Did a city's direct purchases of building materials become sales-tax exempt after it assumed risk of loss under a public-works contract?

Subject

Public Works Contracts

Plain-English summary

The city's direct purchases of building materials were exempt from Florida sales tax after the city changed the insurance and contract terms. The earlier ruling had denied exemption because the design-builder and subcontractors bore the risk of loss.

On reconsideration, the city showed that it purchased $2.5 million of builder's-risk coverage, retained legal and equitable title to city-furnished materials, amended the contract to carry the loss risk, and received a deductive change order for the design-builder's reduced insurance premium. Those new facts brought the sales within the governmental-entity exemption.

What this means for you

The ruling treated risk of loss as a paramount factor, alongside purchase orders in the government's name, immediate title, direct vendor billing and payment, and proper exemption documentation. Formal government involvement without actual risk did not suffice in the original analysis.

Common questions

Q: Why did the Department change the result? The city acquired builder's-risk insurance and amended the contract so the design-builder no longer bore loss or damage risk for city-furnished materials.

Q: Did the city retain title before the materials entered the project? Yes. The amendment said the city kept legal and equitable title from acquisition through incorporation or consumption in the project.

Q: Does this apply to every government construction contract? No. The ruling depended on the full direct-purchase and risk-allocation structure.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-entity exemption
• Fla. Admin. Code rr. 12A-1.038, 12A-1.094 — exemption certificates and public works
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 92A-053R

Original ruling text

Feb 17, 1993

RE: TAA 92A-053R
Reconsideration of TAA 92A-053
Public Works Contracts - Direct Purchases of Tangible
Personal Property by a Governmental Entity
Section 212.08(6), F.S.
Rule 12A-1.094, F.A.C.

Dear :

This is in response to your request that the Department
reconsider TAA 92A-053 dated August 6, 1992, in which it was
determined that purchases of materials required under a contract
for construction of real property (public works contract)
between the XXX (hereinafter [City]), and XXX (hereinafter
[Design/ Builder]) did not meet the requirements for the
exemption provided in s. 212.08(6), F.S. The Department's
"DETERMINATION" was stated as follows:

"It is the position of the department that the legal
incidence of sales tax on purchases of building materials
for a public works contract is directly upon a governmental
entity when: the governmental entity delegates its
authority to a contractor to make purchases of building
materials in the governmental entity's name using the
governmental entity's purchase orders and line of credit;
the purchase orders and the requests for bids state that
the governmental entity is the purchaser in whom title to
the building materials vests immediately from the selling
vendor; the governmental entity is billed directly by the
selling vendor for purchases of building materials; payment
for the building materials is made directly to the selling
vendor by the governmental entity; and the governmental
entity assumes all risks of loss or damage for the building
materials prior to installation or incorporation into the
project. Purchases by a governmental entity under theses
stated conditions are exempt from sales tax when the entity
presents a properly completed exemption certificate in

accordance with Rule 12A-1.038, F.A.C. An exemption
certificate is not required when the governmental entity's
purchase orders are preprinted with the entity's Florida
Sales Tax Consumer Certificate of Exemption number.

"As provided under Rule 12A-1.094, F.A.C., the risk of
damage or loss for building materials is a paramount
consideration in determining whether sales are made to a
governmental entity under a public works contract.
Throughout [City] contract with [Design/Builder], all risks
of loss or damage to materials, supplies, and equipment
during construction are directly born by [Design/Builder]
and subcontractors. [City] assumes no risk of loss, even
though named as an insured and a certificate holder of the
several insurance policies required by the contract.
Therefore, the sales of materials required under the
contract are not within the meaning of s. 212.08(6), F.S.,
and are not exempt as a sales to a governmental entity."

With the request for reconsideration of TAA 92A-053, [City]
furnished a copy of a certificate of insurance issued September
16, 1992, evidencing builder's risk insurance purchased by
[City] for coverage in the amount of $2,500,000 and a deductive
change order which reduces [Design/Builder's] contract by an
amount that represents a reduction of [Design/Builder's]
builders risk insurance premium. [City] further provided a copy
of an amendment to the public works contract which provides:

"Notwithstanding the transfer of City-Furnished Materials
by the CITY to the CONTRACTOR'S possession, the CITY shall
retain legal and equitable title to any and all
City-Furnished Materials. The CITY has purchased and shall
maintain Builders Risk Insurance sufficient to protect
against any loss of or damage to the City-Furnished
Materials. Such insurance shall cover the full value of
any City-Furnished Materials not yet incorporated into the
Project during the period between the time the CITY first
takes title to any of such City-Furnished Materials and the
time when the last of such City-Furnished Materials is
incorporated into the Project or consumed in the process of
completing the Project."

DETERMINATION

Based on the fact that [City] has purchased builder's risk
insurance to cover building materials which are to be
incorporated into the public works contract; that
[Design/Builder], in accordance with the deductive change order
and contract amendment, is relieved of the risk of loss or
damage to those materials; and that [Design/Builder] will reduce
the public works contract in an amount equal to the reduction in
[Design/Builder's] builder's risk insurance premium, it is
determined that sales of materials required under the contract
are within the meaning of s. 212.08(6), F.S., and are exempt as
sale to a governmental entity.

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 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 and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Sharon Gallops
Technical Assistant

SG/pb
Cont. #6103