Can a Florida tax-exempt nonprofit directly buy construction materials tax-free for a real-property project?

Plain-English summary

The Florida Department of Revenue approved a 501(c)(3) organization's Owner Direct Purchase Program for materials used in a public-facility construction project. Ordinarily, a real-property contractor is the consumer of construction materials and owes tax on them. A qualifying nonprofit can instead make the purchase itself and use its exemption if the transaction is genuinely structured as the nonprofit's purchase.

The program met that standard because the nonprofit issued purchase orders in its own name with its Florida exemption certificate, vendors invoiced it directly, it paid vendors from its own funds, title passed to it, and it bore the risk of loss from purchase through installation. Contractors and subcontractors did not buy or resell the exempt products.

The Department described risk of loss as the paramount factor. The nonprofit also bore the economic burden of insurance and would receive the benefit of insurance proceeds for damage to the materials before installation.

What this means for you

Tax-exempt project owners

An exemption certificate alone is not enough. The owner must actually function as the purchaser, including ordering, paying, taking title, and carrying pre-installation risk.

Contractors and design-builders

Keep owner-direct purchases outside contractor purchasing chains. Vendor invoices and payments should run directly to and from the exempt owner, with contractors receiving copies only for coordination.

Accountants and tax professionals

Review purchase orders, delivery terms, insurance, title transfer, payment records, and risk-of-loss clauses together. If the contractor bears the real economic risk, Florida may treat the contractor as the taxable consumer.

Common questions

Q: What made this direct-purchase program sufficient?
A: The exempt owner issued the purchase orders, supplied its exemption certificate, received invoices, paid vendors, took title, and bore risk of loss before installation.

Q: Could the contractor buy the materials using the nonprofit's certificate?
A: No. The program specified that contractors and subcontractors would not purchase the tax-exempt products from vendors.

Q: Who had to insure the materials?
A: The nonprofit bore the economic burden of insurance and the benefit of proceeds for loss during the period it held the risk.

Q: Did the ruling approve every construction purchase?
A: No. It approved the described program and purchases used in the nonprofit's customary exempt activities, subject to the stated procedures.

Citations and references

• Fla. Stat. §§ 212.08(7)(p) and 213.22
• Fla. Admin. Code rr. 12A-1.038(1) and 12A-1.051

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 19A-009

Original ruling text

Florida Department of Revenue
Technical Assistance and Dispute Resolution

5050 West Tennessee Street Tallahassee FL 32399

Jim Zingale
Executive Director

floridarevenue.com

Question:
Is the Owner Direct Purchase Program sufficient to allow a tax-exempt organization to take
advantage of its tax-exempt status on the purchase of materials for use in a real property
construction contract?
Response:

The Owner Direct Purchase Program, as described in the Taxpayer’s request and confirmed in
the supporting documentation submitted with the Taxpayer’s request, is sufficient to allow the
Taxpayer to take advantage of its tax-exempt status on the purchase of materials for use in real
property construction contracts.
March 22, 2019,
XX
Subject: Technical Assistance Advisement
STATUTE CITE(S): Section 212.08, Florida Statutes (F.S.)
RULE CITE: Rules 12A-1.038 and 12A-1.051, Florida Administrative Code (F.A.C.)
XX ("Taxpayer") FEIN: XX
Exemption Certificate Number: XX
XX ("Sole Member") FEIN: XX
Dear XX:
This is in response to your letter dated January 9, 2019, requesting this Department’s issuance
of a Technical Assistance Advisement (“TAA”) pursuant to section 213.22, F.S., and Rule Chapter
12-11, F.A.C., concerning the Owner Direct Purchase Program that is the subject of your
request. An examination of your letter has established you have complied with the statutory
and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby
granting your request for a TAA.

XX,
March 22, 2019
Florida Department of Revenue
Page 2

Facts and Requested Advisement
Your letter provides the following in part:
Taxpayer is a limited liability company incorporated in the State of XX. The sole member
of Taxpayer . . . ("Sole Member"), [is] a nonprofit corporation incorporated in the State
of XX. Sole Member is a nonprofit company created to enter into public-private
partnerships with government and other tax-exempt groups to develop public and
community facilities, including responsibilities for design and construction, related
development funding, and structuring governmental leasehold and ownership interests.
Sole Member is a 501(c)(3) nonprofit organization that is currently exempt from federal
income tax. Taxpayer was formed by Sole Member to participate in the development of
the Project, which is defined below, on behalf of Sole Member. Taxpayer holds a valid
Consumer's Certificate of Exemption issued by the Florida Department of Revenue (the
"Department") and is categorized as exempt under the exemption category of 501(c)(3)
organization. . . .
Taxpayer and the City XX (the "City") have entered into a written agreement for a [PPP
Agreement] to develop, design and construct certain significant improvements for the
City's XX (the "Project"). Taxpayer will contract with XX, or other architect (the
"Architect") to design, and with XX and/or the XX, or other licensed general contractors
or design/builders (the "Contractor") to construct the Project. Those contracts with
Contractors are to be known as the "Construction Contracts".
Under the PPP Agreement, Taxpayer and the City have agreed that Taxpayer is
independently responsible for purchasing certain supplies, goods, equipment, and other
materials ("Products") directly from vendors to be incorporated in or used in
constructing the Project. The City will enter into a long-term (approximately 27-year)
ground lease with Taxpayer under which the City and Taxpayer regard Taxpayer as the
owner of the property and improvements that Taxpayer will design and construct.
When the improvements are designed and constructed by Taxpayer, Taxpayer will lease
the completed Project improvements to the City under a long-term Facilities Lease
Agreement for the City's public purposes. Under that Facilities Lease, the City will have
exclusive use of the facilities. Upon expiration of the Facilities Lease to the City, the real
property and improvements, which the City will have exclusively used for public
purposes during the Facilities Lease, will remain with the City upon termination of the
long-term ground lease under its terms. . . .

XX,
March 22, 2019
Florida Department of Revenue
Page 3

The Project is a customary nonprofit activity of Sole Member. . . . All purchases of
Products for which Taxpayer seeks an exemption are necessary for Taxpayer to achieve
its customary nonprofit activities by facilitating the cost-effective execution and
completion of the Project. Those nonprofit activities will achieve a clear public purpose.
Sole Member is not subject to a final disqualification order issued by the Department of
Agriculture and Consumer Services pursuant to Fla. Stat. § 496.430.
Taxpayer has created an Exhibit to the Construction Contracts which describes the
owner direct purchase procedures (the "Addendum"). Taxpayer has also created a
purchase order template (the "Purchase Order Template"). Taxpayer's Addendum to be
incorporated in the Construction Contracts, and the Purchase Order Template to be
utilized for Taxpayer's direct purchases, will specify that the owner direct purchase
procedure will be exclusively used for those Products purchased by Taxpayer from thirdparty vendors for incorporation in this Project, and for which Taxpayer will bear the risk
of loss from the point of purchase through installation at the job site. No contractors or
subcontractors who provide construction services for the Project will sell or purchase
any tax-exempt Products from a third-party vendor. . . .
Taxpayer will issue its Purchase Orders directly to all vendors of tax-exempt items.
Taxpayer will attach its Consumer's Certificate of Exemption and Certificate of
Entitlement to each purchase order sent to each vendor. . . . Taxpayer's Purchase
Orders shall provide that vendors of tax-exempt items shall invoice Taxpayer directly for
the items purchased and not invoice the Contractor or any subcontractor. Taxpayer will
provide the Contractor and the City with copies of the invoices Taxpayer receives for
informational and coordination purposes. Taxpayer will make payment directly to the
vendor and not to the Contractor or any subcontractor. Taxpayer will take title to the
Products at the time of purchase or delivery by the vendor. Taxpayer will bear the risk
of loss to Products purchased, from the time of purchase by Taxpayer until their
installation at the jobsite.

Included with your request is a copy of a “statement of policy regarding the Owner Direct
Purchase Program (“ODPP”) and a copy of sample purchase order (“PO”).
The ODPP statement of policy provides the following in part:
[Taxpayer] is tax-exempt and may wish to exercise its right to directly purchase various
construction materials, supplies and equipment ("Products") which are otherwise
included in this contract. . . . Products not directly purchased by the [Taxpayer] need not
comply with this Owner Direct Purchase Program.

XX,
March 22, 2019
Florida Department of Revenue
Page 4

In order to purchase Products tax-exempt, [Taxpayer] and those involved in such
[Taxpayer] direct purchases must comply with the ODPP. The ODPP requires that the
[Taxpayer]: prepare and issue its Purchase Orders and Certificate of Exemption directly
to all vendors which sell Products directly to [Taxpayer]; receive vendors' invoices
directly from the vendors; pay vendors directly; take title to Products at the time of
purchase or delivery by the vendors; and at the point of purchase the [Taxpayer] must
bear the risk of damage or loss to the directly purchased Products. The [Taxpayer] itself
is responsible to obtain insurance covering such damage or loss to Products during the
period of time that [Taxpayer] bears that risk of loss.
In compliance with the ODPP, the [Taxpayer] will purchase such Products via its
Purchase Orders. . . . [Taxpayer] shall issue its executed Purchase Orders directly to
vendors. [Taxpayer] shall attach a copy of its Florida Consumer's Certificate of
Exemption to all Purchase Orders.
All vendors shall send invoices directly to the [Taxpayer]. Invoices will then be
forwarded to the Design-Builder for coordination and verification. The [Taxpayer] shall
take title to the Products at the point of purchase or delivery under the Purchase
Orders.
. . . [Taxpayer] will bear the risk of loss to the goods purchased from the time of
purchase and prior to their installation at the project. Owner shall also bear the
economic burden of obtaining insurance covering damage or loss of the Products
purchased pursuant to the ODPP and will directly enjoy the economic benefit of the
proceeds of any such insurance. . . .
Listed below is the written procedure for the implementation of the ODP Policy:
. . . 5. Invoices are to be billed by the Vendor, directly to the [Taxpayer] at [Taxpayer’s]
mailing address. . . . The [Taxpayer] shall pay Vendor directly for the Products following
this day time period.
The [Taxpayer] is responsible for preparing this ODPO program and ensuring that it
complies with current law. Materials purchased within the ODPO program are the
property of the [Taxpayer]. . . .

The PO provides the following “Terms and Conditions”:

1. This is a Direct Purchase Order to Vendor from [Taxpayer]. [Taxpayer] is a tax-exempt
   entity under applicable Jaw and is utilizing its State of Florida sales tax exemption (Tax
   Exempt Number appears on first page of this Purchase Order).

XX,
March 22, 2019
Florida Department of Revenue
Page 5

2. Vendor shall issue Direct Invoices to [Taxpayer] for purchases under this Purchase
   Order.
3. [Taxpayer] shall issue direct payment from [Taxpayer’s] funds to Vendor for sums due
   Vendor under this Purchase Order.
4. [Taxpayer] will take title to the items purchased under this Purchase Order ("Direct
   Purchase Items"), and [Taxpayer] bears the risk of loss to those items, as of the time of
   purchase, which will be the point of delivery by Vendor F.O.B. to the delivery location
   identified in this Purchase Order. "F.O.B." refers to delivery "Free on Board" as
   commonly used and as identified in the Uniform Commercial Code. Vendor is
   responsible for adequate property insurance for risk of loss prior to the time of
   purchase. Vendor shall establish [Taxpayer] as an additional insured under such
   property insurance, as [Taxpayer’s] interests may appear.
5. Vendor's services exclude any aspect of installation of the Direct Purchase Items, and
   Vendor will have no role, function, or participation in any installation of the Direct
   Purchase Items.
6. Warranties and any special or extended warranties as apply to the items purchased
   under this Purchase Order are identified below.

Issue
Whether the Taxpayer’s Owner Direct Purchase Program is sufficient to allow the Taxpayer to
take advantage of its tax-exempt status on the purchase of materials for use in real property
construction contracts.
Law and Discussion
Section 212.08(7)(p), F.S., provides an exemption from sales tax for purchases of tangible
personal property by “501(c)(3) organizations” where payment is made directly to the vendor
by the exempt organization and such purchases will be used to carry out the exempt
organization's customary nonprofit activities. The exempt organization is required by Rule 12A1.038(1), F.A.C., to present the vendor with a properly completed exemption certificate at the
time of purchase in order to establish tax exempt status of the transaction.

XX,
March 22, 2019
Florida Department of Revenue
Page 6

Rule 12A-1.051, F.A.C., governs the taxability of the purchase, sale, or use of tangible personal
property by contractors and subcontractors who purchase, acquire, or manufacture materials
and supplies for use in the performance of real property contracts. Rule 12A-1.051(4), F.A.C.,
provides that real property contractors are generally considered to be the ultimate consumers
or users of the tangible personal property they purchase to perform a real property contract
(i.e., they are not reselling the tangible personal property). The stated general rule for real
property contractors is that they should not charge tax to their customers, regardless of
whether or not they itemize charges for materials or labor, because they are not engaged in the
activity of selling tangible personal property. Real property contractors are considered the
ultimate consumers of the materials and supplies they use to perform real property contracts,
so they must pay tax on the costs of those materials and supplies.
Nonprofit institutions that qualify under section 501(c)(3) of the Internal Revenue Code may
structure construction contracts in order to take advantage of tax exemptions available to
them. If the organization elects to take advantage of tax exemptions in a construction contract,
certain criteria are required in order to legally effect the exemption. The criteria must be
followed for the exempt organization to receive its exemption. The tax-exempt entity when
making purchases of tangible personal property must do so in the tax-exempt entity's own
name, using its own purchase orders, and making direct payment to the vendor of the materials
from its own funds. The tax-exempt entity must be invoiced directly by the supplier for the
purchases. Then s. 212.08(7)(p), F.S., may apply to the purchases.
In cases where a “501(c)(3)” tax exempt entity has structured a construction contract to take
advantage of tax exemptions, the tax exempt entity must assume all risk of damage or loss for
the building materials from the time of purchase and prior to their installation or incorporation
into the project in order for the sale of building materials to be deemed a sale to the tax
exempt entity, and thus be tax exempt. Further, the Department will also give special
consideration to several factors (bidding, indemnification, inspection, acceptance, delivery,
payment, and storage) which govern the status of tangible personal property prior to its
affixation to real property when determining whether the sale is to the tax exempt entity or to
a contractor.
The assumption of risk of damage or loss is the paramount consideration. The assumption of
risk would include the period of time that the building materials are physically stored at the job
site prior to their installation or incorporation into the project. The tax exempt entity will be
deemed to have assumed the risk of damage or loss if the tax exempt entity either bears the
economic burden of posting a bond or obtaining insurance covering damage or loss, or enjoys
the economic benefit of the proceeds of such bond or insurance. If the tax exempt entity does
not assume the risk of damage or loss, the contractor will be construed to be the ultimate or
final consumer of the building materials it uses and will be liable for the applicable tax.

XX,
March 22, 2019
Florida Department of Revenue
Page 7

Review of the “Addendum” and the “Terms and Conditions,” of the Purchase Order Template,
reveal that Taxpayer’s Owner Direct Purchase Program contains the following provisions to
ensure that the Taxpayer is the final consumer of the building materials prior to installation:

1. The Taxpayer will issue purchase orders in its own name, along with a copy of its
   Florida Consumer's Certificate of Exemption.
2. The materials will be delivered to the Taxpayer at the job site, and title of materials
   will transfer to the Taxpayer.
3. The Taxpayer will be billed directly by the selling vendor.
4. The Taxpayer will make direct payment for the purchase of the materials to the selling
   vendor.
5. The Taxpayer will bear all risk of loss or damage to materials from the time of
   purchase and prior to installation into the project.
   Determination
   The Owner Direct Purchase Program, as described in your letter and confirmed in the
   supporting documentation submitted with your request, is sufficient to allow the Taxpayer to
   take advantage of its tax-exempt status on the purchase of materials for use in real property
   construction contracts.
   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 that
   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.

XX,
March 22, 2019
Florida Department of Revenue
Page 8

Your response should be received by the Department within 15 days of the date of this letter.

Sincerely,

Brinton Hevey
Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution
Record ID: 150175