Could a Florida tax-exempt educational organization buy building materials tax-free for a contractor's renovation project?

Plain-English summary

The exempt educational organization could buy building materials tax-free, but only through genuine direct purchases from the vendors.

The organization had to issue its own purchase orders with its Consumer's Certificate of Exemption, buy the materials directly, take title and possession when the materials reached the job site, maintain insurance and bear the risk of loss, receive the invoices, and pay the vendors directly.

The exemption did not extend to materials purchased by the contractor or subcontractors. If they fabricated the organization's materials into other tangible personal property for the project, the ruling treated the contractor or subcontractor as the ultimate consumer and applied the cited fabrication-cost rule.

What this means for you

An exempt owner's name on a construction project was not enough. The owner had to control each purchase and bear the incidents of ownership shown in the ruling; contractor-controlled purchases remained taxable.

Common questions

Q: Could the exempt organization use its exemption for contractor purchases? A: No. The materials had to be sold directly to the exempt organization.

Q: Who had to issue the purchase orders and pay the vendors? A: The exempt organization itself.

Q: When did the organization have to take title and possession? A: When the materials were delivered to the job site.

Q: Who bore the risk before installation? A: The exempt organization had to insure the materials and assume the risk of loss.

Q: What if the contractor fabricated the materials into another item? A: The ruling applied Rule 12A-1.051(5), treating the contractor or subcontractor as the consumer of the fabricated item.

Citations and references

• Fla. Stat. § 212.08(7)(o) — exempt-organization purchases
• Fla. Admin. Code rr. 12A-1.001(3)(a), 12A-1.038(7), and 12A-1.039 — direct purchase and exemption certificate
• Fla. Admin. Code r. 12A-1.051(5) — contractor fabrication
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-029

Original ruling text

Jul 20, 1995

Re: TAA 95A-029
Construction Project for Exempt Organization Section 212.08(7)(o), F.S. Rules 12A-1.001, 12A-1.038, and 12A-1.039, F.A.C. Taxpayer: XXX FEI: XXX STN: XXX

Dear :

Your letters of March 27, 1995, and May 3, 1995, requested a Technical Assistance Advisement concerning the above referenced matter. This response constitutes a Technical Assistance Advisement (TAA) under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

DISCUSSION OF FACTS

Pursuant to your letter of March 27, 1995, the XXX (hereinafter "Exempt Organization") has been issued Consumer's Certificate of Exemption number XXX as an educational institution as defined in s. 212.08(7)(o)2.d., F.S. The Exempt Organization is planning a project of major renovations and additions to its existing building on XXX, and has provided a copy of its contract with XXX (hereinafter "Contractor"), dated March 21, 1995, and a sample purchase order, for our review.

Your letter of May 3, 1995, further provides in part:

"The [Exempt Organization] will be purchasing the materials directly from the vendors. The materials will be the property of the [Exempt Organization] upon delivery. The materials will be covered by the [Exempt Organization's] insurance. All vendor's will be given a copy of the
[Exempt Organization's] sales tax exemption certificate, and all vendor's will be paid directly by the [Exempt

Organization]...."

You have subsequently provided an addendum to the contract, dated June 9, 1995, which makes reference to the aforementioned contract, and an additional document entitled "Evidence of Property Insurance", dated June 13, 1995.

An examination of the contract discloses the following pertinent information:

"[Article] 5.1. The Owner shall pay the Contractor in current funds for the Contractor's performance of the Contract the Contract Sum consisting of the Cost of Work as defined in Article 7 and the Contractor's Fee determined as follows:
...
"The demolition phase of the contract shall be at actual cost plus 15.4% for General Conditions plus 6% for Contractor's Fee. The final G.M.P. [Guaranteed Maximum Price] will be established at a Fixed General Conditions and a Fixed Fee. The final G.M.P. will be 21 calendar days after receipt of all drawings issued for construction.
...
"[Article] 7.1.3.1. Costs, including transportation of materials and equipment incorporated or to be incorporated in the completed construction.

"[Article] 7.1.3.2. Costs of materials described in the preceding Clause 7.1.3.1 in excess of those actually installed but required to provide reasonable allowance for waste and for spoilage. Unused excess materials, if any, shall be handed over to the Owner at the completion of the Work or, at the Owner's option, shall be sold by the Contractor; amounts realized, if any, from such sales shall be credited to the Owner as a deduction from the Cost of the Work.
...
"[Article] 14.4 Sales Tax: It is understood that the owner would like to use the existing sales tax exemption [to] which it is entitled. This policy would have to meet the requirements established by the State of Florida and

`Contractor'."

The Addendum to the Contract provides in part:

"[Exempt Organization] shall reserve the right to purchase directly materials for construction in the execution of the above referenced contract. Further [Exempt Organization] shall purchase and maintain `Builder's Risk' insurance to protect [Exempt Organization] from loss or damage to the aforementioned construction materials."

REQUESTED ADVISEMENT

You request that we verify your understanding regarding the Exempt Organization's exemption from tax on purchases of materials and supplies used in the planned construction project. According to your letter of March 27, 1995:

"... [It] is our understanding that the above mentioned exemption would apply to the purchase of materials and supplies used in the construction subject to the following restrictions: "1. Expenditures must be for tangible personal property only and not for construction contracts or third party purchases. "2. Expenditures must be authorized by, billed to and paid directly to the dealer by the [Exempt Organization]. "3. A document must be provided to the dealer by any employee authorized to purchase on behalf of the
[Exempt Organization] as suggested in [Rule] 12A1.001(9)(d)2.[, F.A.C.]"

RELEVANT AUTHORITY

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;
...
"2. The provisions of this section authorizing exemptions from tax shall be strictly defined, limited, and applied in each category as follows: "... Nonprofit libraries, art galleries, and museums open to the public are defined as educational institutions and are eligible for exemption...."

APPLICABLE RULES

Current versions 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, and Rule 12A-1.051, F. A.C., Sales to or by Contractors Who Repair, Alter, Improve, and Construct Real Property, are enclosed for your information and convenience. Please use the enclosed copies of the rules to reference the rule text.

DETERMINATION

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 tax exempt entity 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. A suggested format for an exemption certificate is provided in Rule 12A1.039, F.A.C. It is recommended that the information needed for a properly completed exemption certificate be incorporated into the purchase orders and the request for bids. A review of the copy of the proposed purchase order submitted with the TAA

request indicates that the recommended information is provided as an attachment to the Exempt Organization's purchase orders.

Based upon your letters and contract documentation, the Exempt Organization qualifies to purchase building materials directly from third-party vendors tax exempt, provided the Exempt Organization extends its Consumer's Certificate of Exemption at the time the sale of such materials takes place. However, this tax exemption is not provided to purchases made by contractors or subcontractors providing construction services for the project. The Exempt Organization must comply with the following provisions in order to maintain this sales tax exemption for such material purchases:

1. The Exempt Organization must issue its own purchase orders
   directly to third-party vendors, which contain or are accompanied by the Exempt Organization's Consumer's Certificate of Exemption;

2. All building materials purchased under the exemption must be
   sold directly to the Exempt Organization;

3. The Exempt Organization must take title and possession of all
   building materials purchased tax exempt at the point in time that they are delivered to the job site;

4. The Exempt Organization must maintain liability insurance on
   the building materials and assume risk of loss for the building materials while stored at the job site prior to their incorporation into the real property; and

5. The Exempt Organization must be directly invoiced for the
   building materials and must make payment directly to third-party vendors.

Notwithstanding the fact that the building materials are purchased by the Exempt Organization, where the Contractor or subcontractors then fabricate such materials into other article of tangible personal property for incorporation into the project, the Contractor or subcontractors are subject to the provisions of Rule 12A-1.051(5), F.A.C. Under this 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 are subject to the full manufactured or fabricated cost of such items, as described in Rule 12A1.051(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,

Delores Overcash
Technical Assistant

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