Could a contractor buy construction materials tax-free for a religious owner under a guaranteed-maximum-price contract that did not separately itemize and price every item?

Plain-English summary

The contractor was the ultimate consumer of the building materials and owed tax on its purchases.

The contract had a guaranteed maximum price made up of a material price, construction price, and contractor fee. But it did not separately itemize, describe, and price every item of tangible personal property, including materials supplied by subcontractors.

For that reason, the Department found that the agreement was not the retail-materials contract described in Rule 12A-1.051(2)(d). The contractor was not reselling the materials to the religious owner; it was consuming them in performing the real-property construction contract. The owner's consumer's certificate of exemption therefore did not make the contractor's own purchases tax-free.

What this means for you

Separating broad material and labor totals was not enough. The ruling required item-by-item description and pricing before treating a contractor as a retailer of materials rather than their taxable consumer.

Common questions

Q: Did the owner's religious exemption certificate exempt the contractor's purchases?
A: No. The Department treated the contractor as the consumer of the materials under this contract.

Q: Why did the proposed resale treatment fail?
A: The contract did not separately itemize, describe, and price every item of tangible personal property.

Q: Did transferring title at the job site change the result?
A: Not under the contract as a whole. The Department still classified it as a guaranteed-price construction contract rather than a qualifying retail-materials contract.

Citations and references

• Fla. Admin. Code r. 12A-1.001(3) — direct sales to exempt organizations
• Fla. Admin. Code r. 12A-1.051(2)(d), (e), and (f) — contractor treatment
• Sears, Roebuck & Company v. Dept. of Revenue, Case No. 92-1080, Second Judicial Circuit (1994)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-035

Original ruling text

Aug 04, 1995

Re: TAA 95A-035
Construction Contract with Exempt Entity
Rules 12A-1.001(3); 12A-1.051(2)(d), (f), F.A.C.

Dear:

This is in response to your request for a Technical
Assistance Advisement dated April 19, 1995, on behalf of your
client, XXXX (hereinafter "Contractor") regarding the nonapplication of any sales and use tax to building materials and
supplies when the materials and supplies are used to fulfill a
construction contract with an exempt non-profit religious
organization. The following facts and analysis were presented
in your request.

FACTS PRESENTED

BACKGROUND

Contractor has entered into a construction contract with
XXXX (hereinafter "Owner"). The Owner is a charitable and
religious organization qualified for exemption from federal
income tax pursuant to s. 501(c)(3) of the Internal Revenue
Code. Owner has been issued a Consumer's Certificate of
Exemption by the Department of Revenue which bears the number
XXXX and expires on XXXX.

The Contractor and Owner have recently entered into a
contract for the construction of a new religious facility. The
facility will be used by the Owner in furtherance of its exempt
purposes. The construction contract, set forth as Exhibit I, is
based on the Standard AIA format, with Supplementary Conditions,
with three amendments thereto.

The Contractor has been engaged to build the Facility for
the Owner. The Contractor anticipates obtaining building

materials for incorporation into the real property on behalf of
the Owner. Contractor believes no sales or use tax is due upon
Contractor's acquisition of tangible personal property for
inclusion into the real property at the time of acquisition or
at the time it is incorporated into the facility and/or turned
over to the Owner.

CONTRACT PROVISIONS

Under Article 5, specifically Paragraph 5.2.1 (Exhibit 2)
found in the Supplementary Conditions (as amended), the
Construction Contract is divided into two primary components,
the cost of materials and the cost of construction. The cost of
materials is defined as the direct cost of all materials,
equipment, appliances, fixtures, furniture or other personal
property required for performance under the construction
contract. The cost of construction is the cost of all labor and
installation required for performance under the construction
contract. The parties specifically intend, and have drafted,
the contract to be treated as a contract as described under Rule
12A1.051(2)(d), F.A.C.

Under Paragraph 5.2.1, Contractor is further required to
prepare a list specifying each and every item of materials to be
installed in the real property pursuant to the Construction
Contract. It is contemplated that the Owner shall purchase the
materials from the Contractor separate from all of the labor and
installation necessary to perform the work required under the
construction contract as required by Rule 12A-1.051(2)(f),
F.A.C. The Contractor is purchasing the materials for the
benefit of the Owner.

The Construction Contract also calls for the Contractor to
purchase materials from subcontractors or vendors, and the
Contractor will issue a Resale Certificate to such subcontractor
or vendor as the Contractor is not the ultimate consumer of the
materials purchased under these circumstances in accordance with
Rule 12A-1.051(2)(d), F.A.C. Thereafter, the Contractor will,
pursuant to the construction contract, rely on the Owner's
consumer's certificate of exemption in transferring ownership
and title of the property to the Owner so that it will not

collect sales tax from the Owner because the Owner is an entity
exempt from the collection of sales tax.

Title to and possession of the materials will transfer
directly from the Contractor to the Owner upon delivery of those
materials to the construction site. Although the Contractor may
accept the materials on behalf of the Owner, title to these
materials will not ultimately vest in the Contractor, as they
are being purchased for the benefit of the Owner. No
consideration is being provided from the Contractor to the
subcontractors or vendors unless and until such time as it
receive funds from the Owner.

TAXPAYER ANALYSIS

A. General

Florida sales and use tax is an excise tax, levied in the
chain of manufacture and distribution, imposed for exercising
the privilege of selling, using, consuming or renting tangible
personal property, or other services that are taxable in the
State of Florida. Generally, tangible personal property sold at
retail is subject to sales tax at the time of sale. Tax is
collected by the dealer. However, when such items of tangible
personal property are not purchased for sale, but are used,
consumed, distributed or stored for use or consumption in the
state, including use or consumption as part of real property,
the tax is due and payable based on the cost price by the end
user or consumer. Tangible personal property which becomes
attached to real property is taxed at the last transaction prior
to being converted into real property. Rules 12A-1.038 and 12A1.051(2)(d), F.A.C.

B. Acquisition of Property by Owner

Rule 12A-1.001(3), F.A.C., states that sales made directly
to a religious institution are exempt from sales tax when
payments are made directly to the dealer by the religious
institution.

With respect to the Contractor's transfer of property to

the Owner, the Contractor acts as a supply house of construction
materials on behalf of the Owner. When the Contractor transfers
these materials directly to the Owner, a bona fide religious
institution, such sales are exempt from sales tax.

Exemption from sales tax on purchases by a religious
organization is governed by Rule 12A-1.038, F.A.C. That rule
requires the Owner to obtain from the Department of Revenue a
sales tax exemption certificate. If it does so and supplies the
exemption certificate to its seller, in this case the
Contractor, the sales to the Owner by the Contractor are tax
exempt.

C. Acquisition of Property by Contractor

Turning to the Contractor's purchase of construction
materials and supplies, the sale is exempt from tax if, at the
time of the purchase, the seller (subcontractor or vendor) takes
from the purchaser (in this case the Contractor) a certificate
to the effect that the property is purchased for resale. Rule
12A-1.038(1), F.A.C. The analysis of the application of this
rule to the facts in this case provides that the Contractor may
purchase construction materials from subcontractors or vendors
for resale so long as the Contractor complies with the
requirements of Rule 12A-1.038(3), F.A.C., which provides that a
completed resale certificate is required from the purchaser if
he is purchasing tangible personal property for resale subject
to the provisions of Rule 12A-1.038(1), F.A.C. The property is
for resale because the Contractor is not the ultimate user of
the tangible personal property. Rule 12A-1.051(2)(d), F.A.C.
In this case, the seller/dealer will not be required to collect
or remit tax to the Department of Revenue upon receipt of a
resale certificate from the Contractor.

RELEVANT AUTHORITY

Rule 12A-1.001(3), F.A.C., provides in part:

"(a) A sale or lease directly to... nonprofit religious...
organizations, for use in the course of their customary
nonprofit religious... activities... are exempt from the

tax imposed by Part I, Chapter 212, F.S.... However, such
institutions or organizations desiring to qualify for the
exemption must obtain from the Department of Revenue a
consumer's certificate of exemption, and payment must be
made directly to the dealer by the exempt entity...."

Rule 12A-1.051, F.A.C., provides in part:

"(1) This rule shall govern the taxability of purchases or
use of tangible personal property by contractors who
purchase or manufacture materials and supplies for use in
the performance of non public works contracts....
"(2) Such contractors may include... building...
contractors and they may use one of the following methods
in arriving at the total contract price:...
"(c) Contracts in which the contractor or subcontractor
agrees to furnish materials and supplies and necessary
services with an upset or guaranteed price which may not be
exceeded; and
"(d) Contracts in which the contractor or subcontractor
repairs, alters, improves or constructs real property and
wherein he agrees to sell specifically described and
itemized materials and supplies at an agreed price or at
the regular retail price and to complete the work either
for an additional agreed price or on the basis of time
consumed.
"(e) When a contractor or subcontractor uses materials and
supplies in fulfilling either a lump sum, cost plus, fixed
fee, guaranteed price or any kind of contract except one
falling in class (d) above, he becomes the ultimate
consumer thereof. The person or dealer who sells such
materials and supplies to such contractor or subcontractor
is making sales at retail and is required to collect the
tax from him based upon the receipts from such sales.
"(f) In cases falling in class (d) above, the contractor or
subcontractor is deemed to be selling tangible personal
property at an agreed retail price and shall collect tax
from his purchaser based upon the amount of the receipts
from such sales, excluding installation charges if
separately stated. A dealer selling to such contractor or
subcontractor must obtain a resale certificate in lieu of

tax...."

ADVISEMENT

In the Department's determination as to whether a real
property contract is of that type described under Rule 12A1.051(2)(d), F.A.C., we rely on the court's decision in Sears,
Roebuck & Company v. Dept. of Revenue, Case No. 92-1080, Second
Judicial Circuit (1994). In this case, the court found that a
contract for construction, alteration, improvement, or
maintenance of real property was not a contract as described
under Rule 12A-1.051(2)(d), F.A.C., because each and every item
of tangible personal property provided under the contract,
including building materials and supplies provided by
subcontractors, was not separately itemized, described, and
priced in the contract.
Contractor and Owner have entered into a guaranteed maximum
price contract for construction of Owner's facility. The
guaranteed maximum price is stated to equal the sum of: (a) a
guaranteed material price plus (b) a guaranteed construction
price plus (c) the Contractor's fee. The contract between
Contractor and Owner cannot be viewed as that type of contract
as provided under Rule 12A-1.051(2)(d), F.A.C., because each and
every item of tangible personal property to be provided under
the contract is not separately itemized, described, and priced
in the contract. Contractor is not making retail sales but is
the consumer of tangible personal property purchased to be used
to fulfill the contract with Owner.

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
Senior Tax Specialist

/sg
Cont. #20923