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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