Did a city's owner direct-purchase manual satisfy Florida's public-works exemption for construction materials?

Plain-English summary

The city was preparing a public parking construction project and submitted its owner direct-purchase manual, but not the construction or construction-administration agreement.

Florida found that the manual satisfied the public-works direct-purchase requirements. The city would issue purchase orders with its exemption number, receive vendor invoices, pay vendors directly, retain title, and assume risk of loss as an insured party entitled to claim proceeds.

The conclusion did not cover articles manufactured or fabricated by contractors or subcontractors. Those parties remained the ultimate consumers and owed use tax on the full cost of their fabricated articles.

What this means for you

The governmental entity must remain the purchaser in substance throughout the material-acquisition process. Insurance and risk of loss are especially important, and contractor-fabricated goods require separate treatment.

Common questions

Did the city's manual qualify? Yes.

What core procedures mattered? Direct order, invoice, payment, title, and risk of loss.

Did the ruling cover contractor-fabricated materials? No.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 10A-038

Original ruling text

SUMMARY
QUESTION: Do the procedures for the purchase of materials set out in the Owner’s
Direct Purchase Procedures Manual for the construction of public works meet the legal
requirements for the City to purchase materials tax exempt?
ANSWER: The procedures meet the legal requirements for the City to purchase
materials tax exempt.
August 11, 2010
XXX
Re:

Technical Assistance Advisement 10A-038
Sales and Use Tax – Public Works Contracts
Subsection: 212.08(6), Florida Statutes (F.S.)
Rules: 12A-1.038, 12A-1.094, Florida Administrative Code (F.A.C.)
Petitioner: XXX [hereinafter “City”]

Dear XXX:
This letter is a response to your petition dated May 6, 2010, 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.
Presented Facts
Your petition states that City “is in the process of working with a contract to commence
bidding the public works construction project known as [Parking Project].” Your petition
includes a copy of City’s “Owner Direct Purchase Procedures (ODPP) Manual” which
shows a revision date of July 15, 2010, and a copy of City’s Florida Consumer’s
Certificate of Exemption. Your petition does not include a copy of the construction
contract/Construction Administration Agreement.
The procedures for executing the City’s direct purchase of materials are found in Section
3.01 of the ODPP Manual.
Paragraph A provides that City will deliver its Purchase Order to the vendor.
Paragraph D states that “City [] shall retain title to any and all Owner Purchased
Materials.

Technical Assistance Advisement
Page 2
Paragraph E provides that the Developer/Construction Manager (DEV/CM) “shall, on the
[City’s] behalf, purchase and maintain, or cause to be purchased and maintained,
builder’s risk insurance pursuant to the requirements set forth in the Construction
Administration Agreement. . . . The City [] shall be named as an additional insured on the
policy and shall receive any proceeds related to any claims on the Owner Purchased
Materials.”
Paragraph M provides that vendor’s “[o]riginal invoices are to be sent to the [City] with a
copy going to the DEV/CM . . . .”
Paragraph P states that City’s Finance Department “shall release an ACH payment or
prepare and release a check drawn to the vendor . . . .”
LAW
Sales to governmental units are exempt from sales tax pursuant to subsection 212.08(6),
Florida Statutes, which provides in pertinent part:
There are also exempt from the tax imposed by this chapter sales made to the
United States Government, a state, or any county, municipality, or political
subdivision of a state when payment is made directly to the dealer by the
governmental entity. . . . This exemption does not include sales of tangible
personal property made to contractors employed either directly or as agents of any
such government or political subdivision thereof when such tangible personal
property goes into or becomes a part of public works owned by such government
or political subdivision. . . . (Emphasis Supplied)
Rule 12A-1.038(4), Florida Administrative Code, 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), Florida Statutes, 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, Florida Administrative Code, 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
....

Technical Assistance Advisement
Page 3
(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 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.

Technical Assistance Advisement
Page 4

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 Supplied)
   DISCUSSION, ANALYSIS AND CONCLUSION
   Rule 12A-1.038(4)(b), Florida Administrative Code, 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), Florida Administrative Code, state that the
   purchase of materials for public works contracts is 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, Florida Administrative
   Code.
   Rule 12A-1.094(4), Florida Administrative Code, 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

Technical Assistance Advisement
Page 5
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 from 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.
   The Procedures satisfy the foregoing requirements for exemption of transactions as sales
   to a governmental entity. City will make direct purchases of various construction
   materials. City will issue its purchase orders directly to the vendor of materials. Invoices
   will be sent directly to City with copies going to the DEV/CM. City will make payment
   directly to the vendors. City will retain legal, and equitable, title to all materials it
   purchases, and it will assume the risk of loss of the materials as an additional named
   insured party on the builder’s risk insurance, as well as receive the proceeds of any
   claims made against such loss.
   Please note that this response does not apply to a contractor that manufactures or
   fabricates its own materials, as specified in Rule 12A-1.094(5), Florida Administrative
   Code. 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), Florida Administrative Code.

Technical Assistance Advisement
Page 6
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,

Gary L. Gray
Program Administrator
Technical Assistance and Dispute Resolution
(850) 922-4729
GLG/lp
Control # 83120