Did a county's revised direct-purchase procedure exempt construction materials for a public facility from Florida sales tax?

Subject

Public Works Contracts

Plain-English summary

The county's direct purchases of construction materials for the public facility were exempt from Florida sales tax. The revised arrangement made the county the actual purchaser rather than treating the materials as taxable contractor purchases.

The county issued its own purchase orders carrying its exemption number, received invoices through the contractor, and paid each supplier directly. It reduced the guaranteed construction price and subcontract amounts by the full material cost and associated tax savings.

Title vested in the county on delivery to the job site. The county also paid the cost of payment and performance bonds and owner's insurance, was an additional insured, and received proceeds for damage to county-purchased materials. Those economic-risk facts were especially important under the cited rule.

What this means for you

A government project's label did not create the exemption. The Department examined the transaction's substance, including who ordered and paid, who took title, how the contract price changed, and who bore loss or received insurance benefits before incorporation into the real property.

Common questions

Q: Could the contractor purchase the materials tax-free merely as the county's agent? No. The ruling required the county's own direct-purchase structure.

Q: Who paid the vendors? The county paid them directly by county check.

Q: Who bore the economic risk? The county paid bond and insurance costs and was entitled to casualty proceeds for county-purchased materials.

Citations and references

• Fla. Stat. § 212.08(6) — government direct-purchase exemption
• Fla. Admin. Code r. 12A-1.001(9)(a) — direct sales to governmental units
• Fla. Admin. Code r. 12A-1.094(4) — public-works transaction substance and risk of loss
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-040

Original ruling text

Jul 08, 1993

RE: TAA 93A-040
Sales Tax - Public Works Contracts
Section 212.08(6), F.S.
Rules 12A-1.001(9), 12A-1.094(4), F.A.C.

Dear :

This is in response to your revised request for a Technical
Assistance Advisement (TAA) dated June 9, 1993, and our
subsequent telephone conversation with your office on June 28,
1993. The initial request for a TAA was submitted in March,
1993, regarding a sales tax exemption on direct purchases of
materials, supplies, and equipment by XXX hereinafter "County")
for the construction of the XXX (hereinafter "Facility"). In
response to that request, we advised you, in our letter dated
April 30, 1993, that the construction contract between XXX
(hereinafter "Contractor") and "County" was not structured in
such a way that the "County" would be deemed to be making direct
purchases of construction materials. With your revised request,
additional documentation has been submitted supporting the
initial TAA request and you state:

"Upon thorough review and evaluation by staff, as well as by the
`County's' Attorney's Office, of the deficiencies identified in
your earlier correspondence, Section 212.08(6), F.S., and
the associated Administrative Code provisions, it is our
collective belief that the procedures to be employed in the
direct purchase of materials, equipment and supplies for this
Project warrant the issuance of a binding TAA by the Department
of Revenue.

"As you will note within the Summary of the Facility' Direct Purchase Procedure,County' will own all directly purchased
materials, equipment and supplies; County' will hold full title to all directly purchased materials, equipment and supplies;County' bears the cost for all payment [of] performance bonds
and policies of insurance and, as additional insured party, is

the sole economic beneficiary of any insurance proceeds received
due to loss, damage or other casualty, and thereupon assumes all
risk for loss, damages or other casualty to directly purchased
goods. (Your Emphasis)

"The Facility' constitutes the single largest public works project undertaken byCounty'. The economic benefits
associated with the sales tax exempt direct purchase of
equipment, materials and supplies for those items County' elects to purchase directly will flow solely toCounty'. The
sales taxes not paid by the County' on such directly purchased items will be deducted by formal change order from the Guaranteed Maximum Price for the construction of theFacility'.
Additionally, the Contractor' will thereupon deduct the sales taxes not paid for items directly purchased byCounty' from its
contracts with applicable subcontractors by formal change
order."

With the revised TAA request, you provided copies of a
summary of "Facility" Direct Purchase Procedure; additions to
Article IX, A, Section 4.13 of the Policy and Procedure Manual
relating to the Procurement Procedure to be employed for
"County" purchased equipment, materials and supplies; Exhibits
to the Agreement Between "County" and the "Contractor"; and a
sample purchase order.

STATUTORY AUTHORITY

Section 212.08(6), F.S., provides in pertinent part:

"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.... This exemption does not include
sales of tangible personal property made to contractors
employed either directly or as agents of any such
government or political subdivision thereof when such
tangible personal property goes into or becomes a part of
public works owned by such government or political
subdivision thereof[.]..."

REGULATORY AUTHORITY

Rule 12A-1.001(9)(a), F.A.C., provides in pertinent part:

"All sales made directly to the United States Government, a
state, or any county, municipality or political subdivision
of a state are exempt[.] ..."

Rule 12A-1.094, F.A.C., provides in pertinent part:

"(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. The Executive
Director or... designee in the responsible division will
determine whether the substance of a particular
transaction... is a sale to a governmental body... based on
all of the facts and circumstances surrounding the
transaction as a whole. The Executive Director or...
designee... will give special consideration to factors
which govern the status of the tangible personal property
prior to its affixation to real property. 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 a bond or obtaining insurance covering damage or
loss; or enjoys the economic benefit of the proceeds of
such bond or insurance...."

DETERMINATION

Pursuant to section 212.08(6), F.S, sales tax does not
apply to sales of tangible personal property, including
construction materials for use in "County's" "Facility", where
payment for such purchases will be made directly to the

vendor(s) by the "County".

It is the Department of Revenue's position that the
"County" has structured the contract in such a way that the
"County" will make direct purchases of construction materials to
be incorporated in the "Facility" based on the following:

1. A Purchase Order Requisition Form in a form acceptable to
   "County" shall be prepared by subcontractors and submitted
   through "Contractor" to "County" prior to ordering "County"
   purchased materials. The requisition form is provided directly
   to "County" and provides the name, address, telephone number,
   and contact person for the materials supplier; a list of
   required materials, the quantity needed, the price and sales tax
   associated with the materials, and delivery dates established by
   the subcontractor.

2. The "County" will prepare and issue standard "County"
   purchase order forms to the appropriate vendors, as designated
   and shown on the subcontractor's purchase order requisition
   forms that are attached to and are a part of the "County's"
   purchase order, for the materials "County" wishes to purchase
   directly. The "County's" purchase order forms will contain the
   "County's" sales tax consumer's certificate of exemption number.

3. In conjunction with the execution of the "County's" purchase
   orders by the suppliers, subcontractors shall execute and
   deliver to the "County", through the "Contractor", deductive
   change orders reflecting the full value of all materials
   directly purchased by "County", plus all sales tax savings
   associated with the materials.

4. Title to "County" purchased materials will vest in "County"
   upon delivery of the materials to the "Facility" job site.

5. Subcontractors will be responsible for all matters relating
   to the receipt of materials purchased by "County" including
   verifying quantities, coordinating purchases, providing and
   obtaining all warranties and guarantees required by the contract
   documents, inspection and acceptance of the goods at the time of
   delivery and shall coordinate delivery schedules, sequence of

delivery, and other arrangements normally required by
subcontractors. Subcontractors shall assure that each delivery
of material purchased by "County" is property documented and
conforms to "County's" purchase orders and will forward
suppliers' invoices to the "County" through the "Contractor" for
payment.

6. The "County" will prepare a check drawn to the supplier based
   on the verified invoices provided by subcontractors through
   "Contractor", and "County" check will be released, delivered and
   remitted directly to the suppliers for materials purchased
   directly by "County".

7. Under the terms of the agreement between "County" and
   "Contractor", the county pays the cost of payment and
   performance bonds and owner's insurance, including builders'
   risk, as a reimbursable expense to "Contractor". The "County"
   is an additional named insured on "Contractor's" builder's risk
   insurance and, in the event of damage or destruction to "County"
   purchased materials, "County" will receive all proceeds derived
   from all valid claims against insurers or others to pay for
   repair or reconstruction as a result of damage or destruction.

Due to these facts, direct purchases of construction
materials by "County" that will be incorporated into "Facility"
are exempt from sales tax.

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
Con. #9200