Were materials and equipment rentals for a city stadium renovation exempt as direct government purchases?

Plain-English summary

Building materials purchased directly by the city were exempt, but equipment rented to contractors was not.

The city used its own purchase orders and exemption number, was billed directly, paid vendors directly, received immediate title, and bore risk of loss through insurance. Those facts placed the legal incidence of tax on the exempt city. The exemption did not extend to contractor or subcontractor equipment rentals.

What this means for you

Government funding or ultimate economic burden alone did not make a public-works purchase exempt. The government had to be the substantive purchaser.

Common questions

Q: Who had to issue the purchase order? A: The city.

Q: Who had to pay the vendor?
A: The city, after being invoiced directly.

Q: Were contractor equipment rentals exempt? A: No.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases
• Fla. Admin. Code r. 12A-1.094 — public-works contracts
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-007

Original ruling text

Feb 15, 1995

RE: TAA 95A-007
Public Works Contract
s. 212.08(6), F.S.
Rule 12A-1.094, F.A.C.

Dear :

This is in response to your letter dated March 28, 1994, in which you request a Technical Assistance Advisement on whether purchases of materials for incorporation into a public works project and rental of equipment used under a public works contract meet the exemption provisions of s. 212.08(6), F.S., as purchases made directly by a governmental entity. In response to our letter dated April 8, 1994, and subsequent telephone conversations, you had submitted additional documentation on April 21, 1994; June 10, 1994; July 6, 1994; July 14, 1994; December 8, 1994; December 15, 1994; and January 11, 1995.

FACTS PRESENTED

XXX [hereinafter Lessee], formerly XXX, entered into a lease agreement with the XXX [hereinafter City] for the lease of the City-owned Municipal Stadium [hereinafter Stadium] which is commonly known as the XXX Stadium.

Condition 33. of Exhibit D of the lease agreement encompasses the obligation of the Lessee to act as project manager for the City for the renovation of the Stadium and the obligations of the City to fund all costs for the renovation project. Lessee has the exclusive and unconditional right to control the project site and to select and enter into contracts with any and all contractors, subcontractors, suppliers, and all others for the renovation project for the Stadium.

Condition 33.H.(vii), Exhibit D, of the lease agreement specifically provides:

"Sales Tax Exemption. Only for the purposes of obtaining Sales Tax Exemption for the purchase of equipment and materials, [Lessee] shall have the right to contract in the name of the City. This provision shall not create any contractual relationship between the City and any contractor or any subcontractor. The City shall cooperate with [Lessee] to make full use of the sales tax exemption provisions set forth in Section 212, Florida Statutes, and Rule 12A-1.094, Florida Administrative Code. The City will designate a City purchasing agent to the project to facilitate the purchase of project materials free from the payment of sales tax."

Lessee entered into a guaranteed maximum price contract with XXX [hereinafter Contractor], to perform the work required for the renovation of the Stadium. Article 6.2 C. of Exhibit "H" of the contract provides that Contractor agrees to comply with all procedures and requirements imposed by the City, the Florida Department of Revenue, and the Lessee in order to take advantage of a Florida sales tax exemption for the renovation project.

You have also provided a copy of the procedures (your Exhibit A) under which the City will purchase materials. These procedures specifically provide that:

"The subcontractor prepares a request for purchase order (PO) which is submitted to the [Contractor]. The contractor sends requests for purchase order (PO) together with attached quote from the supplying vendor to [the Public Works Department of the City] to prepare a purchase requisition utilizing the City purchasing system. The quote must include vendor's Federal ID number and must be addressed to the City....

"A purchase requisition/order is sent by [the City Director of Public Works] to [the Chief Purchasing Officer of the City] for processing. The PO is signed by [City Chief Purchasing Officer] and forwarded to [City Director of Public Works] for distribution.

"The vendor delivers the material to the jobsite. On site, the subcontractor inspects the materials and signs the proof of delivery....

"Invoices are forwarded to the [Contractor]. Upon receipt of materials, [Contractor] will match PO, Proof of Delivery and Invoice, checking for accuracy and compliance.... Two copies of this invoice package will be sent to [City's audit company] for review and approval. [City's audit company] will forward one copy of the approved package to the City [Director of Public Works] for payment processing.

"A Receiving Report is prepared by [City Public Works Department] and forwarded by [City Director of Public Works] to ... [City Treasury Department] for check creation and signing. Checks will be forwarded to [City Director of Public Works] for distribution. Contractor will make copies of the checks to attach to the Contractor's copy of the package for support of payment.

"The above procedure is to be used for all material purchases in excess of $5,000. Vendors should be provided with a copy of the following City Sales and Use Tax Exemption No:...."

On December 8, 1994; the City and Lessee entered into an agreement to formalize the procedures on the direct purchase of materials, supplies and other items by City for incorporation into the Stadium renovation project. The agreement specifically provides that City's chief purchasing officer and director of public works will determine which items will be purchased directly by the City and further provides:

"(a) The purchase shall be in the City's name with ownership of the item upon receipt vested in the City; and, "(b) The purchase shall be by a City Purchase Order directly funded by the City; and, "(c) Vendor/Supplier shall invoice the City directly for payment which shall be made directly by the City to the Vendor/Supplier; and, "(d) The City's Purchase Order shall clearly state the

purchase is exempt from Sales Tax pursuant to the City's Sales and Use Tax Exemption Certificate; and, "(e) The City shall provide Builders Risk Insurance to protect against the loss of the item and to evidence the City's liability therefor; and "(f) Acknowledgment of receipt of the item and approval for payment shall be documented by an official of the City or an authorized agent of the City."

A copy of the City's builder's risk policy for the renovation project has been provided.

STATUTORY/REGULATORY AUTHORITY

Section 212.08(6), F.S., provides:

"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, except public works in progress or for which bonds or revenue certificates have been validated on or before August 1, 1959...."

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

"(1) This rule shall govern the taxability of transactions in which contractors manufacture or purchase supplies and materials for use in public works, as that term is referred to in Section 212.08(6), F. S. This rule shall not apply to non-public works contracts as those contracts are governed under the provisions of Rule 12A-1.051, F.A.C.... In applying this rule, the following definitions are used. "(a) `Contractor' is one who is engaged in the repair, alteration, improvement or construction of real property.

Contractors include, but are not limited to, persons engaged in building, electrical, plumbing, heating, painting, decorating, ventilating, paperhanging, sheet metal, roofing, bridge, road, waterworks, landscape, pier or billboard work. This definition includes subcontractors. "(b) Public works' are defined as construction projects for public use or enjoyment, financed and owned by the government, in which private persons undertake the obligation to do a specific piece of work. The termpublic works' is not restricted to the repair, alteration, improvement, or construction of real property and fixed works where the sale of tangible personal property is made to or by contractors involved in public works contracts. Such contracts shall include, but not be limited to, building, electrical, plumbing, heating, painting, decorating, ventilating, paperhanging, sheet metal, roofing, bridge, road, waterworks, landscape, pier or billboard contracts. "(c) `Real property' within the meaning of this rule includes all fixtures and improvements to real property. The status of a project as an improvement or affixture to real property is determined by the objective and presumed intent of the parties, based on the nature and use of the project and the degree of affixation to realty.... "(2) 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.... "(3)(a) The purchase or manufacture of tangible personal property for resale to a governmental body is exempt from tax provided this exemption shall not include sales of tangible personal property made to contractors employed either directly or as agents of the United States Government, a state, or any county, municipality, or political subdivision of a state when such tangible personal property goes into or becomes a part of public works financed or owned by such governmental bodies or political subdivisions...." "(b) With regard to contracts with government entities, the exemption in subsection (3)(a) is appropriate only where the levy would otherwise fall on the government itself, or

on an agency or instrumentality so closely connected with that government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned. A finding of exempt status, however, requires something more than the implication of traditional agency notions, so that to resist a state's taxing power, a private taxpayer must actually stand in the government's shoes as a principal, rather than as a contractor employed either directly or as the government's agent. A contractor will not be deemed to actually stand in the government's shoes if the contractor has a substantial independent role in making purchases. Accordingly, the fact that title passes directly to the government and payment is made with government funds, in and of itself, cannot characterize the transaction as an exempt purchase if the purchasing entity, in its role as a purchaser, is sufficiently distinct from the government. "(4) The exemption in subsection (3)(a) is a general exemption for sales made to the government. The exception in subsection (2)(a) is a specific exception for sales to contractors. 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 [the Executive Director's] designee in the responsible division will determine whether the substance of a particular transaction is governed by subsection (2)(a) or is a sale to a governmental body as provided by subsection (3) of this rule based on all of the facts and circumstances surrounding the transaction as a whole. The Executive Director or [the Executive Director's] designee in the responsible division 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. Other factors that may be considered by the Executive Director or [the Executive Director's] designee in the responsible division include whether: the contractor is authorized to make purchases in its own name; the contractor is jointly or severally liable to the vendor for payment: purchases are not subject to prior approval by the government; vendors are not informed that the government is the only party with an independent interest in the purchase; and whether the contractors are formally denominated as purchasing agents for the government. Sales made pursuant to so called
cost-plus',fixed-fee', lump sum', andguaranteed price' contracts are taxable sales to the contractor unless it can be demonstrated to the satisfaction of the Executive Director or [the Executive Director's] designee in the responsible division that such sales are, in substance, tax exempt sales to the government."

DETERMINATION

After reviewing the terms of the documents supplied by you and the City, including the rights and obligations of the City and Lessee under their lease agreement and Contractor and Lessee under their construction agreement, the Department has determined that in those cases where the City delegates its authority to the trade contractors in coordination with the Lessee to make purchases of equipment or materials in the City's own name and using the City's purchase orders and using the City's credit where the City is invoiced directly for the purchases, the legal incidence of the sales tax is directly upon the City. It is determined that building material purchases by the City for the renovation project may be made exempt from sales tax in that:

1. City will issue its own purchase orders, which contain the
   City's consumer's certificate of exemption number, directly to the materials vendors; and

2. The "Agreement" between City and Lessee on direct purchases of building materials provides that the City is the purchaser in whom title to the building materials vests immediately upon receipt from the selling vendor; and

3. City is billed directly by the selling vendor for purchases
   of building materials; and
4. Payment for the building materials is made directly to the
   selling vendor by the City; and
5. City assumes all risks of loss or damage for the building
   materials as evidenced by an insurance policy issued in the name of the City for builders' risk for the stadium renovation project.

This tax exemption does not apply to equipment rentals to contractors or subcontractors that provide construction services for the renovation project, even though the economic burden of the tax, by contract or otherwise, may ultimately be borne by the City.

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
Cont. #15220