Could the university buy construction materials tax-free through owner-direct purchases for its campus project?

Plain-English summary

The Florida Department of Revenue concluded that the university could purchase materials tax-free for its student-housing and campus-facilities project if it followed the proposed owner-direct-purchase process.

The university retained extensive control over construction and later project use. For exempt material purchases, it had to issue purchase orders directly to vendors, receive direct invoices, pay from its funds, take title, assume risk of loss from delivery until permanent installation, and maintain the required insurance protection.

The university also had to issue a Certificate of Entitlement with each purchase order and provide the required exemption documentation to the vendor and contractor. The result depended on completing all measures described in the request.

What this means for you

Universities and public-project owners

Owner-direct purchasing must be substantive, not just contractual labeling. The owner must actually contract, pay, hold title, and bear the risk of loss.

Developers and contractors

Support requisitions and construction coordination without becoming the purchaser of the tax-exempt materials.

Vendors and tax professionals

Retain the purchase order, exemption certificate, Certificate of Entitlement, invoice, payment evidence, title terms, and insurance or risk documentation.

Common questions

Q: Could the developer buy the materials and pass through the exemption?
A: The ruling's approved method required direct purchases by the university.

Q: When did the university need to bear risk of loss?
A: From vendor delivery through permanent installation into the project.

Q: Was a Certificate of Entitlement required for each purchase order?
A: Yes.

Citations and references

• Fla. Stat. §§ 212.08(6) and 213.22
• Fla. Admin. Code r. 12A-1.094(4)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 16A-013

Original ruling text

Executive
Director
Leon Biegalski

QUESTION: WILL TAXPAYER’S CONTRACT QUALIFY FOR THE PUBLIC WORKS
EXEMPTION PROVIDED FOR BY SECTION 212.08(6), F.S.?
ANSWER: YES. TAXPAYER WILL SATISFY ALL CRITERIAL REQUIRED BY RULE
12A-1.094(4), F.A.C., AND TIP13A01-01.
July 28, 2016
Subject: Technical Assistance Advisement (“TAA”) 16A-013
Sales and Use Tax-Public works; Real Property Improvements
Section(s) 212.08(6), Florida Statutes (“F.S.”)
Rule(s) 12A-1.094, Florida Administrative Code (“F.A.C.”)
XXXX (“Landlord”)(“University”)(“Petitioner”)
XXXX (“Developer”)
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 and real
property improvements. 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 University may directly purchase materials from suppliers without sales tax for the
proposed project?

Facts
University is a XXXX educational facility. University will build a student housing project (the
“Project”) that will be built on property leased or owned by University. University and
Developer will control the construction of the Project. The Project will consist of residential
buildings, a dining facility, a health and wellness facility, and other ancillary student amenity and
support space on part of the University campus.
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

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Technical Assistance Advisement

The land that the improvements will be constructed upon will be XXXX to Developer for XXXX
years pursuant to a written agreement XXXX. The use of the Project and control of the Project
will be governed by the XXXX. At the end of the XXXX period, the property will XXXX to the
University.
The use of the improvements will be limited to student housing, dining, health and wellness, and
ancillary amenity and support space, all for University’s purpose. Developer will have XXXX to
the Project, until the termination of the XXXX. The XXXX will limit the use of the
improvements to the University’s purposes. Developer is required, under the XXXX, to only
house “Eligible Residents” in the Project. “Eligible Residents” is defined by the XXXX and
includes University students, faculty, and staff. It also includes conference participants in
University programs.
University will oversee the construction of the improvements to the Project. University will
retain a large amount of control over the XXXX. The construction of Project will be in
accordance with University standards and the approved plans and specs, unless University
approves a change. Developer is required to provide University with access and all information
necessary to monitor the performance and progress of the construction, and University is entitled
to attend the development team meetings relating to the progress and performance of the
construction work. University retains the right to name the Project or to sell the naming rights to
any or all of the improvements and receive all compensation from such sale.
University will direct the student rental contracts for housing. Developer will not be allowed to
rent the residential units to the most financially attractive tenants at the highest rates that the
market will bear. The residence halls may only house Eligible Residents, and housing rental
rates must be approved by a unanimous consent of the Project advisory committee, on which
University has two designees. Furthermore, University will perform all of the student marketing,
room assignment, billing, and collection activities related to the contracting of the residential
units. University will retain the right to access the improvements. University will retain free
access to the Project, including the right to inspect the improvements.
University will supervise the operations of the improvements during the term of XXXX. After
construction is completed and any debt is paid, University retains important operational
control of the improvements. The operating expenses in the annual budget, the amount and type
of rental rates, fees, deposits charged to the residents, any material deviation from the repair and
replacement schedule, any significant changes to the improvements, and any proposed changes
in use of the Project are all subject to the unanimous consent of an advisory committee.
University continues to exercise these rights under the XXXX, even after construction is finished
and any debt is paid.
University will benefit from the revenues of the Project, and it will receive a share of the profits.
The Project funds will be deposited annually into several repair and replacement accounts for the
Project. The funds will be required to be used on a regular basis to protect University’s long
term interest in the Project. Furthermore, six years prior to the end of the term, Project funds

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Technical Assistance Advisement

will be deposited in a holdback reserve account for any work required to ensure the Project
XXXX meet or exceed the condition required at the end of the term of the XXXX. University
will also share in the profits of the Project.
University will receive the improvements in good order and at no cost to University at the term
or early termination of the XXXX. At the expiration of the XXXX year term of the XXXX, the
XXXX of the Project are returned to University in good and operable condition, free and clear of
all liens, with all repair and rehabilitation and renovation having been performed, and with at
least twenty-five percent (25%) of their useful life remaining.
The transfer of title to Developer will occur in order to accomplish the purposes of, (i) to
facilitate the financing of the Project, (ii) to transfer the long term maintenance of the Project to
Developer, and (iii) to accelerate delivery of the entire village concept of the Project to meet the
growing demand of University students.
Developer will be responsible for the long term maintenance of the Project, which both protects
University’s long term interest and allows University to use its dedicated funds for the balance of
the on-campus housing system. The transaction structure will allow University to accelerate the
delivery of the entire Project. XXXX will, therefore, be transferred to Developer in order to
accomplish the above, even though most aspects of ownership will be retained by University.
The University will comply with the conditions that must be met to satisfy the requirements of
Rule 12A-1.094, F.A.C., and TIP #13A01-01 that will establish that the University rather than
the contractor is the purchaser of materials.
University will execute the purchase orders for the tangible personal property involved in the
contract directly to the materials vendors. University may have Developer present the
University’s purchase orders to the vendors of the tangible personal property.
The University will acquire title to, and assume liability for, the tangible personal property at the
point in time when it is delivered to the Project job site. The vendors will be required to directly
invoice the University for supplies. The University will directly pay the vendors the invoice
amounts for the tangible personal property purchased directly from the vendors. The University
will assume all risk of loss or damage for the tangible personal property involved in the contract.
as indicated by the University’s acquisition of, or inclusion as the insured party under, insurance
on the building materials.
The University will issue a Certificate of Entitlement with each purchase order, along with a
copy of its Consumer’s Certificate of Exemption, to each vendor, as well as to the Developer.
The University will be responsible for payment of tax, penalty, and interest on any purchases that
are not found to be in compliance with the procedures for tax-exempt direct purchase of
materials.

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Technical Assistance Advisement

Taxpayer Position
University believes that it is the true equitable ownership of the Project that should be considered
a public works contract pursuant to Rule 12A-1.094, F.A.C., and Taxpayer Information
Publication (“TIP”) #13A01-01.
University is the equitable owner of the Project. The University oversees construction, retains
access to the Project, supervises operations, directs the contracting of the residential units,
receives a share of the profits and benefits from the revenue of the Project, and XXXX with at
least twenty-five percent (25%) of the useful life of the improvements remaining. It follows that,
regardless of Developer’s possession of XXXX, University is the XXXX of the Project and
XXXX. The University and Developer will comply with the requirements of Rule 12A-1.094,
F.A.C., and the Taxpayer Information Publication.
Section 212.08(6), F.S., provides that sales to political subdivisions of Florida are exempt from
sales tax. Rule 12A-1.038(4), F.A.C., contains guidelines for claiming and documenting the
exemption. Rule 12A-1.038(4)(b), F.A.C., states that in order for a sale to a political subdivision
to be tax exempt, payment for tax-exempt purchases must be made directly to the selling dealer
by the political subdivision, and the political subdivision 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. The cited exemption exempts only direct
purchases by governmental entities. The exemption does not apply when a contractor, employed
by a political subdivision, 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 this case, are contained
in Rule 12A-1.094, F.A.C.
Rule 12A-1.094(2) and (3), F.A.C., 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 a political subdivision, however, the transaction is
exempt. For there to be an exempt transaction, the political subdivision must directly purchase,
hold title to, and assume the risk of loss of the tangible personal property from the time of
delivery to the jobsite, and satisfy various factors provided 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 political subdivision rather than a contractor is the purchaser of materials. These
criteria include the issuance of a direct purchase order from the political subdivision to the
vendor, direct invoice from the vendor to the political subdivision, direct payment by the
political subdivision to the vendor, passage of title from the vendor to the political subdivision,
and assumption of risk of loss by the political subdivision. However, the assumption of risk of
damage or loss from the time that the building materials are physically delivered to the job site is
a paramount consideration. The political subdivision must assume all risk of loss or damage for

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Technical Assistance Advisement

the tangible personal property from the moment of acceptance of title to the materials. To
establish that it has assumed that risk, the political subdivision should purchase, or be the insured
party under, insurance on the building materials. University will ensure that all these criteria are
followed.
In addition, to establish that the political subdivision is entitled to the exemption, it must issue a
Certificate of Entitlement to the vendors, with each purchase order, and to the contractor(s). A
copy of the political subdivision’s Consumer’s Certificate of Exemption must be attached to the
Certificate of Entitlement. The Certificate of Entitlement sets forth the requirements for making
tax-exempt direct purchases and notes the political subdivision’s acknowledgement that it is
responsible for tax, penalty, and interest on material purchases that do not meet the exemption
criteria. By statute, the political subdivision is prohibited from assigning liability for the tax,
penalty, and interest to another party by contract or agreement. A suggested format for the
certificate is found in Rule 12A-1.094(4)(c), F.A.C. Taxpayer will ensure that all these criteria
are followed.
Applicable Law and Discussion
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.

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Technical Assistance Advisement
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,
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(4), 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.

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Technical Assistance Advisement

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)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.
6. 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.
7. 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.

So long as University ensures that all measures that the request provides that University will be
obligated to take, then the criteria provided by Rule 12A-1.094, F.A.C., will be satisfied.
University will be required to complete all measures provided herein, including, but not limited
to, direct issuance of purchase orders, direct payment to vendors by University, direct invoicing
from vendors to University, passage of title of tangible personal property directly from the
vendors to University, assumption of risk of loss (including the required insurance coverage as
provided herein) of the materials used in Project from the moment that vendor delivers the
material to the jobsite until it is permanently affixed as a real property improvement. If all
measures that are provided in the request are completed by University, then University may
purchase the materials used in Project without paying the vendor for sales tax.
Concluding Statement
The proposed provisions will enable Taxpayer to directly purchase materials from vendors without
University having to pay sales tax when the materials are used in the project.

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.

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Technical Assistance Advisement

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: 211006