk of loss, and insure the materials.

Florida nevertheless found the procedure insufficient as written. One contract provision had vendors route invoices through the contractor and project manager, while another required the seller to send the original invoice to the authority. Because an exempt direct purchase requires the vendor to invoice the governmental entity directly, those provisions had to be clarified before the exemption could apply.

The Department also cautioned that materials manufactured or fabricated by the contractor or subcontractors could not enter the direct-purchase program. Those contractors were treated as the ultimate consumers and owed use tax on the full fabricated cost.

What this means for you

Government ownership and direct payment are not enough by themselves. Public-works documents should consistently show the government as purchaser at every step, including the original vendor invoice.

Common questions

Which requirements did the authority satisfy? Direct purchase orders, direct payment, passage of title, and assumption of risk of loss.

Why was the proposed exemption denied? The invoice provisions were contradictory and did not clearly require direct vendor invoicing to the authority.

Could contractor-fabricated items be bought through the program? No. The ruling treated the fabricating contractor or subcontractor as the taxable consumer.

Citations and references

• Fla. Stat. § 212.08(6) and Fla. Admin. Code rr. 12A-1.038, 12A-1.094, and 12A-1.051(10), as discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-033

Original ruling text

SUMMARY
QUESTION:
Are the procedures and contract provided sufficient to allow Authority 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 do not meet the legal requirement for the Authority to purchase
materials tax exempt for incorporation into a public works contract.
The Authority is directly issuing the purchase order to the suppliers and is directly paying said suppliers.
The title to the property is passing directly to the Authority at the time of delivery and the Authority is
assuming the risk of loss. However, the provisions concerning invoices are contradictory and confusing.
The Authority must be directly invoiced by the supplier in order to purchase materials tax exempt.
July 15, 2009
XXX
Re:

Technical Assistance Advisement 09A-033
Sales and Use Tax – Public Works Contract
Subsection: 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.038, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner: XXX [hereinafter “Authority”]

Dear XXX:
This letter is a response to your petition dated April 7, 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 contract exhibits provided are sufficient to allow Authority 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 construction project. Contract
provisions governing the direct purchase of materials have been drawn up to cover that project, and you ask
if the direct purchase procedures outlined in said provisions are sufficient to allow Authority to use its
consumer’s certificate of exemption to procure materials for incorporation into the public works contract.
Included in your request was a document entitled “Special Conditions: Provisions Governing State of
Florida Sale and Use Tax Exemption for Authority Furnished Materials”, which will be
a part of the final contract for this project. That section reads, in relevant part:
1.1
The Contractor shall compile Contractor's and any subcontractors' itemized requirement for
materials and equipment, including quantities, unit costs, manufacturers' or vendors' catalogue or
order numbers, delivery instructions, and other specific terms and information that is required to
order the specific materials and equipment comprised in Contractor's bid, and terms and conditions
to be imposed on suppliers regarding delivery and submittal time requirements, and quantities
thereof required by Contractor or subcontractors in accordance with the applicable requirements of
the Agreement, from time to time, during the construction of the Project, as materials and
equipment need to be ordered for the Project, and submit such compilation (the “Material and
Equipment Compilation”) to _________, the Authority's
project manager (“Project Manager”).Within XXX days of Contractor's submission of each Material
and Equipment Compilation, the Authority shall provide written notice to Contractor of the
materials and equipment which the Authority wishes to purchase directly from vendors. The
Contractor shall provide the Authority with a schedule or schedules (which shall be included in the
Materials and Equipment Compilation), which specifies the date by which any portion of the
materials or equipment must be ordered in order to orderly incorporate the materials and equipment
into the Project without unduly prolonged on-site storage (the “Order Date”). Should the Authority
and Contractor agree by written change order that the Authority shall purchase equipment or
materials directly from the vendor of materials or equipment, the Authority shall issue a Purchase
Order directly to such vendor prior to the Order Date (a Purchase Order). The Authority shall
include with any such Purchase Order, a copy of the Authority's sales and use tax exemption
certificate. All Authority purchases shall be subject to the requirements of Attachment A unless the
Authority, Contractor and applicable vendor otherwise agree. The Authority shall make direct
payment to the vendor from the Authority's account.
1.2
The Contractor, upon the delivery of any such materials or equipment, shall verify the
conformity of such materials or equipment with the terms of the Purchase Order and the Contract
Documents. If the Contractor determines that the materials and equipment are conforming, the
Authority shall take title and possession of such material and equipment before such materials and
equipment are incorporated into the Project. If the Contractor determines that the materials and
equipment are non-conforming, the Contractor shall immediately notify the Authority in writing and
the Authority shall reject such material and equipment.

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1.3
The Authority shall assume all risk of loss on all materials and equipment purchased
pursuant to its sales and use tax exemption, subject to the Provisions of Special Condition 1.5.

1.5
The Contractor shall be fully responsible for all matters relating to the receipt of materials
and equipment furnished by the Authority in accordance with these Special Conditions, including,
but not limited to, the responsibility for verifying correct quantities, verifying documents or orders
in a timely manner, coordinating purchases, providing and obtaining all warranties and guarantees
required by the Contract Documents, inspection and acceptance of the materials and equipment at
the time of delivery, and loss or damage to materials and equipment following acceptance of items
due to the negligence of such Contractor or any subcontractors. The Contractor shall coordinate
delivery schedules, sequence of delivery, loading orientation, and other arrangements normally
required by such Contractor for the particular materials or equipment furnished. The Contractor
shall provide or arrange for all services required for the unloading, handling and storage of such
materials and equipment through installation.
1.6
The Contractor shall visually inspect all shipments from material and equipment vendors
purchased directly by the Authority in accordance with this Special Condition (the “Authority
Furnished Materials”) and approve the vendors' invoices for materials or equipment delivered, as
Authority Furnished Materials are furnished to the site. The Contractor shall assure that each
delivery of Authority Furnished Materials is accomplished by documentation adequate to identify
the Purchase Order against which the purchase is made. This documentation may consist of a
delivery ticket and an invoice from the vendor conforming to the Purchase Order, together with
such additional information as the Authority may require. The Contractor shall deliver to the
Authority's Project Manager all invoices for materials and equipment upon verification by such
Contractor that the materials and equipment conform exactly to the Contract Documents and the
Purchase Order. Upon receipt of any invoice for Authority Furnished Materials, the Authority's
Project Manager shall deliver such invoice to the Authority for payment directly to the vendor.

1.10 After the Authority takes possession of the Authority Furnished Materials at the site
possession of the Authority's Furnished Material shall immediately and automatically transfer to the
Contractor without notice. The transfer of possession of Authority Furnished Materials from the
Authority to the Contractor shall constitute a bailment for the mutual benefit of the Authority and
such Contractor. The Authority shall be considered the bailor and such Contractor the bailee of the
Authority Furnished Materials. Authority Furnished Materials shall be considered returned to the
Authority for purposes of their bailment at such time as they are incorporated into the Project or
consumed in the process of completing the Project.
1.11 The Authority shall purchase and maintain insurance sufficient to protect itself against
casualty to Authority Furnished Materials.

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1.13 The Contractor, on a monthly basis, shall review invoices submitted by all vendors of
Authority Furnished Materials delivered to the site during the prior month and either concur or
object to the Authority's Issuance of payment to the vendors, based upon such contractor's records
of materials delivered to the site and whether any of the Authority Furnished Materials for which
payment has not been made were either non-conforming or defective.
1.14 In order to arrange for the prompt payment to the vendor, the Contractor shall provide to the
Authority's Project Manager a list of the acceptance of the goods or materials within XXX (XXX)
days of receipt of said goods or materials. Accompanying the list shall be a copy of the applicable
Purchase Order, invoices, delivery tickets, written acceptance of the delivered items, and such other
documentation as may be reasonably required by the Authority. Upon receipt of the appropriate
documentation, the Authority shall prepare a check payable to the vendor based upon the receipt of
data provided. This check will be released, delivered and remitted directly to the vendor. The
Contractor shall assist the Authority to immediately obtain partial or final release of waivers as
appropriate. The Authority shall not make any payment without the appropriate Contractor's
concurrence and approval, which shall be delivered to the Authority by the Authority's Project
Manager. There shall be no retention on Authority Furnished Materials against either the vendor,
the Contractor(s) or the subcontractor(s).
In addition, you provided us with a copy of “Attachment A”, which was referenced above. “Attachment A”
provides, in relevant part:

The following Terms and Conditions are applicable to this order entered into by and between
[Authority] (referred to as Buyer) and Vendor (referred to as Seller).

DELIVERIES
Deliveries are to be made during hours 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding
holidays, unless otherwise stipulated. Seller shall notify the Buyer of deliveries that require special
handling and/or assistance for off-loading. Failure to notify the Buyer concerning this type of delivery
will result in the billing to Seller of any add-on re-delivery, storage, or handling charges.

INVOICING
Seller must render original invoice to [Authority], Attn: _______.

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LAW AND DISCUSSION
Sales to governmental units are exempt from sales tax pursuant to Subsection 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, 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 Subsection 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

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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. (emphasis added)
   (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. . . .
   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

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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 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 the proposed contract and “Attachment A” clearly indicate that:
   1.
   2.
   3.
   4.

Purchase orders shall be executed by the Authority;
Title shall pass to the Authority upon the merchandise arriving at the job site F.O.B.;
Payments shall be made directly by Authority to vendors; and
The Authority has assumed all risk of damage or loss of the supplies, as is indicated by the
Authority obtaining insurance to cover the materials.

However, the documents provided do not clearly indicate if the suppliers will invoice the Authority
directly. “Attachment A” does state that “Seller must render original invoice to [Authority].”
On the other hand, the proposed contract language states that, “The Contractor shall deliver to the
Authority's Project Manager all invoices for materials and equipment upon verification by such Contractor
that the materials and equipment conform exactly to the Contract Documents and the Purchase Order. Upon
receipt of any invoice for Authority Furnished Materials, the Authority's Project Manager shall deliver such
invoice to the Authority for payment directly to the vendor.”

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CONCLUSION
The procedures outlined in the documents provided are in compliance with most of the direct purchase
procedures set forth in Rule 12A-1.094(4), F.A.C. However, the provisions regarding direct invoices are
contradictory and confusing. As such, it does not appear that the Authority will be able to take advantage of
its tax-exempt status for the purchase of materials to be incorporated into the project, unless these
provisions and procedures are revised to clearly indicate that the original invoices shall be submitted
directly to Authority.
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.
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 # 62850