Could a Florida nonprofit hospital buy parking-garage construction materials tax-free through its contractor as purchasing agent?

Subject

Purchase of Construction Materials by a Nonprofit Hospital

Plain-English summary

The hospital's purchases of building materials and supplies under the agency agreement were tax-exempt direct purchases. The hospital executed its own purchase orders, acquired title at delivery, bore risk of loss and insurance, received the vendor invoices, paid suppliers directly from its own funds, and held a valid Florida consumer's certificate of exemption.

The exemption did not erase tax on off-site fabrication. When contractors or subcontractors turned hospital-bought materials into fabricated articles for the parking structure, they owed use tax on their fabrication cost, but could exclude the cost of direct materials the hospital had purchased and furnished.

What this means for you

Calling a contractor a purchasing agent was not enough. The Department relied on the transaction's substance: the exempt organization had to be the actual purchaser, pay the vendor, take title and risk, and provide complete exemption documentation.

Common questions

Could the contractor prepare the purchase orders? Yes, as agent, but the hospital had to review and execute them as purchaser.

Who paid suppliers? The hospital, directly from its own funds.

Were fabricated components entirely tax-free? No. The fabricator owed use tax on fabrication costs other than qualifying hospital-purchased direct materials.

Was the sample purchase order alone sufficient exemption documentation? No. The ruling said it lacked all required information unless amended, so a completed exemption certificate also had to be furnished.

Citations and references

• Fla. Stat. §§ 212.08(7)(o) and 213.22
• Fla. Admin. Code rr. 12A-1.001(3)(a), 12A-1.038, 12A-1.039, and 12A-1.051(5)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-040

Original ruling text

Jul 08, 1994

Re: Technical Assistance Advisement 94(A)-040
Sales Tax - Purchase of Construction Materials by a
Nonprofit Hospital
Petitioner: XXX (hereinafter the "Exempt Organization")
Address: XXX
Consumer's Certificate of Exemption #: XXX
Contractor: XXX

Dear :

This response is in reply to your February 1, 1994, petition for
the Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S. Your petition regards the
referenced matter and party. The Department has carefully
examined your petition and finds it to meet the criteria set
forth in Chapter 12-11, F.A.C., requisite to issuance of a TAA.
Therefore, the Department is by this response issuing the
requested TAA.

DISCUSSION OF FACTS

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

"[The Exempt Organization] is a charitable organization
that has qualified for exemption pursuant to Section
501(c)(3) of the Internal Revenue Code of 1986. A copy of
the Exempt Organization's determination letter from the
Internal Revenue Service indicating its status as a section
501(c)(3) organization is attached as Schedule `1'. 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
the general contractor (hereinafter the `Contractor') for
the construction of a one thousand thirty (1,030) space

parking structure (the Parking Structure'), adjacent to the new surgical wing presently nearing completion which will be used by physicians, staff, patients, visitors and vendors of the Exempt Organization. A complete copy of the contract is attached as Schedule2' (hereinafter the
`Construction Contract').

"The Construction Contract will provide for a fixed cost of
$5,153,718.00.

"Section 15 of the Supplementary Conditions to the
Construction Contract, attached as Schedule 3' contains a sales tax savings provisions. 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
Parking Structure.

"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 material 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. A copy of the Exempt Organization's Consumer's
Certificate of Exemption will be attached to each purchase
order. 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 such 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 Saving 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."
A careful examination has been made of the Construction
Contract including the Agreement and we find the pertinent terms
and conditions embodied therein to be consistent with the
description set forth in your petition.

A review of the sample purchase order submitted as "Schedule 4"
to your petition shows it to be a purchase order of the Exempt
Organization. Further, both the "bill to" and "ship to" address
is that of the Exempt Organization.

As well, a review of the Department's records confirms the
Exempt Organization as the valid holder of Consumer's
Certificate of Exemption Number XXX. Our records further
confirm that such Consumer's Certificate of Exemption bears an
issue (renewal) date of November 23, 1993 and an expiration date
of November 23, 1998.

Following a preliminary unissued draft of this TAA by the
undersigned, you were contacted via tele-conference call (the
week of March 28, 1994) by Mr. Buzz McKown and myself, for the
purpose of clarifying whether the subject contract would consist
in large part of work by the Contractor and subcontractor who
will be fabricating concrete and steel products for their own
use in performing the Contract of constructing the Parking
Structure. As a result of this telephone conversation, you
supplemented your original petition with your letter of April 8,
1994, which provides in part the following:

"I would like to respond to the issues that were brought up
by Buz[z] McKown and yourself in our telephone conference
last week. Mr. McKown's concern relates to whether the
Purchasing and Agency Agreement that is part of the above
referenced construction contract would apply to purchases
from contractors who fabricate tangible personal property
for incorporation into real estate, pursuant to F.A.C. s.
12A-1.051(5).

"We would submit that if the agreement with the fabricating

contractor who fabricates tangible personal property (the
`Fabricator') provides for the [Exempt Organization] to
purchase the materials to be used to fabricate the tangible
personal property, with the Fabricator then adding the
labor to fabricate the tangible personal property, then the
tax the Fabricator pays pursuant to F.A.C. Rule 12A1.051(5)(b) would not include the cost of the materials
purchased by the [Exempt Organization] and provided to the
Fabricator. We submit that the Fabricator would, under
such facts, be subject to the tax based on all of the other
costs (other than the cost of the materials purchased by
the [Exempt Organization]) set out in F.A.C. [Rule] 12A1.051(5).

"On the other hand, any tangible personal property bought
from a Fabricator where the Fabricator purchases all of the
materials, would be subject to the tax based on the full
manufactured cost, including the cost of the materials."
REQUESTED ADVISEMENT

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

You request a ruling from the Department 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 by the Exempt
Organization, the Contractor, or the subcontractors.

DISCUSSION OF LAW

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...." (Emphasis Supplied)

In construing the foregoing statutory exemption, the Department
must adhere to and be guided by the long-standing and
fundamental precept of statutory construction, established by
the Florida Supreme Court, which mandates that exemptions from
or exceptions to taxing statutes must be strictly construed
against the taxpayer. See Asphalt Pavers v. Dept. of Revenue,
584 So.2d 57 (Fla. 1st DCA 1991); Dade Cty. Taxing Auth. v.
Cedars of Lebanon, 355 So.2d 1205 (Fla. 1978), reh. den. April
5, 1978; Williams v. Jones, 326 So.2d 425 (Fla. 1975), reh. den.
March 4, 1976; Straughn v. Camp, 293 So.2d 689 (Fla. 1974);
United States Gypsum Company v. Green, 110 So.2d 409 (Fla.
1959).

APPLICABLE RULES

Rule 12A-1.001(3)(a), F.A.C., provides administrative
interpretation of the statutory exemption set out in s.
212.08(7)(o), F.S. This rule states in pertinent part the
following:

"(3) RELIGIOUS, EDUCATIONAL, CHARITABLE, VETERANS' AND
SCIENTIFIC ORGANIZATIONS, FEDERAL AND STATE CHARTERED
CREDIT UNIONS, FLORIDA RETIRED EDUCATORS ASSOCIATION AND
LOCAL CHAPTERS, AND ORGANIZATIONS PROVIDING SPECIAL
EDUCATIONAL AND SOCIAL BENEFITS TO MINORS.
"(a) A sale or lease directly to or sales or leases of
tangible personal property by churches, or a sale or lease
directly to nonprofit religious, nonprofit educational,
nonprofit charitable institutions, and veterans'
organizations, for use in the course of their customary
nonprofit religious, nonprofit educational, nonprofit
charitable activities, and for use by veterans'
organizations, including church cemeteries, are exempt from
the tax imposed by Part I, Chapter 212, F.S.... See

subparagraph (9)(d)2. of this rule for a suggested document
to be provided the dealer by an employee who has been
authorized to make purchases on behalf of a nonprofit
organization when payments are made directly to the dealer
by the exempt entity. This exemption shall not inure to any
transaction otherwise taxable when payment is made by an
exempt entity's employee by any means, including but not
limited to, cash, check, or credit card, when that employee
is subsequently reimbursed by the exempt entity. See Rules
12A-1.038 and 12A-1.039, F.A.C...." (Emphasis Supplied)

An agency's administrative interpretation of a statute by rule
has been accorded great deference by the courts, and will not be
overturned unless the agency's interpretation of the statutes is
clearly erroneous; reviewing court will defer to any
interpretation within the range of possible interpretation. See
Pershing Industries v. Department of Banking, 591 So.2d 991, 993
(Fla. 1 DCA 1991); Eager v. Florida Keys Aqueduct Authority, 580
So.2d 771 (Fla. 3 DCA 1991); Natelson v. Department of Ins., 454
So.2d 31 (Fla. 1 DCA 1984); State ex rel. Szabo Food Serv., Inc.
of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1973), reh. den. Jan.
9, 1974.

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, is
enclosed for your information and convenience. Please use the
enclosed copies of the rules to reference the rule texts in
their entirety.

Relative to contractors who manufacture or fabricate items of
tangible personal property for their own use in performing
contracts for the construction of real property improvements,
Rule 12A-1.051(5), F.A.C., provides the following:

"(5)(a) Contractors, except asphalt contractors, who
operate fabricating or manufacturing plants which make
items of tangible personal property for their own
consumption and use in the performance of contracts for the
construction or improvement of real property are subject to
tax upon the fabricated or manufactured cost of such items.

"(b) The tax is based upon the cost price of the product
manufactured, produced, compounded, or processed or
fabricated. Elements of cost price will include those costs
that are directly or indirectly attributable to the
manufacturing, producing, compounding, processing, or
fabricating of an article of tangible personal property for
one's own use and which is properly chargeable to a capital
account or to the cost of the product under generally
accepted cost accounting standards. Major elements to be
included in the manufactured cost price of tangible
personal property for one's own use include direct
materials, direct labor, and indirect manufacturing costs.
"1. Direct material costs include all materials and related
freight costs, that are physically observable as being
identified to the finished tangible personal property, that
are consumed in producing the property, or that become a
component or ingredient of the finished property. See
paragraphs (c) and (d), below, for calculating the tax on
the cost of the finished product when sales tax has or has
not been paid on direct materials.
"2. Direct labor includes labor costs that are traceable to
the production of the finished property.
"3. Indirect manufacturing costs refer to all costs other
than direct materials and direct labor that are associated
with the manufacturing process and include both variable
and fixed factory overhead. Other terms describing this
category include factory overhead,'factory burden,' and
`manufacturing overhead.' Such indirect manufacturing costs
include, but are not limited to the following,
notwithstanding the fact that sales tax has been paid:
"a. Indirect labor and all direct and indirect labor
overhead including overtime premium, vacation and holiday
pay, sick leave pay, shift differential, payroll taxes,
payments to a supplemental unemployment benefit plan, and
employee fringe benefits and supervisory personnel;
"b. Compensation of officers, to the extent it is related
to production and not administrative functions;
"c. Indirect materials and supplies;
"d. Rework labor, scrap, and spoilage;
"e. Tools and equipment, to the extent not capitalized;
"f. Depreciation;

"g. Amortization;
"h. Depletion;
"i. Insurance;
"j. Rent of equipment, facilities, or land;
"k. Interest expense attributable to production costs;
"l. Costs of administrative, service, or support
departments allocable to production;
"m. General and administrative expenses incurred in
production activities (for example, security services,
factory accounting, and data processing);
"n. Material handling and warehousing of direct materials
and goods in process;
"o. Repairs and maintenance related to production
facilities;
"p. Taxes, other than taxes based on or measured by income;
"q. Freight costs of direct materials (freight-in);
"r. Expenses incurred in implementing quality control;
"s. Utilities, including electricity, water, telephone,
etc.;
"t. Waste disposal; and/or
"u. Any other indirect costs allocable to production,
however described or classified.
"(c) Direct materials on which the tax has been paid shall
not be included when computing the tax on the cost price of
items of tangible personal property manufactured, produced,
compounded, processed, or fabricated.
"(d) Persons who manufacture, produce, compound, process,
or fabricate items of tangible personal property for resale
or for their own use or consumption may purchase direct
materials tax exempt but shall include the cost of the
direct materials when computing tax on the cost price of
the items so manufactured, produced, compounded, processed,
or fabricated for such persons' own use or consumption. If
tax has been paid on the direct materials, the method
described in paragraph (c) should be used when computing
the tax on the cost price of the items so manufactured,
produced, compounded, processed, or fabricated.
"(e) The tax is due at the moment the contractor
manufactures an item of tangible personal property for his
own use, and such tax shall be remitted to the Department
of Revenue in accordance with Rule 12A-1.056, F.A.C.

"(f) Fabrication labor incurred at the job site in the
performance of repairing, altering, improving, or
constructing real property is not subject to tax. For the
purpose of this rule, `job site' means a temporary site
where fabrication is performed for a specific job. This
site becomes a permanent manufacturing plant site when
fabrication is performed for any job other than the
specific job for which the site was selected." (Emphasis
Supplied)

CONCLUSIONS OF LAW

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
Exempt Organization 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 sample copy of the
proposed purchase order submitted with the TAA request indicates
that not all the requisite information is 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's position that the structure of the Agency
Agreement as incorporated in the Construction Contract results
in the purchases of building materials and supplies pursuant to
the Agency Agreement being recognized as direct purchases by the
Exempt Organization. The substance of the purchases of building
materials and supplies pursuant to the terms and conditions of
the Agency Agreement runs consistently with the form of the
transactions in supporting that such purchases are made directly
by the Exempt Organization. Florida courts have rejected the

notion that a taxpayer can exalt the form in which an agreement
or transaction is cast over its substance. The substance of an
agreement or transaction and not the form dictates its tax
consequences. See Dept. of Revenue v. Seaboard Coastline RR.
Co., 480 So.2d 1349, 1353 (Fla. 1st DCA 1985), reh. den. Jan.
28, 1986, 492 So.2d 1331 (Fla. 1986), rev. den. June 13, 1986;
Dept. of Revenue v. Anheuser-Busch, 527 So.2d 877, 883 (Fla. 1st
DCA 1988), reh. den. Aug. 1, 1988. Therefore, based on
substance, the instant facts withstand the strict construction
of the statutory exemption provided in s. 212.08(7)(o), F.S.,
mandated by the Florida Supreme Court Doctrine, supra. We are
compelled to this conclusion by the following facts and
circumstances as advanced and documented in your request:

1. The Exempt Organization will execute the purchase
   orders for the building materials;
2. The Exempt Organization, not the Contractor or
   subcontractors, acquires title to the building
   materials and supplies at the point of delivery from
   the supplier;
3. The Exempt Organization, not the Contractor or
   subcontractors, acquires liability insurance on the
   building materials and assumes risk of loss and theft
   for the building materials before their incorporation
   into realty;
4. The Exempt Organization is directly invoiced for the
   building materials by the vendors;
5. The Exempt Organization directly pays the vendors for
   the building materials; and
6. The Exempt Organization is the holder of a valid
   Consumer's Certificate of Exemption issued by this
   Department.

Notwithstanding the fact that the materials are purchased
directly by the Exempt Organization, where the Contractor or
subcontractors then fabricate such materials into other articles
of tangible personal property for incorporation into the Parking
Structure, the Contractor and subcontractors remain subject to
the provisions of Rule 12A-1.051(5), F.A.C., above. Under said
rule provision, the Contractor and subcontractors, not the
Exempt Organization, are the ultimate consumers of the articles

of tangible personal property they manufacture or fabricate to
perform the contract. As such, the Contractor and
subcontractors, respectively, are subject to use tax on the full
cost of the manufactured or fabricated articles as detailed in
Rule 12A-1.051(5), F.A.C. Rule 12A-1.051(5)(c), F.A.C.,
provides for the exclusion of direct material costs in the
computation of manufactured or fabricated costs when tax has
been paid on such materials. This assumes the contractor (a
taxable entity) is the purchaser of the direct materials. Under
the instant facts, the direct materials may have been purchased
directly by the Exempt Organization pursuant to the Agency
Agreement and then furnished to the Contractor or subcontractors
for fabrication into other items of tangible personal property
for incorporation into the Parking Structure. In those
instances, where the direct materials are purchased by the
Exempt Organization pursuant to the Agency Agreement, the
Contractor or subcontractors who fabricate such direct materials
into other articles of tangible personal property for
incorporation into the Parking Structure, will be allowed to
exclude the cost of these direct materials in computing the
fabricated costs on which they must accrue and remit use tax.

Therefore, the Department hereby enters its finding that based
on the foregoing, the purchases of building materials and
supplies by the Exempt Organization pursuant to the Agency
Agreement are not taxable to the Exempt Organization, the
Contractor, or the subcontractors. This conclusion is
contingent upon the Exempt Organization tendering an exemption
certificate in compliance with Rules 12A-1.038 and 12A-1.039,
F.A.C., to each of the suppliers of the building materials
and/or supplies together with the purchase orders, or upon the
Exempt Organization amending its purchase orders to include all
the required elements of an exemption certificate. However, the
Department further finds that pursuant to Rule 12A-1.051(5),
F.A.C., the Contractor and the subcontractors alike are subject
to the accrual and remittance of use tax on the full fabricated
cost of the articles they manufacture or fabricate,
respectively, for incorporation into the Parking Structure
excluding the cost of direct materials used to fabricate such
articles which where purchased by the Exempt Organization
pursuant to the Agency Agreement.

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. 13476