Could a supply house buy school-construction materials for resale tax-free and sell them directly to a Florida school board exempt?

Subject

Exempt Entity

Plain-English summary

The supply house could buy the construction materials for resale without tax and sell them directly to the school board exempt, provided the required certificates and direct-payment conditions were satisfied. The supply house had to give its vendors a blanket resale certificate at purchase, and the school board had to give the supply house its consumer's certificate of exemption and pay the dealer directly.

The Department did not treat the supply house as a public-works contractor or a governmental instrumentality. It designed the purchasing process used in its ordinary business and earned 2.2% of the prior month's material purchases, so it remained a separate commercial entity pursuing private ends.

That did not prevent the exemptions. The supply house purchased for resale, and its later sales were made directly to an exempt governmental entity under the separate rules for resale documentation and direct government purchases.

What this means for you

The ruling distinguished two routes that are easy to conflate. The transaction was not exempt because the supply house stood in the school board's shoes as a public-works contractor; it was exempt because the supply house documented resale purchases and then made properly documented direct sales to the school board.

Common questions

Q: Was the supply house treated as the school board's instrumentality? No.

Q: Could the supply house buy from vendors without tax? Yes, if it provided the required resale certificate at the time of purchase.

Q: Could it sell to the school board without tax? Yes, if the board paid directly and provided its consumer's certificate of exemption.

Citations and references

• Fla. Stat. § 212.08(6) — direct sales to governmental entities
• Fla. Admin. Code r. 12A-1.001(9)(a) — governmental-unit exemption and direct payment
• Fla. Admin. Code rr. 12A-1.038(1), (3), 12A-1.039 — resale and exemption certificates
• Fla. Admin. Code r. 12A-1.094 — public-works contracts
• United States v. New Mexico, 102 S. Ct. 1373 (1982)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-026

Original ruling text

May 05, 1993

RE: TAA 93A-026
Sale of Tangible Personal Property to Exempt Entity
Consumer's Certificate of Exemption
s. 212.08(6), F.S.
Rules 12A-1.001(9)(a), and 12A-1.038(1), (3), F.A.C.

Dear :

This is in response to your letters of September 11, 1992,
and December 31, 1992, incorporated and adopted by your
subsequent letter of January 21, 1993, in which you request, on
behalf of your client, XXX (hereinafter, "Taxpayer"), the
issuance of a Technical Assistance Advisement regarding the
application of sales and use tax to construction materials and
supplies purchased by Taxpayer, acting as a supply house, for
resale to a governmental entity, XXX (hereinafter, School
Board). You further incorporate a Letter of Technical Advice
(LTA) from the Department issued to you on, or about, October
16, 1992.

In that LTA you were informed that, under Rule 12A-1.094,
F.A.C., a governmental entity and a prime contractor could
structure a contract in such a manner as to legally avoid sales
tax. In response to that LTA your subsequent letter to the
Department provides "we believe that no Florida sales or use tax
will be due on [Taxpayer's] purchases and sale of materials."

Upon review of all documents submitted to the Department,
(i.e., the contract for purchase of construction materials and
supplies from Taxpayer, the Special Conditions to Material
Purchase/Payment, and Taxpayer's Form 1 to Form 4), representing
the proposed transaction, and evincing the relation between
Taxpayer and School Board, and their respective status to the
aforementioned transaction, the Department has concluded that
Rule 12A-1.094, F.A.C., is not the correct provision under which
Taxpayer could be granted an exemption from tax liability.

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 of the Florida Statutes.

FACTS

As ascertained from your letters, the documents submitted
for review (the contract for purchase of construction materials
and supplies from Taxpayer, the Special Conditions to Material
Purchase/Payment, and Taxpayer's Form 1 to Form 4), and our
conversations, the following conclusions of fact have been
reached.

Taxpayer will purchase for, and sell to, School Board,
construction materials and supplies for the construction of a
school building. The parties in this proposed transaction are:

Taxpayer - the supply house through which contractors and
subcontractors will place all orders for any construction
materials and supplies to be used in the construction of
the school building.

School Board - the owner of the construction site which
will enter into the proposed contract with Taxpayer to
provide all construction materials and supplies as ordered
by the contractors or subcontractors.

Contractor or General Contractor - the entity that will be
doing the construction for the School Board.

Subcontractor - any contractor who takes portion of the
contract for the (general) contractor.

The procedure by which the materials and supplies are to be
purchased, as set forth by the contract, is as follows:

Taxpayer shall prepare and provide School Board, with
specifications for ordering and purchasing of materials and
supplies, which the School Board will include to become
part of the supplementary conditions of specifications of

the contract with the contractors.

The School Board will provide Taxpayer with a listing of
the construction materials and supplies for the project,
along with the project specifications.

The Contractor/Subcontractor shall complete and return to
Taxpayer and the School Board, within five days of contract
award, a Project Information Statement (Form 1) and also a
Subcontractor/Vendor Information Form (Form 2) to Taxpayer
within five working days after execution of contract with
subcontractor.

The Contractor shall also submit to Taxpayer a Material
Request Form (Form 3). Taxpayer will then issue a purchase
order to the material supplier within three working days
from receipt of request.

The Contractor/Subcontractor shall complete and submit to
Taxpayer a Materials Validation Statement (Form 4) by no
later than the 8th day of the month.

Taxpayer shall provide detailed transaction reports and
forward them to the Contractor and the School Board no
later than the 10th day of the month.

The School Board shall pay Taxpayer for construction
materials purchased by Taxpayer and resold to the School
Board by the 12th day of the month.

Other important factors in these transactions as set forth
in the contract are the following:

Taxpayer is to be paid by the School Board 2.2 percent of
the total amount of materials purchased through Taxpayer in
the prior month.

Taxpayer shall maintain insurance and the School Board
shall carry products liability insurance and insure the
supplies and materials. Moreover, the Contractor shall
arrange for the insurance to be issued with the School

Board listed as the insured and the Contractor as an
additional insured. The School Board shall be billed and
liable for the insurance.

The Contractor is obligated to furnish all materials and
supplies required to complete the project except materials
provided by the School Board; and remains responsible for
coordination, inventory, protection, storage, scheduling,
receiving, checking, shipping tickets and invoices,
installation, cleaning, all applicable warranties, and that
all materials purchased meet the requirements of the
contract.

Taxpayer shall purchase materials as directed by the School
Board, and shall be responsible for the delivery of these
materials and supplies to the appropriate construction
site.

Taxpayer shall obtain title to and possession of these
materials and supplies from the vendors, and will transfer
title to and possession of to the School Board upon
delivery of those materials and supplies to the
construction site.

It is alleged by Taxpayer that the benefits to accrue
pursuant to this contract arrangement will be: 1) the better
control of construction supplies and materials and their costs;
and, 2) the prompt payment of charges for these supplies and
materials, and the resulting discounts.

RELEVANT PROVISIONS

The following provisions of the Florida Statutes (F.S.) and
the Florida Administrative Code (F.A.C.), are pertinent to the
issues presented by the aforementioned transaction.

Section 212.08, F.S., provides:

"(6) EXEMPTIONS; POLITICAL SUBDIVISIONS. - 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... "
In light of this statute, the Department has promulgated
Rule 12A-1.001, F.A.C., which provides, in pertinent part, as
follows:

"(9) GOVERNMENTAL UNITS.
"(a) All sales made directly to the United States
Government, a state, or any county, municipality, or
political subdivision of a state are exempt,... Payment
must be made directly to the dealer by the governmental
entity of a state, or county, municipality, or political
subdivision of a state.... Such governmental entities
desiring to qualify for the exemption, must obtain from the
Department of Revenue a consumer's certificate of
exemption..."

Rule 12A-1.038, F.A.C., provides, in pertinent part, as
follows:

"(1) It is the specific legislative intent that every
sale,... is taxable under Chapter 212, F.S., unless such
sale, admission, use, storage, consumption or rental is
specifically exempt. The exempt status of the transaction
must be established by the dealer. Unless the dealer shall
have taken from the purchaser a certificate to the effect
that the property or service was purchased for resale and
bearing the name and address of the purchaser, the
effective date of the certificate and the number of his
dealer's certificate of registration, or a certificate
bearing the number of his consumer's exemption certificate,
and the effective date of the certificate, the sale shall
be deemed to be a taxable sale at retail..."
"(3) A resale certificate is required from every purchaser
who purchases tangible personal property or service for
resale,... Otherwise, the dealer will be required to
collect and remit the tax to the Department of Revenue... "

In light of s. 212.08(6), F.S., the Department has
promulgated Rule 12A-1.094, F.A.C., relating to public works

contracts, which provides, in part, as follows:

"(1) This rule shall govern the taxability of transactions
in which contractors manufacture or purchase supplies and
materials for use in public works,... In applying this
rule, the following definitions are used.
"(a) `Contractor' is one who is engaged in the repair,
alteration, improvement or construction of real
property....
"(2)(a) The purchase or manufacture of supplies or
materials by the contractor for incorporation into a public
works project is taxable to the contractor since he is the
ultimate consumer....
"(3)(a) The purchase or manufacture of tangible personal
property for resale to a governmental body is exempt from
tax provided this exemption shall not include sales of
tangible personal property made to contractors employed
either directly or as agents of the United States
Government, a state, or any county, municipality or
political subdivision of a state when such tangible
personal property goes into or becomes a part of public
works financed or owned by such governmental bodies or
political subdivisions.
"(b) With regard to contracts with government entities, the
exemption in subsection (3)(a) is appropriate only where
the levy would otherwise fall on the government itself, or
on an agency or instrumentality so closely connected with
that government that the two cannot realistically be viewed
as separate entities, at least insofar as the activity
being taxed is concerned. A finding of exempt status,
however, requires something more than the implication of
traditional agency notions, so that to resist a state's
taxing power, a private taxpayer must actually stand in the
government's shoes as a principal, rather than as a
contractor employed either directly or as the government's
agent. A contractor will not be deemed to actually stand
in the government's shoes if the contractor has a
substantial independent role in making purchases.
Accordingly, the fact that title passes directly to the
government and payment is made with government funds, in
and of itself, cannot characterize the transaction as an

exempt purchase if the purchasing entity, in its role as a
purchaser, is sufficiently distinct from the government.
"(4) ... 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 the transaction is cast.... Such factors
include provisions which govern bidding, indemnification,
inspection, acceptance, delivery, payment, storage, and
assumption of the risk of damage or loss for the tangible
personal property prior to its affixation to real property.
Assumption of the risk of damage or loss is a paramount
consideration. A party may be deemed to have assumed the
risk of loss if the party either: bears the economic burden
of posting bond or obtaining insurance covering damage or
loss; or enjoys the economic benefit of the proceeds of
such bond or insurance. Other factors that may be
considered... include whether: the contractor is authorized
to make purchases in its own name; the contractor is
jointly or severally liable to the vendor for payment;
purchases are not subject to prior approval by the
government; vendors are not informed that the government is
the only party with an independent interest in the
purchase; and whether the contractors are formally
denominated as purchasing agents for the government...."

DISCUSSION

Florida sales and use tax is an excise tax, levied in the
chain of manufacture and distribution, imposed for exercising
the privilege of selling, using, consuming or renting items of
tangible personal property or services that are taxable in this
state. When tangible personal property is sold at retail, tax
is due and payable based on the sales price and is collectible
by the dealer from the purchaser; and when such items are not
purchased for sale but are used, consumed, distributed or stored
for use or consumption in this state, tax is due and payable
based on the cost price by such user or consumer. However,
since the sale or purchase of real property is not subject to
Florida sales or use tax, tangible personal property is taxed at
the last transaction prior to being converted into real

property.

Tax liability as it relates to public works contracts, and
the extent to which a state may impose taxes on contractors that
conduct business with the government was addressed in United
States v. New Mexico, 102 S.Ct. 1373 (1982). The New Mexico
court held that tax immunity was appropriate only when the levy
of the tax falls directly on the United States itself, or on an
agency or instrumentality so closely connected to the government
that the two could not realistically be viewed as separate
entities. More specifically, the court emphasized that it is
irrelevant that the property involved will be used for the
government's benefit, if the contractor remains a distinct
entity pursuing "private ends," and the contractor's actions
remain "commercial activities carried on for profit."

In light of the standard employed by the New Mexico court,
and consistent with Rule 12A-1.094, F.A.C., upon review of the
documents submitted the Department finds that the contract
between School Board and Taxpayer is not a public works
contract. The Department concludes that Taxpayer is not "so
closely connected to the government, that it could not be viewed
as a separate entity," or as a "contractor" as defined in Rule
12A-1.094(1)(a), F.A.C., supra, for the purposes of sales tax
liability. To reach this conclusion the Department specifically
notes the fact that Taxpayer set forth the process for the
purchase of the construction materials and supplies to be part
of this contract; that process is employed by Taxpayer for his
regular course of business. Furthermore, Taxpayer is paid by the
School Board a commission of 2.2 percent of the total items
invoiced.

Hence, under the test employed in New Mexico, it is clear
that with regard to the contract between Taxpayer and the School
Board, Taxpayer is not an instrumentality of the government;
instead, Taxpayer is pursuing private ends through commercial
activities carried on for profit. Therefore, under Rule
12A-1.094, F.A.C., Taxpayer could not be exempted from sales tax
liability of the construction materials and supplies as a public
works contractor, since he is not an instrumentality of the
government (New Mexico), and neither is he a contractor (Rule

12A-1.094, F.A.C.).

However, we are also guided by the plain language of s.
212.08(6), F.S., and Rule 12A-1.001(9)(a), F.A.C., supra, which
provides that sales made directly to the United States
Government, a state, or any county, municipality, or political
subdivision of a state are exempt, when payment is made directly
to the dealer by the governmental entity. Accordingly, when
Taxpayer, as a dealer, sells construction materials and supplies
directly to School Board, such sales are exempt from sales tax
under s. 212.08(6), F.S., and Rule 12A-1.001, F.A.C.

With regard to Taxpayer's purchase of the construction
materials and supplies, Rule 12A-1.038(1), F.A.C., further
provides that it is the specific legislative intent that each
and every sale is taxable under Chapter 212 of the Florida
Statutes, unless such sale is specifically exempt. Therefore,
if the dealer does not take from the purchaser, at the time of
sale, a certificate to the effect that the property or service
was purchased for resale, such purchase shall be taxable.

The application of Rule 12A-1.038, F.A.C., to Taxpayer's
case, provides that Taxpayer may purchase the construction
supplies and materials for resale to the School Board, exempt
from sales tax liability, insofar as Taxpayer complies with the
requirements of Rule 12A-1.038, F.A.C.

Rule 12A-1.038(3), F.A.C., provides that a completed resale
certificate is required from every purchaser who purchases
tangible personal property for resale, subject to the provisions
of subsection 12A-1.038(1), F.A.C.; otherwise the selling dealer
will be required to collect and remit the tax to the Department.
Taxpayer is required to obtain from School Board its blanket
exemption certificate as provided in Rule 12A-1.039, F.A.C., in
order to make sales to School Board tax exempt.

The Florida Department of Revenue does not supply dealers
with preprinted forms which meet the standards of Rule
12A-1.038, F.A.C., and has therefore promulgated Rule 12A-1.039,
F.A.C., providing only a suggested form for a blanket resale and
exemption certificate, that meets the minimum requirements of

Rule 12A-1.038, F.A.C. (A copy of Rules 12A-1.038 and 12A-1.039
is enclosed for your review).

Please be advised that a blanket resale certificate does
not expire, as this is not a document issued by the Department.
It may continue to be used until the issuer, in this case
Taxpayer, revokes it by written notice to the supplier, or until
such time as the Florida Department of Revenue cancels
Taxpayer's tax registration, should such an event occur.

Therefore, the sale of construction materials and supplies
by Taxpayer to School Board is exempt from sales tax liability
under 212.08(6), F.S. and Rule 12A-1.001(9), F.A.C., since it is
sold to a governmental entity, provided School Board extends to
Taxpayer its consumer certificate of exemption, in accordance
with Rule 12A-1.038 and 12A-1.039, F.A.C. Furthermore, the
purchase of these construction supplies and materials by
Taxpayer for resale to School Board is also exempt from sales
tax liability, provided Taxpayer extends its blanket resale
certificate to its vendors at the time of purchase, in
accordance with Rules 12A-1.038 and 12A-1.039, F.A.C.

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
based 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,

Nydia Men‚ndez
Technical Assistant

NM/pb
Enclosure
Con. #6740