Could a county make exempt direct purchases of materials and services used by a private operator to maintain the county's water and wastewater facilities?

Plain-English summary

The county's purchases could be exempt if the parties amended their agreement to adopt the submitted direct-purchase procedures and complied with all six required criteria.

The county had to issue its own purchase orders with exemption information, be invoiced directly, take title and possession before incorporation into real property, assume all risk of loss, pay the insurance or bonding premiums, and pay vendors directly from its own checking account.

The submitted procedure met those criteria if incorporated through an addendum. The Department warned that an audit finding of incomplete compliance would make the TAA null and void.

What this means for you

Calling the private operator an agent was not enough. The substance of the transaction had to show that the county, rather than the operator, was the purchaser before the property entered the public works.

Common questions

Q: Could the operator requisition materials?
A: Yes, but the county had to issue the purchase order to the vendor and remain the actual purchaser.

Q: Who had to bear the risk of damage or loss?
A: The county.

Q: Could the operator pay the vendor and seek reimbursement?
A: No under the approved criteria. The county had to pay the vendor directly from its own checking account.

Q: Did the existing agreement already qualify?
A: The ruling required an addendum incorporating the direct-purchase procedures and bringing the agreement into full compliance.

Citations and references

• Fla. Stat. § 212.08(6) — governmental exemption
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.038, and 12A-1.094 — government and public-works purchases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-033

Original ruling text

Aug 03, 1995

Re: Technical Assistance Advisement 95(A)-033
Sales Tax - Public Works Contract Encompassing the
Maintenance and Operation of County Owned Waste Water
Facilities
Parties: XXX (herein the "Company")
XXX (herein the "County")
The Company and County: (Collectively the "Parties")
s. 212.08(6), F.S.
Rule 12A-1.094, F.A.C.

Dear :

This response is in reply to your May 11, 1995, petition for the
Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S., and Rule 12A-11, F.A.C.
Your petition regards the referenced matter and Parties. 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:

"XXX, owns, operates and maintains a Water System and
Wastewater System which is comprised of raw water supplies,
treatment facilities, transmission, distribution, and
collection facilities which enable the County to provide
water and wastewater utility services to its customers.
The County has awarded the Company a contract for the
operation of the County's Water System and Wastewater
System. The Company will soon execute an Operation and
Maintenance Agreement with the County (the `Agreement')
which will authorize the Company to manage, operate and

maintain the County's Water and Wastewater Utility System
(the `Utility System').

"In performing its obligations under the Agreement, the
Company is responsible for assuring that the Utility System
is properly operated and maintained. It will be necessary
for the Company to periodically replace equipment,
supplies, chemicals and other items of tangible personal
property which may be necessary for the proper operation
and maintenance of the Utility System. These items will be
utilized by the Company to perform normal operations and
maintenance and to perform corrective, preventive or
ongoing maintenance of the Utility System and its equipment
and facilities. The material, supplies and services
utilized to conduct these activities are necessary in order
to maintain the Utility System at an adequate and efficient
level of service in accordance with applicable Federal and
State laws, regulations and permits which regulate the
operation and maintenance of the Utility System. In
addition to the normal tangible personal property necessary
to operate and maintain the Utility System, electricity
will be furnished to various components of the Utility
System as necessary for its normal operation.

"The Company recognizes that under the provisions of s.
212.05, Fla. Stat., Florida Sales and Use Tax is imposed on
every person exercising the privilege of selling tangible
personal property or services at retail in this State. The
Company further recognize that under s. 212.08(6), Fla.
Stat., an exemption from the tax imposed by Chapter 212
exists for sales which are made to any county when payment
is made directly to the dealer or vendor by the county.
The Company recognizes that this exemption may not be
applicable to the sales of tangible personal property made
to contractors employed either directly or as agents by any
county when such tangible personal property becomes a part
of public works owned by the County.

"In recognition of the taxing and exemption provision of
Chapter 212, Fla. Stat., the parties have agreed to utilize
a `Direct Purchase Procedure' for the purchase of any

tangible personal property or services which may be
necessary in order for the Company to fulfill its
obligations under the terms of the Agreement. The parties
have agreed to utilize the Procedures outlined herein in
order to allow the County to avail itself of the exemption
provisions of s. 212.08, Fla. Stat., on all sales otherwise
taxable under Chapter 212, Fla. Stat. Exempt sales will
include all sales made directly to the County when payment
is made directly to the dealer by the County.

"The terms of the Operation and Maintenance Agreement as
presently drafted, allow for the purchase of tangible
personal property and services as may be needed in order
for the Company to fulfill its obligations under the terms
of the Agreement. Under Section 4.04 of the Agreement, the
parties have recognized the potential benefit which may be
realized if a purchasing structure is established to comply
with the requirements of s. 212.08(6), Fla. Stat. The
parties have agreed to amend the terms of the Agreement to
incorporate the terms of the Direct Purchasing Procedures
which are outlined herein, should those procedures be
determined by the Department to be adequate in order to
structure a purchase transaction which would comply with
the sales tax exemption provisions available to the County
pursuant to Section 212.08(6), Fla. Stat. Attached hereto
as Exhibit `A' is the Operation and Maintenance Agreement
which will be executed between the Company and the County
and which will be subsequently amended by the parties to
incorporate the Department approved Direct Purchasing
Procedures which are set out in this request.

"The following Direct Purchasing Procedures will be
utilized to purchase tangible personal property and
services necessary in order for the Company to perform its
obligations under the terms of the Agreement:

"The Company, acting as the agent for the County, will
initiate the requisition of materials or supplies,
utilizing the County's standard purchase order requisition
form or such other form as may be acceptable to the County.
The requisition form will be completed by the Company and

submitted to the County and will include all pertinent
information including, the name, address and telephone
number of the vendor or supplier; a contact person with the
Company and dealer or vendor; a list of the materials and
the quantities requisitioned, including stated prices and
the dates and times associated with the delivery of
materials or supplies.

"Upon receipt of the requisition form, the County will
prepare and issue its standard County purchase order to the
dealer for the items requisitioned by the Company. The
County's purchase order will indicate that the County is
the purchaser and shall be billed directly for the items
purchased. The County's purchase order forms will
incorporate the information contained in its Consumer['s]
Certificate of Exemption issued by the Florida Department
of Revenue pursuant to Rule 12A-1.038, Fla. Admin. Code, or
if such information is not incorporated into the purchase
order form, the County will provide the dealer with its
properly executed Consumer['s] Certificate of Exemption.

"Subsequent to the issuance of the County's purchaser order
to the dealer, the Company will assume the responsibility
for coordinating with the dealer on matters relating to the
receipt of materials purchased by the County including
verifying quantities, inspection, acceptance, storage and
obtaining any and all warranties and guarantees applicable
to items purchased. The Company will be responsible for
assuring that the delivered materials conform with the
County's purchase order.

"In the case of purchases made under the procedures set
forth herein, and notwithstanding any other provision of
the Agreement: (1) the title to all materials purchased by
the County will pass directly from the dealer to the County
upon delivery, and at no time will title vest in the
Company; (2) the County will assume the risk of loss or
damage on all materials purchased which may be due to or
arise as the result of acts of God, theft, or damage by
third parties.

"The Company will assume responsibility for assembling
dealer invoices and forwarding these invoices to the County
for payment. Electric utility service furnished to Countyowned utility facilities will be billed to the County as
the purchaser of said services. Electric utility bills
received by the Company will be reviewed for accuracy and
then forwarded to the County for payment under one
requisition form.

"All dealer invoices and utility bills forwarded to the
County after verification by the Company, will be paid
directly by the County by check released and delivered to
the dealer or electric utility supplier for the materials
or services provided directly to the County."

A careful examination has been made of the copy of the Agreement
submitted with your request. As you are aware, the Agreement as
presently cast contemplates and provides for the direct
procurement and provision by the Company of materials and
supplies necessary to perform its duties and responsibilities
under the Agreement of managing, operating, and maintaining the
Utility System (Article III, Section 3.01(a)(iii) of the
Agreement). Moreover, under the agreement in its present form,
the Company, not the County, is responsible for obtaining and
paying the premiums on any and all insurance and bonding
relating to the Company's performance of the Agreement (Article
VII and SCHEDULE 5 of the Agreement).

REQUESTED ADVISEMENT

You endeavor to receive the Department's advice regarding the
following specific issue:

"This request seeks a determination from the Department as
to whether sales of tangible personal property and services
are exempt from the tax imposed by Chapter 212, Fla. Stat.,
when made to the County and when payment is made directly
to the dealer by the County in accordance with the
provisions of s. 212.08(6), Fla. Stat., and the Direct
Purchasing Procedures outlined herein."

DISCUSSION OF LAW

The following statutory, administrative, and case law is
relevant to addressing the issue under advisement herein:

Section 212.08(6), F.S.: "EXEMPTIONS; POLITICAL
SUBDIVISIONS. 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 shall
not inure to any transaction otherwise taxable under this
chapter when payment is made by a government employee by
any means, including, but not limited to, cash, check, or
credit card when that employee is subsequently reimbursed
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...." (Emphasis Supplied)

In construing the above 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).

Rule 12A-1.001(9)(a), F.A.C.: "(a) All sales made directly
to the United States Government, a state, or any county,
municipality, or political subdivision of a state are
exempt, except machines, equipment, parts, and accessories

therefor used in the generation, transmission, or
distribution of electricity. Except for purchases by
employees of the United States Government, this exemption
is not available for any taxable transaction when payment
is made by a governmental employee by use of personal
funds, including cash, checks, or credit cards, when the
employee is subsequently reimbursed by the governmental
entity. Payment must be made directly to the dealer by the
governmental entity of a state, or any county,
municipality, or political subdivision of a state.
Purchases made by Federal employees on behalf of their
agency are exempt even though the employee is subsequently
reimbursed by the agency. Such governmental entities
desiring to qualify for the exemption must obtain from the
Department of Revenue a consumer's certificate of exemption
(see Rules 12A-1.038 and 12A-1.039, F.A.C.). The exemption
provided in this subsection shall be strictly defined,
limited, and applied to each entity as provided herein."

Rule 12A-1.094, F.A.C.: "(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 term
`public 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. Mobile
homes and other mobile buildings are deemed fixtures if
they (1) bear RP license tags, or (2) have the mobile
features (such as wheels and/or axles) removed, and are
placed on blocks or footings and permanently secured with
anchors, tie-down straps or similar devices.
"(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... 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 ... 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... 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... designee in
the responsible division that such sales are, in substance,
tax exempt sales to the government.
"(5) Contractors who manufacture materials for
incorporation into public works shall be liable for tax in
the manner provided in Rule 12A-1.051(5) or (6), F.A.C.
"(6) Contractors who supply raw materials such as rock,
shell, fill dirt and similar materials for incorporation
into public works shall be liable for tax in the manner
provided in Rule 12A-1.051(11)-(14), F.A.C.
"(7) Contractors who purchase tangible personal property
outside the State of Florida, or inside the State but fail
to pay sales tax, and use such property in a public works
project shall be presumed to have the beneficial use of
such property because the property is being used in
furtherance of the contractor's essentially independent
commercial enterprise. Accordingly, such contractors shall
be liable for the use tax." (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.

CONCLUSION OF LAW

Through the application of the above statutory and case law over
time, certain criteria have developed each and all of which must
be fully satisfied in order for a contract covering the
construction, improvement, or maintenance of public works to
result in direct purchase (tax exempt) of materials by the
governmental entity. These criteria are identified as follows:

1. The governmental entity must issue its own purchase
   orders directly to the third party vendor, which contain or
   are accompanied by the governmental entity's exemption
   certificate which certificate must include the governmental
   entity's name, address, and exemption number with issue and
   expiration date shown (see Rule 12A-1.038, F.A.C.).
2. All materials purchased under the exemption must be sold
   directly to the governmental entity (i.e., direct invoicing
   of the governmental entity by material vendors is
   required).
3. The governmental entity must take title and possession
   of all materials purchased tax exempt from the seller
   before they are incorporated into real property.
4. The governmental entity must assume all risk of loss on
   all materials purchased tax exempt.
5. The governmental entity must be responsible for and pay
   the premiums on all insurance and/or bonding on all
   materials purchased tax exempt.
6. The governmental entity must make direct payment to the
   third party vendor for all such purchases from the its
   checking account.

If an addendum to the Agreement is prepared by and between the
Parties which embodies terms and conditions which satisfy all
six (6) of the criteria described above and brings the agreement
as a whole into full and complete conformity in each and every
respect with all such criteria, then the purchases of tangible
personal property by the County pursuant to Agreement as and
when amended by such an addendum will qualify as exempt from
sales and use tax under the provisions of s. 212.08(6), F.S.,
and Rules 12A-1.001(9), and 12A-1.094(3)(a), F.A.C.

Any amendment to the agreement would be subject to audit review

by the Department. In the event such an audit were to occur and
reveal that the Agreement had not been amended by addendum so as
to bring the Agreement as a whole into full compliance and
conformity with the six criteria set forth above, then this TAA
would be rendered null and void in force and effect and the
Department would not be bound thereby.

The Direct Purchasing Procedures ("DPPs") as set forth in your
petition and quoted, above, if incorporated into the Agreement
by way of addendum, would bring the Agreement into compliance
with the six criteria set forth above. Therefore, the purchases
by the County made pursuant to the DPPs in the form of an
addendum to the Agreement would qualify as direct purchases by
the County and, thus, be exempt from sales and use tax under the
provisions of s. 212.08(6), F.S., and Rules 12A-1.001(9), and
12A-1.094(3)(a), 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,

Daniel M. Wagner, Jr.

Tax Law Specialist

DW/
Control No. 21322