Was a Medicare Part B contractor's purchase of scanning equipment, software, and a maintenance agreement exempt as a federal-government purchase?

Subject

Lease Purchase of Computer Hardware

Plain-English summary

The contractor's equipment, noncustom software, and maintenance agreement were subject to Florida sales tax. The company administered Medicare Part B under a federal contract and was reimbursed dollar for dollar, but it was still a contractor rather than a federal employee or constituent part of the United States government.

The Department therefore rejected the governmental-unit exemption for those purchases. It separately agreed that the portion attributable to customized software was the purchase of a professional service and was exempt under the cited rules.

What this means for you

Federal reimbursement did not make the contractor's own purchases government purchases. The ruling separated taxable hardware, noncustom software, and maintenance from customized software services.

Common questions

Q: Did dollar-for-dollar federal reimbursement make the purchases exempt? No.

Q: Was the Medicare contractor treated as a federal instrumentality? No. The Department treated it as an independent contractor.

Q: Was any part of the transaction exempt? Yes. The customized-software portion was treated as an exempt professional service.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-unit sales-tax exemption
• Fla. Admin. Code r. 12A-1.001(9)(a) — governmental units
• Fla. Admin. Code r. 12A-1.032(4), (5) — customized software
• Chestnut Fleet Rentals v. Department of Revenue, 559 So. 2d 264 (Fla. 1st DCA 1990)
• United States v. New Mexico, 455 U.S. 720 (1982)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-049

Original ruling text

Jul 23, 1993

Re: Technical Assistance Advisement 93(A)-049
Sales Tax - Lease Purchase of Computer Hardware; Licensing
of Computer Software; Maintenance Agreement Covering
Hardware and Software
Section 212.08(6), F.S.
Rules 12A-1.001(9)(a) and 12A-1.032(4),(5), F.A.C.
Petitioner: XXX (Herein "the Company")
Address: XXX
FEI# XXX
XXX (Herein "the Supplier")

Dear :

This response is in reply to your May 10, 1993, petition for the
Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S., concerning the captioned
matter and parties. Your petition has been carefully examined
and the Department finds it to be in compliance with the
requisite criteria set forth in Chapter 12-11, F.A.C.
Therefore, the Department is herewith granting your request for
the issuance of a TAA and the ensuing discourse shall embody
said ruling.

DISCUSSION OF FACTS

Your petition and supporting documents impart the following
significant information regarding the issues under advisement
herein:

FROM YOUR PETITION

"[The Company] has a contract with the Secretary of the
United States Department of Health and Human Services
Health Care Financing Administration [`HHS'] to carry out
the provisions of the Social Security Act by administering
Part B of the Medicare program (a copy of the contract is
attached as Exhibit A). Medicare Part B provides

supplemental benefits for aged and disabled individuals who
elect to enroll under such program and is financed by
premium payments from enrollees, together with funds
appropriated by the federal government, 42 U.S.C. 1395j.
The Secretary of HHS is authorized to enter into contracts
with entities to carry out the provisions of the Act, 42
U.S.C. 1395u. The Act sets out requirements for the
contract and, pursuant to the contract, [the Company]
assumes many of the responsibilities of the government in
administering the Medicare Program.

"[The Company] determines the coverage of services; the
reasonable charges for the services furnished; and makes
the payments determined to be due for those services
rendered to eligible individuals. (Article II, p.2,
Contract). The contract details the procedure [the
Company] must utilize in determining reasonable charges and
coverage of services. (Article V, p.5, Contract). It also
provides a hearing procedure that must be followed when
requests for payment are denied, not acted upon with
reasonable promptness, or when the amount or such payments
is in controversy. (Article XI, p.10, Contract).

"The funds for payment of benefits and expenses are
advanced by letter of credit to [the Company's] designated
commercial bank. (Article VIII, p.6, Contract). The letter
of credit specifies a maximum amount that may be withdrawn
each month and amounts which are not withdrawn do not carry
over to the next month. [The Company] is paid its `cost of
administration under the principle of neither profit nor
loss.' (Article XV, p.12, Contract).

"In order to perform the obligations under its contract,
[the Company] is acquiring optical scanning equipment from
[the Supplier] to be utilized to input claims information
into the Medicare Part B claims processing system. The
equipment will only be utilized for the Medicare program
and all costs of the equipment will be reimbursed dollar
for dollar by the federal government. (A copy of the
contract is attached as Exhibit B). A description of the
equipment to be purchased is included in the contract. The

contract provides that the seller and [the Company] will
develop a `mutually agreed upon Detailed Programming
Specification document' for the licensing of software.
[The Company] is also purchasing a maintenance agreement
from [the Supplier] covering both the equipment and
software."

FROM THE DOCUMENT STYLED "PART B CONTRACT"

Throughout the Part B Contract ("Contract") the Company is
referred to as the "Carrier." Article I, I of the Contract
defines the term "Carrier" as follows:

"The term `Carrier' means the contractor which is a party
to this contract pursuant to section 1842 of the Act, as
amended." (Emphasis Supplied)

REQUESTED ADVISEMENT

You endeavor to elicit the Department's advice regarding the
following specific question:

"Whether the purchase of equipment, software and a
maintenance agreement by [the Company] to be used in
providing Medicare benefits is subject to sales tax."

DISCUSSION OF LAW

We consult s. 212.08(6), F.S., as pertinent to the resolution of
your question regarding sales and use tax:

"(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. This exemption shall not inure to any
transaction otherwise taxable under this chapter when
payment is made by a government employee by any means,
including, but not limited to, cash, check, or credit card
when that employee is subsequently reimbursed 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, except
public works in progress or for which bonds or revenue
certificates have been validated on or before August 1,
1959...."

The operative rule construing and elucidating the forgoing
subsection of statute is Rule 12A-1.001(9), F.A.C., which states
the following:

"(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, except
machines, equipment, parts, and accessories therefor used
in the generation, transmission, or distribution of
electricity. Except for purchases by employees of the
United States Government, this exemption is not available
for any taxable transaction when payment is made by a
governmental employee by use of personal funds, including
cash, checks, or credit cards, when the employee is
subsequently reimbursed by the governmental entity. Payment
must be made directly to the dealer by the governmental
entity of a state, or any county, municipality, or
political subdivision of a state. Purchases made by Federal
employees on behalf of their agency are exempt even though
the employee is subsequently reimbursed by the agency. Such
governmental entities desiring to qualify for the exemption
must obtain from the Department of Revenue a consumer's
certificate of exemption (see Rules 12A-1.038 and
12A-1.039, F.A.C.). The exemption provided in this
subsection shall be strictly defined, limited, and applied
to each entity as provided herein. (Emphasis Supplied)

You argue that Company in carrying out its obligations under the
Contract should be viewed as a federal instrumentality in much
the same way that federal employees were deemed to be federal

instrumentalities and, thus, immune from state sales tax in the
matter of Chestnut Fleet Rentals v. Dept. of Rev., 559 So.2d 264
(Fla. 1st DCA 1990). Recall that in this case the court held
that notwithstanding the provisions of s. 212.08(6), F.S., the
Supremacy Cause of the United States Constitution, Article VI,
Clause 2, precluded imposition of sales tax on automobile
rentals to federal employees who paid for rentals with personal
funds and were later reimbursed by the government. The court
concluded that the employees were acting as instrumentalities of
the federal government when paying for the rented vehicles such
that incidence of tax would have fallen on the government.

In reaching its findings the Chestnut Court looked to the
important distinctions made between federal employees and
contractors under contract with the federal government by the
United States Supreme Court in the matter of United States v.
New Mexico, 455 U.S. 720, 102 S.Ct. 1373, 71 L.Ed.2d 580 (1982).
In that case, the court found that contractors conducting
business with the federal government under an advance funding
procedure were taxable entities independent of the United States
such that a state use tax could be applied to the contractors
without offending federal sovereignty, as the contractors were
not constituent parts of the government. The court held that the
contractors were not entitled to immunity as they could not be
regarded as instrumentalities of the government. The court
contrasted the contractors' relationship with the federal
government with that of federal employees. The court concluded
that the differences between the two were "crucial", and that
unlike federal employees, contractors could not properly be
regarded as "constituent parts" of the Federal Government.

CONCLUSIONS OF LAW

Applying the line of reasoning set out in the above case law to
the instant facts can lead to but one inescapable conclusion.
This conclusion is that the Company is clearly a contractor not
a federal employee and, thus, unlike a federal employee is not a
constituent part or instrumentality of the federal government
when acting on the federal government's behalf pursuant to the
Contract. Therefore, the purchase of equipment, software (other
than customized software) and a maintenance agreement by the

Company to be used in providing Medicare benefits is subject to
sales tax. As to the portion of the subject transaction
attributable to purchase of customized software by the Company,
we hereby concur with your analysis that said portion of the
transaction constitutes the purchase of a professional service
and is exempt from sales or use tax pursuant to the provisions
of Rule 12A-1.032(4),(5), 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
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 confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 8739