Could a city buy construction materials tax-free for a public project through an owner-direct-purchase arrangement?

Plain-English summary

The Florida Department of Revenue concluded that a city could buy materials tax-free for an airport public-works project if it executed the proposed contract amendment and followed the direct-purchase safeguards described in the ruling.

The city had to issue purchase orders directly to vendors, receive vendors' invoices, pay vendors directly from public funds, take title at delivery, and retain the risk of loss from delivery at the jobsite until the materials were permanently incorporated into the real-property improvement. It also had to issue the required Certificate of Entitlement and provide its exemption certificate.

The ruling was conditional because the second amendment was unsigned when submitted. It also did not apply to materials a contractor or subcontractor manufactured or fabricated itself; the ruling says those contractors remained the ultimate consumers for use-tax purposes.

What this means for you

Cities and other Florida political subdivisions

The exemption is for a genuine direct government purchase, not merely a contractor purchase labeled as governmental. Risk of loss was a paramount factor.

Public-works contractors

Prepare requisitions and purchase-order information without becoming the purchaser. The governmental entity must contract with, be invoiced by, and pay the vendor directly.

Vendors and tax professionals

Retain the purchase order, Certificate of Entitlement, exemption documentation, and evidence of title and risk allocation. If the claimed exemption fails, the statute and rule place liability on the governmental entity when the required certificate was issued.

Common questions

Q: Was the city's existing contract automatically sufficient?
A: No. The Department's answer depended on execution of the second amendment and compliance with all stated measures.

Q: When did the city need to assume risk of loss?
A: At delivery to the jobsite, continuing until permanent installation into the public work.

Q: Did the ruling exempt contractor-manufactured materials?
A: No.

Citations and references

• Fla. Stat. §§ 212.08(6) and 213.22
• Fla. Admin. Code rr. 12A-1.038(4), 12A-1.051(10), and 12A-1.094(2)-(5)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 17A-005

Original ruling text

Executive
Director
Leon M. 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 CRITERIA REQUIRED BY RULE 12A1.094(4), F.A.C., IF IT EXECUTES THE CONTRACT AS AMENDED, AND MAINTAINS
THE RISK OF LOSS THROUGH INSTALLATION INTO THE PUBLIC WORK.
March 9, 2017
Re: Technical Assistance Advisement 17A-005
Sales and Use Tax- Public Works; Real Property Improvements
Taxpayer: City of XXXX
Section(s) 212.08(6), Florida Statutes ("F.S.")
Rule(s) 12A-1.094, Florida Administrative Code ("F.A.C")
Dear XXXX:
This letter is in response to your request August 29, 2016, for issuance of a Technical Assistance
Advisement (“TAA”) pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C. An
examination of your request has established you complied with the statutory and regulatory
requirements for issuance of a TAA. Therefore, the Department is hereby granting your request
for a TAA.
FACTS PROVIDED
City of XXXX (Taxpayer) is the owner and operator of the XXXX International Airport
(Airport). Taxpayer has contracted to construct a building on airport property owned by
Taxpayer. When the building is completed, Taxpayer will own the building and lease it to a third
party. Taxpayer states it intends to buy certain materials for the project.
Taxpayer also provided a copy of the construction contract, the first amendment to the
construction contract, and the lease agreement. The amendment includes the following relevant
language from pages 2-4:

12. Owner Direct Purchases. The following subsections are hereby added to the Contract
    under Section 10.3.4 of the Contract:
    Child Support – Ann Coffin, Director  General Tax Administration – Maria Johnson, Director
    Property Tax Oversight – Dr. Maurice Gogarty, Director  Information Services – Damu Kuttikrishnan, Director

www.floridarevenue.com
Florida Department of Revenue
Tallahassee, Florida 32399-0100

Technical Assistance Advisement
Page 2

10.3.4.1 City certifies and represents that it is properly certified as an entity
exempt from the payment of sales and use taxes in the State of Florida. Prior to
City's purchase of any materials pursuant to the provisions of Section 10.3.4,
Cityshall provide Construction Manager, upon request, with documentation
confirming such exemption, including City's Certificate of Entitlement. City
acknowledges that Construction Manager may rely upon this certification and
representation by City.
10.3.4.2 City may purchase materials to be incorporated into the Work directly
pursuant to the terms and conditions of this Section 10.3.4.
10.3.4.3 In the event City elects to purchase materials directly, City and
Construction Manager shall follow the following procedures:
(a) Prior to City's issuance of the Notice to Proceed, Construction
Manager shall provide to City a list of the materials and equipment potentially
available for direct purchase by City. Such list shall include (i) an estimate of the
value of each such item, (ii) an estimate of the sales/use tax savings on each such
item, and (iii) the deadline for ordering each such item, such that the materials can
be timely ordered, fabricated and delivered so as not to delay the prosecution of
the Work. Construction Manager shall not order any such items until not less than
thirty (30) days after such list has been provided to City. City shall notify
Construction Manager in writing of the materials and equipment to be used or
incorporated into the Work that City has determined that it will purchase directly.
This notice must be provided to Construction Manager before the Construction
Manager has ordered the materials, and such materials shall be ordered by City on
or before the ordering deadline specified in such list.
(b) Construction Manager shall prepare, on City's form, a purchase order
directed to the vendor of the materials sufficient to describe and order the
materials which City has elected to purchase directly, and shall provide such
purchase order to City. Such purchase order shall provide that the purchased item
shall be FOB job site. Construction Manager's submission of a completed
purchase order form is a representation by Construction Manager to City that the
materials described therein comply with the Contract Documents. City may not
prepare or issue a purchase order not prepared by Construction Manager.
(c) City shall execute the purchase order and shall issue the purchase order
directly to the vendor supplying the materials, including, as an attachment to such
purchase order, a copy of the City's Certificate of Exemption in accordance with
the provisions of Florida Administrative Code, Paragraph 12A-1.094, Public
Works Contracts.
(d) The vendor shall then issue its invoice directly to City, and City shall
pay the invoice according to its terms directly to vendor from public funds.

Technical Assistance Advisement
Page 3

(g) City shall take title to the materials at the time of delivery by the
vendor to the job site, and all warranties with respect to such materials shall run
directly from the vendor to City; however, Construction Manager shall be deemed
a third-party beneficiary of such warranties. City's direct purchase of materials
shall not, however, alter any of Construction Manager's obligations under the
Contract Documents, including but not limited to Construction Manager's
warranty obligations under the Contract Documents.
(h) As provided above, direct purchases by City shall be FOB the jobsite,
so the vendor assumes the risk of loss or damage to the materials from the date of
submission of the order until the materials are delivered to the job site and
properly unloaded and stored at the job site, upon which City shall assume the
risk of loss or damage to the materials until Construction Manager exercises
control over such materials.

10.3.4.6 City shall indemnify and hold the Construction Manager harmless of and from
any liability for sales and use taxes for direct purchases by City should it be determined
that the purchases, in fact, are subject to the payment of sales and use taxes or that the
methodology described herein is not sufficient to exempt such direct purchase materials
from sales and use taxes.
On December 12, 2016, Taxpayer provided an unsigned copy1 of a second amendment to
the contract (hereafter “Second Amendment”), which removes Section 10.3.4.3(h) and
replaces it with the following:
(h)
As provided above, direct purchases by City shall be FOB the jobsite, so the
vendor assumes the risk of loss or damage to the materials from the date of
submission of the order until the materials are delivered to the job site and properly
unloaded and stored at the job site, upon which City shall assume the risk of loss or
damage to the materials.
REQUESTED ADVISEMENT
Are Taxpayer’s purchases of materials for use in the completion of the project subject to tax?
APPLICABLE STATUTES
Section 212.08(6), F.S., provides, in part, the following:
(6) EXEMPTIONS; POLITICAL SUBDIVISIONS

1

Taxpayer notes it intends to have this amendment signed as soon as possible.

Technical Assistance Advisement
Page 4

(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, 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.

Technical Assistance Advisement
Page 5

Rule 12A-1.094(4) and (5), F.A.C, provide, in part, the following:
(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
   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....
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.

(d) Sales to contractors, including subcontractors, are subject to tax.
(e) The governmental entity may not transfer liability for such tax, penalty,
and interest to another party by contract or agreement.

Technical Assistance Advisement
Page 6

(f) In the case of contracts with any agency or branch of the United States
government in which the federal governmental agency or branch is not required to
produce a Certificate of Entitlement, the purchase must comply with the five criteria
provided in paragraph (b), for the purchase of tangible personal property to be
exempt from sales and use tax. If the criteria in paragraph (b) are not met, the
contractor is the ultimate consumer of such tangible personal property and is liable
for sales or use tax on such purchases and manufacturing costs.
(5) Contractors, including subcontractors, that manufacture, fabricate, or furnish
tangible personal property that the contractor incorporates into public works are
liable for tax in the manner provided in subsection (10) of Rule 12A-1.051, F.A.C.
The contractor and subcontractors, not the governmental entity, are deemed to be the
ultimate consumers of the articles of tangible personal property they manufacture,
fabricate, or furnish to perform their contracts and may not accept a Certificate of
Entitlement for these articles.
As provided by Rule 12A-1.094(4)(c)4., F.A.C, the following is the format of the Certificate of
Entitlement to be issued by the governmental entity:
CERTIFICATE OF ENTITLEMENT
The undersigned authorized representative of __(hereinafter
"Governmental Entity"), Florida Consumer's Certificate of Exemption Number
____, affirms that the tangible personal property purchased pursuant
to Purchase Order Number_ from __(Vendor) on or
after__ (date) will be incorporated into or become a part of a public
facility as part of a public works contract pursuant to contract #
___with ___ (Name of
Contractor) for the construction of ___.
Governmental Entity affirms that the purchase of the tangible personal property
contained in the attached Purchase Order meets the following exemption requirements
contained in Section 212.08(6), F.S., and Rule 12A-1.094, F.A.C.
You must initial each of the following requirements.
_ 1. The attached Purchase Order is issued directly to the vendor supplying the
tangible personal property the Contractor will use in the identified public works.
2. The vendor's invoice will be issued directly to Governmental Entity.
__ 3. Payment of the vendor's invoice will be made directly by Governmental Entity
to the vendor from public funds.
_ 4. Governmental Entity will take title to the tangible personal property from the
vendor at the time of purchase or of delivery by the vendor.
___ 5. Governmental Entity assumes the risk of damage or loss at the time of purchase
or delivery by the vendor.
Governmental Entity affirms that if the tangible personal property identified in the
attached Purchase Order does not qualify for the exemption provided in Section
212.08(6), F.S., and Rule 12A-1.094, F.A.C., Governmental Entity will be subject
to the tax, interest, and penalties due on the tangible personal property purchased.

Technical Assistance Advisement
Page 7

If the Florida Department of Revenue determines that the tangible personal
property purchased tax-exempt by issuing this Certificate does not qualify for the
exemption, Governmental Entity will be liable for any tax, penalty, and interest
determined to be due.
I understand that if I fraudulently issue this certificate to evade the payment of
sales tax I will be liable for payment of the sales tax plus a penalty of 200% of the
tax and may be subject to conviction of a third degree felony.
Under the penalties of perjury, I declare that I have read the foregoing Certificate of
Entitlement and the facts stated in it are true.
Signature of Authorized Representative ___Title __
Purchaser's Name (Print or Type) __ Date ___
Federal Employer Identification Number: _____
Telephone Number: _________
You must attach a copy of the Purchase Order to this Certificate of Entitlement. Do not
send to the Florida Department of Revenue. This Certificate of Entitlement must be
retained in the vendor's and the contractor's books and records.
DISCUSSION ANALYSIS AND CONCLUSION
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
general exemption on sales to governmental entities. Rule 12A-1.038(4)(b), F.A.C, provides, in
part, 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 of Florida.
Political subdivisions 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(TPP) 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 addressed by 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 direct purchase order, direct invoice, direct payment, passage of title, and

Technical Assistance Advisement
Page 8

assumption of risk of loss. 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 the TPP 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.
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.
To summarize, the conditions that must be met to satisfy the requirements of Rule 12A-1.094,
F.A.C., and establish that the political subdivision rather than the contractor is the purchaser of
materials, include:

1. The political subdivision must execute the purchase orders for the tangible
   personal property involved in the contract directly to the materials vendors. The
   contractor may present the political subdivision's purchase orders to the vendors of
   the tangible personal property;
2. The political subdivision 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;
3. Vendors must directly invoice the political subdivision for supplies;
4. The political subdivision must directly pay the vendors for the tangible
   personal property; and
5. The political subdivision must assume all risk of loss or damage for the tangible
   personal property involved in the contract, as indicated by the political
   subdivision's acquisition of, or inclusion as the insured party under, insurance on
   the building materials.
6. The political subdivision must 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 contractor. The political subdivision is responsible for payment of tax, penalty, and
   interest on any purchases that are not found to be in compliance with the procedures for taxexempt direct purchase of materials.
   The terms of section 10.3.4 (of the Second Amendment) state Taxpayer will make direct
   purchases of the TPP after receiving requisition forms from the contractors. The provisions go on
   to state that Taxpayer will pay the vendors directly, and retain legal, and equitable, title to all
   materials it purchases. Additionally, the terms of section 10.3.4 (of the Second Amendment)
   state Taxpayer shall assume the risk of loss of the TPP at the time of delivery. Therefore, by
   assuming risk of loss.

Technical Assistance Advisement
Page 9

So long as, Taxpayer executes the Second Amendment (quoted in relevant part in the facts)
provided to the Department, and Taxpayer ensures that all measures that the request provides
that Taxpayer will be obligated to take, then the criteria provided by Rule 12A-1.094, F.A.C,
will be satisfied. Taxpayer will be required to complete all measures provided herein, including,
but not limited to, direct issuance of purchase orders, direct payment to vendors by Taxpayer,
direct invoicing from vendors to Taxpayer, passage of title of tangible personal property directly
from the vendors to Taxpayer, assumption of risk of loss 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
Taxpayer, then Taxpayer may purchase the materials used in project without paying the vendor
for sales tax.
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), F.A.C. 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), 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 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 15 days of the date of this
letter.
Sincerely,
Timothy Surface
Tax Conferee
Technical Assistance & Dispute Resolution
Record ID: 211763