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