Could a governmental owner buy public-works building materials directly and tax-free while using a construction manager?

Subject

Sales Tax Exempt Purchases of Building Materials

Plain-English summary

The governmental owner could buy materials directly from third-party suppliers without sales tax. It had to issue its own purchase orders and exemption certificate, buy and receive the materials before incorporation, take title and possession, bear risk of loss and insurance costs, reduce contractor bond and insurance amounts, and pay vendors directly from its own checking account.

Purchases made by contractors or subcontractors remained taxable because they were the consumers of materials incorporated into public works.

What this means for you

The exemption followed the substance of the purchase, not a paper designation. The owner had to exercise the economic rights and responsibilities of the purchaser.

Common questions

Could the owner buy from its construction contractor tax-free? The approved procedure was limited to third-party suppliers.

Who bore risk before installation? The owner.

Who paid the vendor? The owner directly.

Citations and references

• Fla. Stat. §§ 212.08(6) and 213.22
• Fla. Admin. Code r. 12A-1.001(9)(a)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-029

Original ruling text

May 03, 1994

Re: Technical Assistance Advisement 94A-029
Sales and Use Tax; Sales Tax Exempt Purchases of Building
Materials
Section: 212.08(6), F.S.
Rule: 12A-1.001, F.A.C.

Dear :

This is in response to your letters of February 25, 1994,
April 5, April 11 and April 19, 1994, wherein you requested a
technical assistance advisement concerning direct purchases of
materials, supplies, and equipment by the XXXXX. In your April
5, 1994 letter, you confirm that it is the XXXXX intention to
use the direct purchase procedure only to purchase supplies,
goods, equipment, appliances and other materials from third
party suppliers and not from contractors or subcontractors
providing construction services for the project. Your request
is on behalf of the XXXX (hereafter "Owner"), for use in the
XXXX (hereafter "Facility"). The Agreement referred to below is
between Owner and XXXXX (hereafter "Contractor") for
construction management.

According to your letter, the Facility falls under the
definition of "Public Works" pursuant to Florida Administrative
Code Sec. 12A-1.094(1)(b) and is a project of great public
importance to the Owner and XXXXX (hereafter "County"). You
further state that the Facility is the cornerstone of a public
infrastructure program to revitalize the Purchaser and the
southeastern area of downtown XXXXX (hereafter "City").

In your letter of April 11, 1994, you confirm that Owner's
Florida State Sales Tax Exemption Number is XXXXX.

DISCUSSION OF FACTS

You provided, with your letter of April 19, 1994, among

other documents, a dated and executed copy of the contract which
is made between the Owner and the Contractor. This contract
contains the planning, design, permitting, construction and code
inspection for Owner's development work at the Facility. The
Owner's construction budget is XXXXX per Article 1.4 of the
Agreement, for work identified in the site plan attached hereto
as Exhibit "B". The Contractor oversees certain aspects of the
project.

The cost of the project, as identified in Article 9.1,
shall mean costs necessarily incurred in the project during the
construction phase for construction services and paid by the
contractor which are not included in the construction and design
phase fee. The Owner agrees to pay the Contractor for the cost
of the project as defined in Article 9.

Article 9.2(2) provides for the material cost of all
materials, supplies and equipment incorporated in the project,
including costs of transportation and storage, except for the
Owner's right to purchase directly as presented in Article 17.7.

Article 17.7 provides for the Owner to have the right, to
directly purchase certain materials, supplies, goods and
personalty to be used in the construction of the project from
vendors. It is the intention of the Owner that such direct
purchases shall be exempt from imposition and collection of
sales tax pursuant to Section 212.08(6), F.S. and Rule 12A1.001(9)(a), F.A.C.

The Contractor and Owner mutually agree and covenant to
amend this Agreement by Addendum #2 to include provisions
relating to such direct purchases by Owner. Addendum #2,
between the contractual parties, is or is proposed to be amended
to provide that Paragraph 3 of the Addendum provides for Owner
and Contractor to agree upon certain goods, and materials and
services which shall be purchased pursuant to the terms of such
Addendum so as to minimize the sales tax consequences of such
purchases. Specifically, that items or services to be purchased
would be subject to sales tax if not purchased in accordance
with the terms of the Addendum, and the items or services to be
purchased may be clearly and precisely identified in order to

facilitate the ordering of such items or services.

As provided in your letter of April 19, 1994, services as
presented in the preceding paragraph relate only to the
installation or servicing of items of tangible personal property
which remain tangible personal property. The Owner does not
intend to directly purchase any construction related services
through the purchasing procedure set forth in Addendum #2.

Further, paragraph 4 of the Addendum provides for the
Contractor to supply the Owner with a complete and full
description sufficient to identify the item purchased including,
where applicable, the manufacturer or brand, model or
specification number, quantity, price, vendor, the necessity of
such item in connection with the construction of the project,
and any other information which may be required by the Owner.

Your letter of February 25, 1994, restates in pertinent
part, the following provisions of the Addendum:

"As you will note from paragraph 5 of the Addendum, the
[Owner] will issue purchase orders in its name for each
item purchased. Each purchase order will define the
[Owner] as the purchaser and the ultimate consumer of the
items or service and will include the [Owner's] State of
Florida sale tax exemption number.

"Paragraph 6 of the Addendum provides that the title to the
materials purchased will vest in the [Owner] upon delivery
to the job site. The risk of loss and theft of all
materials purchased will be upon the [Owner]. Paragraph 7
of the Addendum provides that the [Owner] will obtain
insurance to protect it from the risk of loss. In
addition, the Builder's Risk Policy will designate the
[Owner] as the insured.

"We believe that the procedures outlined in the enclosed
documents for the purchase of materials, equipment and
supplies to the [Facility] qualify for the tax exempt
status and request that you issue a binding TAA on this
request...."

Paragraph 9 of the Addendum provides that in order to
arrange for payment to the seller, the Contractor shall supply
Owner a requisition for payment. Upon receipt of the
appropriate documentation, Owner shall prepare a check from its
respective checking account directly to the seller based upon
the requisition data provided.

In you letter dated April 5, 1994, your confirm that it is
the Owner's intention to use the direct purchase procedure only
to purchase supplies, goods, equipment, appliances and other
materials from third party suppliers and not from contractors or
subcontractors providing construction services for the project.

DISCUSSION OF LAW

STATUTORY AUTHORITY:

The following passages quoted from the Florida Statutes
(F.S.) are particularly germane to the matter under
consideration:

Section 212.08, F.S.
"(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....

REGULATORY AUTHORITY:

The following provisions of the Florida Administrative Code
(F.A.C.), Rule 12A-1.001(9), are pertinent to the transactions
described in your letter:

"(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.... 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.)

CONCLUSION OF LAW

Based on your letters, contract documentation and our
telephone conversations, the Owner qualifies to purchase
supplies, goods, equipment, appliances and other materials
directly from third party suppliers tax exempt. This tax
exemption is not provided to purchases made by contractors or
subcontractors providing construction services for the project.
The Owner must comply with the following provisions in order to
maintain this sales tax exemption for such material purchases:

1. The Owner must issue its own purchase orders directly
   to the third party vendor, which contain or are
   accompanied by the Owner's exemption certificate.

2. All materials purchased under the exemption must be
sold directly to the Owner.

3. The Owner must take title and possession of all
   materials purchased tax exempt from the seller before
   they are incorporated into real property.

4. The Owner must assume all risk of loss on all
   materials purchased tax exempt.

5. The Owner must bear cost of all insurance on all
   materials purchased tax exempt.

6. The Contractors' bond and insurance provisions must be
   reduced to reflect the Owner's cost of direct
   materials purchased tax exempt.

7. The Owner must make direct payment to the third party
   vendor for all such purchases from the Owner's
   checking account.

If the above provisions are met, the purchase of supplies,
goods, equipment, appliances and other materials from third
party suppliers by Owner is exempt from tax provided, the Owner
supplies the vendor with its certificate of exemption at the
time of purchase.

However, as provided in the above quoted rules, 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. In
this instance, the Contractor should include the sales tax
amounts in his bid for the contract. (See Housing By Vogue,
Inc./Mobile Home Industry v. DOR, No. 61,146, 1982).

This response constitutes a Technical Assistance Advisement
under Section 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 Section 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 Section 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,

Aleda J. Marshall
Technical Assistant

AJM/pb
Control #13980