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