Which material purchases were exempt or taxable after a city and contractor restructured a municipal-marina public-works contract?

Plain-English summary

The city's direct purchase from outside suppliers was exempt, but the contractor and subcontractor acquisition categories remained taxable. A contractor's later resale to the city could itself be exempt without undoing tax on the contractor's earlier purchase.

The city originally awarded a lump-sum municipal-marina contract. After learning that the contractor's public-works material purchases were taxable, the parties tried to split the arrangement into a city material purchase and a separate installation agreement. But the amendments were unsigned, the original contract remained enforceable, and taxability followed the substance of each transaction.

• Materials the contractor bought, later sold to the city, and then used in the project: the contractor's purchase was taxable.
• Materials the contractor manufactured or fabricated for the project: taxable to the contractor on fabricated cost, even if title passed to the city before use.
• Materials the city bought directly from other sources and paid for directly: exempt.
• Materials the contractor bought and used without a prior resale to the city: taxable.
• Materials bought by subcontractors for their prime-contract work: taxable.

The city's agreement to reimburse or indemnify the contractor for assessed tax increased contract consideration; it did not convert the contractor's tax into an exempt city tax payment.

What this means for you

Municipalities and procurement officers

A tax-exempt government entity does not automatically exempt materials purchased by its public-works contractor. Direct purchasing, direct payment, title, risk, enforceable documents, and actual performance all matter.

Contractors, subcontractors, and construction teams

Resale labels or unsigned amendments do not control if the transaction's substance shows contractor consumption. Budget tax and indemnity obligations explicitly.

Common questions

Were materials bought directly and paid for by the city exempt? Yes.

Did a contractor's later resale of materials to the city exempt the contractor's purchase? No.

How were contractor-fabricated items treated? The contractor owed tax on fabricated or manufactured cost.

Were subcontractor purchases exempt? No.

Did city indemnification eliminate the contractor's tax liability? No.

Citations and references

• Sections 212.05(1)(a)1., 212.06(1), and 212.08(6), Florida Statutes — historical sales, fabrication, and government-purchase rules.
• Rules 12A-1.051(5) and 12A-1.094(3)-(4), Florida Administrative Code — contractors and substance-over-form public-works analysis.
• Housing by Vogue, Inc. v. Department of Revenue, 422 So. 2d 3 (Fla. 1982).

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 90A-061

Original ruling text

Title:

Public Works Contract

Sep 20, 1990

RE: TAA 9OA-061 Sales and Use Tax Public Contracts Sections 212.05(1)(a)1., 212.06(1) & 212.08(6), F.S. Rules 12A-1.051(5) & 12A-1.094(3), F.A.C.

Dear

Your letter of May 24, 1990, requested a Technical Assistance Advisement on the application of the sales and use tax to the above referenced matter. This response to your request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

Your letter and its enclosure relates the following facts, upon which your request and this Technical Assistance Advisement are based. During May, 1988, your City issued a call for bids on a construction project for a dockage system, wave attenuator and breakwater at its municipal marina. In this call for bids was the statement: "Do not include state or federal taxes, not applicable to municipalities."

The City and the bidder that was ultimately successful could have interpreted this in one of two ways: (1) the transaction between the City and the contractor was not subject to Florida sales taxes, and the contractor would not be required to collect sales tax and the City would not be required to pay sales tax on it; (2) Sales of material to the contractor to perform the contract would be exempt from Florida sales tax. Both parties interpreted it in the second of these ways. Based on this understanding, one of the bidders submitted a bid that was accepted, and several months later the City and that contractor entered into a contract that obligated the contractor to "be held responsible for any materials, equipment and work to the full amount of all payments made thereon, and he will be

required to make good at his own cost any injury or damage which said material, equipment or work may sustain from any unforeseen obstructions or difficulties which may be encountered, or from any source or cause whatsoever, or from any action of the elements, before final acceptance thereof."

Subsequently, it was discovered that while the first of the two possible interpretations discussed above was correct, the second was not, and that, in fact, the contractor is required by Florida law to pay sales tax on any material it purchases to perform a public works contract. Consequently, as related in your letter: " ... the City and the Dealer reached an agreement that the project would be restructured to provide two elements. The first element was for the City to purchase from the Dealer all components and materials for the floating dock and breakwater system. The second element was an installment agreement hiring the Dealer for its consultation and specialized personnel to install the breakwater and floating dock system from the components that had already been purchased by the City."

Your letter further advises that:

"It was contemplated by the parties that the services [of the contractor] would be exempt ... [and that] the sales of these components would also be exempt under Rule 12A-1.094(3), F.A.C."

Under the contract, as thus modified, there were five different categories of purchases of materials to complete the contract. The applicability of Florida sales tax will be explained after statement of each.

CATEGORY I. Material used in the project that was purchased by the contractor for sale to the City for later use by the contractor in completing the contract.

TAXABILITY: Pertinent excerpts of subsection (6) of Section 212.08, F.S., provide:

"(6) There are also exempt from the tax imposed by this

chapter sales made to...any county, municipality, or political subdivision of a state when payment is made directly to the dealer by the governmental entity... This exemption does not include sales of tangible personal property made to contractors either directly or as agents of any such...political subdivision...when such tangible personal property goes into or becomes a part of the public works owned by such...political subdivision..."

Applying this provision to the transactions involving this material ["CATEGORY I"] the sales of the material to the contractor are not exempt from Florida sales tax, since, in the words of the statute, these are "sales made to the contractor either directly or as agent of such political subdivision, when such tangible personal property goes into or becomes a part of the public works owned by such political subdivision." In the words of the statutory provision quoted above, these sales were "made to the contractor either directly or as agent for" the city; and in either event the sales to the contractor were taxable, since they were of property that went into and became a part of public works owned by it.

Housing by Vogue, Inc., v. Department of Revenue, 422 So.2d 3 (1982) is authority for this conclusion. In that case, there was a difficult issue as to whether the purchases by the contractor were for a public works contract, and the court decided they were. There is no doubt that under the facts stated in your letter, the contractor's purchases were for a public works contract; and, therefore, the result reached in that case that the sales to the contractor were not exempt applies to the facts your letter presents.

Your letter correctly identifies subsection (4), Rule 12A-1.094, F.A.C., as pertinent to your inquiry. As you know, it provides that, "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 on the substance of the transaction, rather than the form in which it is cast..." Further, it provides that the Executive Director or her designer will determine whether the substance of a particular transaction is one or the other, while the sale of

the materials by the contractor to the city can probably be proved without difficulty to have been exempt as a sale to a governmental entity, there are facts and circumstances that would make it difficult to prove that the prior sale of the materials to the contractor was other than taxable as a sale to the contractor, not to the city. Among them are that:

1. The original written contract was a lump sum contract,
   which obligated the contractor to use the material it bought for the contract, without first selling it to the city.

2. Although the parties drafted and agreed on certain
   contract amendments, they were not signed, and the project continued as provided in the written contract, which continued legally enforceable to the extent that it was inconsistent with the drafted, unsigned amendments.

CATEGORY II. Materials manufactured or fabricated by the contractor and sold to the City by the contractor for later use by the contractor to perform the contract, and used by the contractor for that purpose.

TAXABILITY: Paragraph (b), Section 212.06(1), F.S., provides in part:

"(b) Except as otherwise provided, any person who manufactures, produces, compounds, processes, or fabricates in any manner tangible personal property for his own use shall pay a tax upon the cost..."

More specifically, paragraph (a) of Rule 12A-1.051(5), F.A.C., applies this general rule to contractors, as follows:

"Contractors, except asphalt contractors, who operate fabricating or manufacturing plants which make items of tangible personal property for their own consumption and use in the performance of contracts for the construction of improvement of real property are subject to tax upon the fabricated or manufactured cost of such items."

The City's contractor did, in fact, manufacture or fabricate this property for its own use in performing the contract. From the time its manufacture or fabrication was planned until it was so used, it was intended and understood by both parties to the contract that its sole purpose was for use in performing the contract. Therefore, even though title to it passed to the City before it was so used, it was fabricated by the contractor for such use.

CATEGORY III. Property purchased by the City from other sources and later used by the contractor to perform the contract.

TAXABILITY: Sale of this property to the City was exempt under subsection (6), Section 212.08, F.S., which exempts from both the sales and use taxes:

"...sales made to the United States Government, a state, or any county, municipality, or political subdivision of a state when payment is made directly by the governmental entity."

CATEGORY IV. Property purchased by the contractor to perform the contract without resale to the City prior to use for that purpose.

TAXABILITY: The seller of the property was required to collect sales tax on this sale and the contractor was required to pay it, since these were, "sales made to the contractor either directly or as agent of such political subdivision, when such tangible personal property goes into or becomes a part of the public works owned by such political subdivision," as discussed above with reference to CATEGORY I property.

CATEGORY V. Property purchased by the contractor's subcontractor or subcontractors to perform contracts for the prime contractor.

TAXABILITY: As is recognized by the City, there is no basis for any exemption of these sales.

Enclosed with your request for Technical Assistance Advisement was a copy of the Indemnity Agreement of May 4, 1990, whereby

the City agreed to indemnify and hold harmless the contractor "against any assessed sales taxes, interest and costs reasonably incurred in connection with the claims made by the State of Florida." When the City does so because of the taxability of transactions discussed above, it is an increase in the consideration for performance of the contract, and is in compliance with its contractual obligation, not a payment by the City of taxes. Therefore, there is no exemption available to decrease or obliterate the responsibility of the contractor to pay taxes on those transactions.

This response constitutes a Technical Assistance Advisement under s. 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 s. 213.22, F.S. Our response is predicated upon 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 from that which is expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details that might lead to identification of the taxpayer must be deleted by the Department before disclosure. As required by Rule 12-11.005 F.A.C., you have requested deletion of "the name, addresses and Taxpayer Identification Numbers of the Dealer and taxpayer"; and this request will be honored.

Sincerely,

J. William Norman
Assistant

JWN/pb