Could a governmental owner buy materials tax-free for a Florida public works project under its proposed direct-purchase contract?

Plain-English summary

The Florida Department of Revenue concluded that the governmental owner could purchase materials tax-free for its public works project only if it corrected one missing contract term: suppliers had to invoice the owner directly.

The proposed procedure already called for the owner to issue purchase orders, pay suppliers from public funds, take title upon delivery, assume the risk of loss, and provide its Consumer's Certificate of Exemption and a Certificate of Entitlement. But the proposal did not require vendors to send their invoices directly to the owner.

Because direct invoicing is one of the factors in Rule 12A-1.094, the procedure did not qualify as written. The Department said the owner could use the exemption after adding that requirement and ensuring that suppliers actually invoiced the owner directly.

What this means for you

Governmental project owners

An owner-direct-purchase program needs more than a government exemption certificate. The documents and actual conduct should show direct purchase orders, direct invoices, direct payment, passage of title, assumption of risk, and the required Certificate of Entitlement.

Contractors and suppliers

Routing invoices through the contractor can defeat the owner's claimed direct-purchase treatment. The ruling also says contractor- or subcontractor-fabricated materials do not qualify for inclusion in the direct-purchase program described there.

Accountants and tax professionals

Review both the contract language and what happens in practice. The Department warned that contradictory conduct can prevent the exemption even if the paperwork is drafted to resemble an owner purchase.

Common questions

Q: Was the proposed procedure already exempt?
A: No. It lacked a requirement that suppliers invoice the governmental owner directly.

Q: Was changing the contract enough by itself?
A: No. The Department required both revised contract language and actual direct invoicing to the owner.

Q: Who would be liable if a certified purchase was later found taxable?
A: The quoted statute says the governmental entity is liable for tax, penalty, and interest when it issued the certificate of entitlement for a transaction later found not exempt.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 17A-020

Original ruling text

October 10, 2017

Executive
Director
Leon Biegalski

TAX: Sales and Use Tax
TAA NUMBER: 17A-020
ISSUE: Public Works Contract
STATUTE CITE(S): Section(s) 212.08(6), F.S.
RULE CITE(S): Rule 12A-1.094, F.A.C.
QUESTION: Will Taxpayer’s contract satisfies the criteria for Rule 12A-1.094(4), F.A.C.?
ANSWER: Yes, so long as Taxpayer modifies the contract to require direct invoicing to
Taxpayer.

XXXXXXXX
XXXXXXXX
XXXXXXXX
XXXXXXXX
Subject: Technical Assistance Advisement (“TAA”)
TAA 17A-020
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.”)
XXXXXX (“Taxpayer”)(“Owner”)(“Petitioner”)
Exemption Certificate Number: XXXXXXXXXXXXXX
Dear XXXXXXXXXXXX:
This letter is a response to your petition dated August 10, 2017, for the Department’s issuance of
a Technical Assistance Advisement (“TAA”) to Petitioner, regarding public works project
requirements. 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.
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

Page 2 of 2
Technical Assistance Advisement

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 XXXXXXXXXXXXXXXXX. 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 existing structures
XXXXXXXXXXXXXXXX. The completion of the project will allow the XXXXXXXXXX
XXXXXXXXXXXX.
The owner direct purchase procedure will be used exclusively for 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 has been provided.
The proposed contract language requires Taxpayer to issue a direct purchase order to the vendors
and suppliers from whom Taxpayer will make direct purchases. Taxpayer will obtain title upon
delivery of the items to the job site location designated by Taxpayer. The items will be approved
for acceptance by Taxpayer or Taxpayer’s agents prior to installation. Taxpayer will assume risk
of loss for the items delivered, and Taxpayer will be required to be the insured party for these
items.
The proposed bid and contract language do not require direct invoicing from the supplier and
vendors to the Taxpayer. Your request provides that Taxpayer will amend the proposal as
needed to comply with the requirements provided for by s. 212.08(6)(c), F.S. Taxpayer will
make payment directly to the vendor and not to the contractor. Taxpayer will issue the
Consumer’s Certificate of Exemption and Certificate of Entitlement to each vendor and supplier.
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….

Page 3 of 3
Technical Assistance Advisement
(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.
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,

Page 4 of 4
Technical Assistance Advisement
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.
   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.

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

Page 5 of 5
Technical Assistance Advisement
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 will be required to assume the risk of loss for the items purchased 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 prior to delivery. Taxpayer will issue the
Consumer’s Certificate of Exemption and Certificate of Entitlement to each supplier when
submitting the purchase orders. 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 must be included in the proposal and contract. If it is not included in the contract, or
if direct invoicing from the supplier to Taxpayer does not happen, then Taxpayer’s direct purchase
procedures to not satisfy all required conditions, and the exemption provided for by s. 212.08(6)(c),
F.S., does not apply.
Concluding Statement
Taxpayer’s direct purchase procedures currently do not meet the requirements of the abovementioned Rule, unless Taxpayer changes the proposed contract language to include for direct
invoicing to Taxpayer from the suppliers, 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,
Chuck Wallace

Page 6 of 6
Technical Assistance Advisement

Chuck Wallace
Technical Assistance & Dispute Resolution
(850) 717-7541
AMS ID: 7000018599