Could a charitable organization buy building materials tax-free for a medical facility while its contractor handled ordering and delivery?

Subject

Real Property Contract/Tax Exempt Entity

Plain-English summary

The charitable organization could buy the covered building materials without Florida sales tax because it—not the contractor—was the direct purchaser and ultimate consumer. The organization executed purchase orders, took title upon job-site delivery, carried risk of loss and liability insurance before incorporation, received vendor invoices, and paid vendors directly from its own funds.

The contractor acted as purchasing agent and handled ordering, inspection, storage, and coordination. A change order reduced the construction price by the material cost and avoided tax amount so the contractor did not retain the sales-tax savings.

The organization also needed to give vendors a properly completed exemption certificate at purchase or place the required exemption information in the purchase orders and bid requests. The submitted purchase-order form did not yet contain all recommended information.

What this means for you

An exempt project owner could not simply let a contractor buy materials and claim the owner's status. The transaction had to show actual direct purchase, title, risk, invoicing, payment, and exemption documentation by the charity.

Common questions

Q: Could the contractor prepare orders and manage delivery? Yes, as the charity's agent, while the charity executed the orders and remained the purchaser.

Q: Who paid the vendors? The exempt organization paid them directly from its own funds.

Q: Was the exemption certificate still required? Yes, unless the necessary exemption information was properly incorporated into the purchase documents.

Citations and references

• Fla. Stat. § 212.08(7)(o) — charitable purchases
• Fla. Admin. Code rr. 12A-1.001, 12A-1.038, 12A-1.039 — exemptions and certificates
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-002

Original ruling text

Title:

Real Property Contract/Tax Exempt Entity

Jan 05, 1993

RE: TAA 93A-002
Sales Tax
Real Property Improvement Contracts with Tax Exempt
Organizations
Section 212.08(7)(o), F.S.
Rules 12A-1.001, 12A-1.038, and 12A-1.039, F.A.C.

Dear :

This is in response to your letter of November 24, 1992, in
which you request a Technical Assistance Advisement (TAA), on
behalf of your client, the XXX (hereinafter "Exempt
Organization"), on the application of sales and use tax to
building materials and supplies when such materials and supplies
will be used to fulfill a real property improvement contract
with a tax exempt organization.

FACTS PRESENTED

"`Exempt Organization'... is a charitable organization that has
qualified for exemption pursuant to Section 501(c)(3) of the
Internal Revenue Code of 1986.... The Exempt Organization has
been issued a certificate of tax exemption by the Florida
Department of Revenue.

"The Exempt Organization will enter into a contract with a
general contractor (hereinafter the Contractor') for the construction of a sixty bed medical/surgical facility (hereinafter theFacility') which will be used by the Exempt
Organization in furtherance of its charitable purposes. A
complete copy of the contract is attached as Schedule 2' (hereinafter theConstruction Contract').

"Section 15 of the Supplementary Conditions to the Construction

Contract, attached as Schedule 3' contains a sales tax savings provision. Section 15.1 sets out the details of aPurchasing
And Agency Agreement' between the Exempt Organization as
principal and the Contractor as agent (the `Agency Agreement').
Under the terms of the Agency Agreement, the Contractor agrees
to serve as the Exempt Organization's purchasing agent for
materials and supplies that will be necessary for construction
of the Facility.

"Pursuant to Section 15.1.5 of the Agency Agreement, the Agency
Agreement only applies to the purchase of materials in excess of
$1,000. Sections 15.1.6, 15.1.7 and 15.1.8 of the Agency
Agreement deal with administrative details in regard to the
operation and procedures of the Agency Agreement. Section 15.2
of the Agency Agreement details the methods in which the
materials and supplies are purchased by the Exempt Organization
so that the Exempt Organization is the ultimate consumer of the
materials and supplies purchased pursuant to the Agency
Agreement. The Agency Agreement is structured this way in order
to enable the Exempt Organization to issue its certificate of
tax exemption to the suppliers for the purchase of such
materials and supplies.

"Section 15.2.1.1 of the Agency Agreement provides that all
purchase[s] of materials pursuant to the Agency Agreement will
be made pursuant to a purchase order form which indicates the
Exempt Organization as the ultimate consumer of the materials
being purchased. The Exempt Organization will provide the
Contractor with purchase order forms which are to be prepared by
the Contractor, as the Exempt Organization's Agent, and
submitted to the Exempt Organization for execution as the
purchaser and ultimate consumer of such materials. A sample
purchase order form is attached as Schedule `4'. The purchase
order form clearly indicates that the purchaser is the Exempt
Organization. The purchase order form further indicates the
Exempt Organization's Certificate of Tax Exemption Number. The
Exempt Organization's representative will review and execute the
purchase order forms and deliver them to the Contractor, who
shall in turn submit the purchase order to the vendor of the
materials being purchased.

"Section 15.2.1.2 of the Purchasing And Agency Agreement
provides that each supplier shall submit its bill for such
materials to the Contractor for approval. When the Contractor
has approved payment of the invoice for the materials delivered
pursuant to the purchase order, the Contractor shall submit the
invoice directly to the Exempt Organization for payment. The
Exempt Organization shall then promptly process such payment by
issuing a check from its own funds for the amount of the invoice
payable directly to the supplier. The Exempt Organization will
then deliver the check directly to the supplier.

"Section 15.2.1.3 of the Agency Agreement provides for a `Sales
Tax Savings Change Order' to be processed for each invoice from
suppliers paid by the Exempt Organization pursuant to the Agency
Agreement. The Sales Tax Savings Change Order provides for a
reduction of the contract price by an amount determined by the
following formula:

"I x (1+R)
"I = invoice cost including all discounts and not including any
late penalties unless late penalties are the fault of the
contractor.
"R = applicable sales tax rate

"The Contractor and Exempt Organization will sign the Sales Tax
Savings Change Order and the contract price will be reduced by
said amount. The intent of this provision is to cause the
contract price to be reduced by the amount paid by the Exempt
Organization for all materials purchased pursuant to the Agency
Agreement plus the amount of State of Florida sales taxes that
would have been paid for such materials had the Contractor, or
any other non-tax exempt entity, been the ultimate consumer of
such materials. This provision further provides that all
savings of State of Florida sales taxes as a result of such
Sales Tax Savings Change Order shall accrue solely to the
benefit of the Exempt Organization, and that the Contractor
shall not benefit whatsoever from any savings as a result of any
Sales Tax Savings Change Order.

"Section 15.2.1.5 provides that the duties of the Contractor, as
agent for the Exempt Organization, include the ordering,

inspecting, accepting delivery, storing, handling, distribution,
coordination and quality control for the materials purchased
under the Agency Agreement. However, this paragraph clearly
provides that title to all such materials purchased under the
Agency Agreement shall be vested in the Exempt Organization as
the ultimate consumer, and that the Exempt Organization bears
the risk of loss and theft on all such materials until such time
as the materials are physically incorporated into the
construction project, at which time the Builders Risk Insurance
Policy carried by the Contractor under the terms of the
Construction Contract shall cover the risk of loss in regard to
such materials.

"Section 15.1.9 of the Agency Agreement provides that the
payment for materials purchased under the Agency Agreement shall
not require the withholding of any retention for the materials.
In other words, the Exempt Organization shall be responsible for
the payment of the full amount of the invoice for such materials
and shall not be entitled to retain the standard 10% amount of
the total payment due to Contractor as it is otherwise
customary. This is further evidence that the Exempt
Organization bears the risk of loss in regard to such materials.

"II. RULING REQUESTED

"We request a ruling from you as to whether the Exempt
Organization is the ultimate consumer of materials it purchases
under the terms of the Agency Agreement so that the Exempt
Organization would be entitled to present its Certificate of Tax
Exemption to the suppliers of such materials purchased under the
Agency Agreement so that State of Florida sales taxes would not
be paid on materials purchased pursuant to the Agency Agreement.

"We propose that the Exempt Organization is the ultimate
consumer of such materials, and as such would be eligible to
present its Certificate of Tax Exemption to the suppliers of
materials purchased under the Agency Agreement so that the
Exempt Organization would not be required to pay any State of
Florida sales tax, and so that further, neither the Contractor,
its sub-contractors or any of the material suppliers will be
required to either pay or collect any State of Florida sales tax

for such materials.

"III. ANALYSIS
"We would propose that the Exempt Organization is the ultimate
consumer of such materials purchased under the Agency Agreement
as a result of the procedure set out therein. Specifically, the
Exempt Organization signs and issues the purchase order and
makes payment, with its own funds, to the supplier. In
addition, the Exempt Organization maintains the risk of loss on
the purchase of the materials prior to it (sic) becoming
incorporated into the Facility. Finally, there is no retention
of any payments made by the Exempt Organization for the purchase
of such materials. Since the Exempt Organization will be making
full payment to the suppliers, thereby reducing the amount
retained for final payment to the Contractor, the Exempt
Organization is relinquishing the customary right to retain 10%
of the total contract amount pending final inspection of the
Facility. These provisions provide conclusive evidence that the
Exempt Organization and not the Contractor, bears the risk of
loss in regard to materials purchased pursuant to the Agency
Agreement.

"We would further propose that Florida Administrative Code Rule
12A-1.051(7) is not applicable in this case because this
particular rule only applies to tangible personal property
purchased by contractors to be incorporated into jobs for
charitable institutions. In this case, the Exempt Organization,
and not the Contractor, is clearly the purchaser of the
materials, and accordingly, such purchases should not be
taxable...."

APPLICABLE STATUTE

Section 212.08(7)(o), F.S., provides in pertinent part:

"1. There are exempt from the tax imposed by this part
transactions involving:...
"b. Sales or leases to nonprofit religious, nonprofit
charitable, nonprofit scientific, or nonprofit educational
institutions when used in carrying on their customary
nonprofit religious, nonprofit charitable, nonprofit

scientific, or nonprofit educational activities, including
church cemeteries;"

APPLICABLE RULES

A current edition of Rule 12A-1.001, F.A.C., Specific
Exemptions, Rule 12A-1.038, F.A.C., Resale and Exemption
Certificates, and Rule 12A-1.039, F.A.C., Suggested Forms, are
enclosed for your information and convenience. Please use the
enclosed copies of the rules to reference the rule text.

DETERMINATION

Pursuant to section 212.08(7)(o), F.S., and Rule
12A-1.001(3)(a), F.A.C., sales tax does not apply to the
purchase of tangible personal property, including building
materials, where payment is made directly to the vendor by the
tax exempt entity and such purchases will be used to carry out
the "Exempt Organization's" customary nonprofit activities.
Further, the "Exempt Organization" is required by Rule
12A-1.038(7), 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. It is
recommended the information needed for a properly completed
exemption certificate be incorporated into the purchase orders
and the request for bids. A review of the copies of proposed
purchase orders submitted with the TAA request indicates that
the recommended information is not incorporated into the form.
If such information is not incorporated into the forms, the
"Exempt Organization" will be required to provide the vendor
with an exemption certificate. A suggested format for an
exemption certificate is provided in Rule 12A-1.039, F.A.C.

It is the Department of Revenue's position that the "Exempt
Organization" has structured the contract in such a manner that
the "Exempt Organization" will be making purchases of building
materials directly from the vendors for the following reasons:

1. The "Exempt Organization" will execute the purchase orders
   for the building materials;

2. The "Exempt Organization" acquires title to the building
materials at the point in time they are delivered to the job
site;

3. The "Exempt Organization" will acquire liability insurance
   on the building materials and assume risk of loss for the
   building materials while stored at the job site prior to the
   incorporation into the real property;

4. The "Exempt Organization" is directly invoiced for the
   building materials by the vendors; and

5. The "Exempt Organization" directly pays the vendors for the
   building materials.

Due to these facts and the fact that the "Exempt
Organization" has obtained a Consumer's Certificate of Exemption
from the Department, such direct purchases of building materials
are exempt from sales tax when the vendors have been properly
notified of the exempt status of the transaction as discussed in
the opening paragraph of this Determination section.

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 s. 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
Enclosures
Cont. #5839