Could the governmental owner use tax-exempt direct purchases when its proposed public-works contract omitted direct vendor invoicing?

Plain-English summary

The Florida Department of Revenue concluded that the governmental owner's proposed direct-purchase process did not qualify as drafted because it omitted direct invoicing from suppliers to the owner.

The proposal otherwise provided for the owner to issue purchase orders, pay suppliers directly, take title at jobsite delivery, assume risk of loss, and issue its exemption certificate and Certificate of Entitlement.

Those safeguards were not enough without direct vendor invoices. If the contract was changed to require direct invoicing and suppliers actually invoiced the owner, the material purchases could qualify for the public-works exemption.

What this means for you

Governmental project owners

Treat direct invoicing as a mandatory element, not an administrative detail. The invoice must be addressed directly to the exempt owner.

Contractors and suppliers

Contract language and actual practice must match. Contractor-manufactured or fabricated materials also remain outside the direct-purchase program described in the ruling.

Accountants and tax professionals

Audit every required element: purchase order, invoice, payment, title, risk of loss, exemption certificate, and Certificate of Entitlement.

Common questions

Q: Did the original proposed process qualify?
A: No.

Q: What was missing?
A: Direct supplier invoices to the governmental owner.

Q: Could the exemption apply after correction?
A: Yes, if the contract changed and suppliers actually invoiced the owner directly.

Citations and references

• Fla. Stat. §§ 212.08(6) and 213.22
• Fla. Admin. Code rr. 12A-1.051(10) and 12A-1.094(4), (5)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 16A-011

Original ruling text

Executive
Director
Leon Biegalski

QUESTION: WILL TAXPAYER’S CONTRACT SATISFY THE CRITERIA FOR RULE 12A1.094(4), F.A.C.?
ANSWER: YES, SO LONG AS TAXPAYER MODIFIES THE CONTRACT TO REQUIRE
DIRECT INVOICING TO TAXPAYER.
July 27, 2016
Subject: Technical Assistance Advisement (“TAA”) 16A-011
Sales and Use Tax-Public Works
Section(s) 212.08(6), Florida Statutes (“F.S.”)
Rule(s) 12A-1.094, Florida Administrative Code (“F.A.C.”)
XXXXX (“Taxpayer”)(“Owner”)(“Petitioner”)
Exemption Certificate Number: XXXX
Dear XXXX:
This letter is a response to your petition dated XXXX, for the Department’s issuance of a
Technical Assistance Advisement (“TAA”) to Petitioner, regarding public works. Your petition
has been carefully examined, and the Department finds it to be in compliance with the requisite
criteria set forth in Rule Chapter 12-11, F.A.C. 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 proposed contract provisions will enable Taxpayer to directly purchase materials from
suppliers without sales tax when the materials are used in a public works contract?

Facts
Taxpayer will be purchasing materials, supplies, and equipment directly from suppliers for use in
a project at the XXXX, which is a department of Taxpayer. The project is a “public works” for
purposes of Rule 12A-1.094(1)(b), F.A.C. The project is for an expansion and upgrade to an
existing structure at XXXX for the purpose of enabling a XXXXX. The completion of the
project will allow the XXXX.
Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

http://dor.myflorida.com/dor/
Florida Department of Revenue
Tallahassee, Florida 32399-0100

Page 2 of 5
Technical Assistance Advisement

The owner direct purchase procedure will be used exclusively for the purpose of supplies, goods,
equipment, appliances, and other materials from third party suppliers, and not from contractors
or subcontractors providing construction services for the project. The proposed contract
language for the owner direct purchase procedure includes language addressed by a previous
request.
In that request, the contract required Taxpayer to issue a direct purchase order to the vendors, the
vendor issued the invoice directly to Taxpayer, Taxpayer issued payment directly to the vendor
and not to the contractor, Taxpayer obtained title when tangible personal property was delivered
to the job site, and Taxpayer assumed the risk of damage or loss. The proposed language is for
the most part identical to the previous request. However, the proposed language does not
provide for direct invoicing to Taxpayer by the suppliers.
Applicable Law
Sales to governmental units are exempt from sales tax, pursuant to Section 212.08(6), F.S., which
states, in pertinent part:

(a) 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 shall not inure to any transaction otherwise taxable under this chapter when
payment is made by a government employee by any means, including, but not limited
to, cash, check, or credit card when that employee is subsequently reimbursed by the
governmental entity….
(b) The exemption provided under this subsection does not include sales of tangible
personal property made to contractors employed directly to or as agents of any such
government or political subdivision when such tangible personal property goes into or
becomes a part of public works owned by such government or political subdivision. A
determination of whether a particular transaction is properly characterized as an exempt
sale to a government entity or a taxable sale to a contractor shall be based upon the
substance of the transaction rather than the form in which the transaction is cast.
However, for sales of tangible personal property that go into or become a part of public
works owned by a governmental entity, other than the Federal Government, a
governmental entity claiming the exemption provided under this subsection shall certify
to the dealer and the contractor the entity’s claim to the exemption by providing the
dealer and the contractor a certificate of entitlement to the exemption for such sales. If
the department later determines that such sales, in which the governmental entity
provided the dealer and the contractor with a certificate of entitlement to the exemption,
were not exempt sales to the governmental entity, the governmental entity shall be
liable for any tax, penalty, and interest determined to be owed on such transactions.
Possession by a dealer or contractor of a certificate of entitlement to the exemption from
the governmental entity relieves the dealer from the responsibility of collecting tax on
the sale and the contractor for any liability for tax, penalty, or interest related to the sale,

Page 3 of 5
Technical Assistance Advisement

and the department shall look solely to the governmental entity for recovery of tax,
penalty, and interest if the department determines that the transaction was not an exempt
sale to the governmental entity. The governmental entity may not transfer liability for
such tax, penalty, and interest to another party by contract or agreement.
(c) The department shall adopt rules for determining whether a particular transaction is
properly characterized as an exempt sale to a governmental entity or a taxable sale to a
contractor which give special consideration to factors that govern the status of the
tangible personal property before being affixed to real property. In developing such
rules, assumption of the risk of damage or loss is of paramount consideration in the
determination. The department shall also adopt, by rule, a certificate of entitlement to
exemption for use as provided in paragraph (b). The certificate shall require the
governmental entity to affirm that it will comply with the requirements of this
subsection and the rules adopted under paragraph (b) in order to qualify for the
exemption and that it acknowledges its liability for any tax, penalty, or interest later
determined by the department to be owed on such transactions.
Rule 12A-1.094, F.A.C., provides the guidelines for purchasing materials tax-exempt for a
public works contract. Rule 12A-1.094, F.A.C., states, in relevant part:

(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.
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

Page 4 of 5
Technical Assistance Advisement

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)1. To be entitled to purchase materials tax exempt for a public works project, a
governmental entity is required to issue a Certificate of Entitlement to each vendor and
to the governmental entity’s contractor to affirm that the tangible personal property
purchased from that vendor will go into or become a part of a public work. This
requirement does not apply to any agency or branch of the United States government.

2. The governmental entity’s purchase order for tangible personal property to be
   incorporated into the public works project must be attached to the Certificate of
   Entitlement. The governmental entity must issue a separate Certificate of Entitlement
   for each purchase order. Copies of the Certificate may be issued.
3. The governmental entity will also affirm that if the Department determines that
   tangible personal property sold by a vendor tax-exempt pursuant to a Certificate of
   Entitlement does not qualify for the exemption under Section 212.08(6), F.S., and this
   rule, the governmental entity will be liable for any tax, penalty, and interest determined
   to be due.

If the contract or actions of the parties contradict the owner direct purchases procedures set forth,
Taxpayer may not take advantage of its tax-exempt status on the purchase of materials for use in
the public work. Also, a contractor that manufactures or fabricates its own materials, as
specified in Rule 12A-1.094(5), Florida Administrative Code, does not qualify for inclusion in
direct purchase programs. In such an instance, 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.
Here, Taxpayer assumes liability for the items upon delivery to the jobsite. Taxpayer will acquire
title to the materials upon delivery to the jobsite. Taxpayer will issue its own purchase orders
directly to the suppliers. Taxpayer will issue the exemption certificate and Certificate of Entitlement
to the suppliers. Taxpayer will issue a check for the items purchased directly to the supplier.
However, Taxpayer’s proposal does not require direct invoicing to Taxpayer by the supplier. This
change in the proposed language from the previous request will cause Taxpayer’s direct purchase
procedures to not satisfy all required conditions provided by the Rule. The exemption does not apply
unless the contract provisions require direct invoicing to Taxpayer, and the supplier actually directly
invoices to Taxpayer.

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Technical Assistance Advisement

Concluding Statement
Taxpayer’s direct purchase procedures currently do not meet the requirements of the abovementioned Rule, unless Taxpayer changes the proposed language, and the suppliers actually provide
a direct invoice to Taxpayer. Then, once the changes are made, Taxpayer may purchase the materials
tax-exempt for use in a public works contract.

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 on 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 than 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.
Respectfully,

Charles Wallace
Technical Assistance & Dispute Resolution
850-717-7541
Record ID: 210811