Did a city's public-works equipment purchases qualify for Florida's government sales-tax exemption under its construction contract?

Plain-English summary

Florida found that the city's existing public-works contract did not clearly establish exempt direct purchases of the project's major equipment.

The bid and proposal documents showed that the city intended to issue purchase orders, receive invoices, and pay vendors. But the contract lacked clear and convincing evidence that the city satisfied every required condition, especially the complete allocation of title, possession, risk of loss, insurance or bonding, and direct payment.

The Department listed six requirements: city-issued purchase orders with its exemption certificate; direct vendor sales and invoices to the city; city title and possession before incorporation into real property; city assumption of all risk of loss; city payment of all insurance or bonding premiums without contractor benefit; and direct payment from the city's checking account.

A contract addendum satisfying all six could make the equipment purchases exempt. Without it, the equipment and materials incorporated into the facility were taxable, with possible interest and penalty after audit.

What this means for you

• Government intent and direct payment alone were not enough.
• The contract had to clearly place pre-installation ownership and risk with the city.
• All six requirements had to appear in the agreement as a whole.
• Any amendment remained subject to Department audit.

Common questions

Q: Were the purchases exempt under the existing contract?
A: No.

Q: Could an addendum produce exemption?
A: Yes, if it fully satisfied all six criteria.

Q: What happened without a compliant amendment?
A: The incorporated equipment and materials were taxable.

Citations and references

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

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-014

Original ruling text

Feb 02, 1996

Re: TAA 96A-014
Sales Tax Exemption - Public Works Contract
Section 212.08(6), F.S.
Rules 12A-1.001(9); 12A-1.094, F.A.C.

Dear:

This is in response to your original request for a
Technical Assistance Advisement (TAA) dated July 26, 1995, in
which you requested a determination on the application of the
XXXX (hereinafter "City") sales tax exemption for purchases of
construction materials for the XXXX (hereinafter "Facility), a
public works. In response to the request, we advised you that a
TAA could not be issued without a copy of the construction
contract between City and XXXX (hereinafter "Contractor"). On

August 31, 1995, you provided a copy of that contract.

FACTS

Contractor was awarded, in accordance with XXXX, a lump-sum
contract for construction of the Facility. The contract
provides that bids, plans, specifications, blueprints,
requirements of the City, the proposal of the Contractor, and
the award of the bid to the Contractor are specifically made a

part of the contract by reference.

The "Proposal" document for XXXX provides: "In accordance
with the Invitation to Bid inviting Proposals for construction
of the ‘Facility’ for the ~City’, subject to the conditions and
requirements of the Instructions to Bidders, General Conditions,
Special Conditions, Specifications, Plans, Addenda, and other
Contract Documents, all of which so far as they relate to the
Proposal, are made a part thereof, the undersigned... proposes
to construct the specified work... for the unit and/or lump sum

prices contained in the following Proposal Schedule...."

Section "C" "Major Items of Equipment," of the "Proposal"

document provides: "The undersigned as Bidder agrees that the
Contract, if awarded, will be on the basis of the materials and
equipment named in the Proposal and Contract Documents. The
undersigned as Bidder also agrees, that for the items listed
below the Bidder will provide the specific manufacturer listed

on the Proposal or if more than one manufacturer/supplier is
listed by circling the manufacturer/supplier he is furnishing

under his TOTAL BASE BID. If Bidder fails to circle one of the

manufacturer/ suppliers listed, Bidder agrees to provide the

City's choice of listed manufacturers/suppliers. The Bidder

shall also indicate the purchase order price of the major item

of equipment. The amount shown shall be the actual purchase
order price for Owner purchased equipment per Instructions to
Bidders. For items not listed below Bidder declares that his

bid was based on one of the manufacturer/ suppliers named in the

Contract Documents.

"The undersigned as Bidder agrees that there will be no
substitutions or ‘or-equal' items considered for major items of
equipment listed..."

Section 2.15 of the "Instruction to Bidder's" document

provides that bidders shall include in their bid prices any

sales or use tax required by law, except, as provided by
subsection 2.15.1 of the document which states: "Bidders shall
not include Florida Sales Taxes on Major Equipment Items, shown

on the Proposal Form, for purchase by the “City’.

Section 2.25 of the "Instruction to Bidder's" document

provides in part:

"2.25 MAJOR ITEMS OF EQUIPMENT

"2.25.1 The Proposal Form shall include a tabulation of
*Major Items of Equipment’ to be purchased by the City and
installed as part of this Contract. The Contract
Specifications include descriptions of these Major Items of
Equipment and the manufacturer(s) or supplier(s) for each
item of equipment which complies with design requirements,

is listed on the Proposal Form.

"2.25.1.1 the ‘Purchase Order’ cost of the Major Equipment
Items shall be indicated on the space provided in the
Proposal Form for each item of equipment and included in
the Total Base Bid. In addition the Contractor shall

circle the item manufacturer which corresponds to the

equipment price listed.

"2.25.1.2 The purchase of this equipment by the City, in no
way, relieves the Contractor the responsibility for the
negotiation of price, timely placement of order, delivery
schedule, notice to proceed with fabrication, shop
drawings, warranties, manufacturer's services, Operation

and Maintenance Manuals, etc.

"2.25.4 Within forty-five (45) days after bids have been
received and publicly opened by the City, the low bidder
shall file with the Engineer, two (2) copies of a ‘draft’
purchase order for each Major Equipment Item selected on
the Proposal Form. This ‘draft’ purchase order shall be of
sufficient detail to adequately describe the equipment,
appurtenances, and services being purchased from the
manufacturer or supplier. The purchase order amount shall
not exceed the amount indicated on the Proposal Form and
shall not included (sic) Florida Sales Tax. The cost for
materials, appurtenances, services, etc. related the (sic)
the individual equipment item, not included in the purchase
order, shall be the responsibility of the Construction

Contractor.

"2.25.4.1 The Engineer will review the ‘draft’ purchase
order and forward to the City for processing and issuance
of the Purchase Order to the manufacturer or supplier C/O

the Construction Contractor."

In addition to the above, the following information was

provided in the letter submitted with the copy of the contract.

"This letter provides additional information to our request
for a Technical Assistance Advisement for the referenced

project. The primary issue is who purchases and insures

the equipment. The City's intent is to have the Contractor
submit a draft purchase order (PO). The City will then
issue a PO for the item(s) listed in the draft PO. The

City will place the order, be invoiced for, and pay for the
equipment. The Contractor will coordinate delivery
directly with the vendor. The City is self-insured for
Builder's Risk but will pay for an insurance policy to

cover transportation and off-site storage. A check request

for this policy is attached...."

City did not provide evidence that it is self-insured for

builder's risk for the "Major Equipment Items."

DISCUSSION OF LAW

Section 212.08(6), F.S., provides in part:

"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...."

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., provides in part:

"(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.... 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.... 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., provides in part:

"(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....

"(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....

"(c) ‘Real property’ within the meaning of this rule
includes all fixtures and improvements to real property...
"(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 asa

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 [the Executive Director's] 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 [the Executive Director's] 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 [the
Executive Director's] 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’, and ‘guaranteed

price’ contracts are taxable sales to the contractor unless

it can be demonstrated to the satisfaction of the Executive
Director or [the Executive Director's] 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."

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.

ADVISEMENT

Through the application of the above statutory and case law
over time, certain criteria have been 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 purchases (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. It is required that the
   governmental entity must be directly invoiced by material

vendors.

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. The contractor may not be

held liable for damage or loss to such materials.

5. The governmental entity must be responsible for and pay
   the premiums on all insurance and/or bonding on all materials
   purchased tax exempt. The contractor may not share in any
   economic benefit of proceeds from bonds or insurance covering

risk of damage or loss of the materials.

6. The governmental entity must make direct payment to the
   third party vendor for all such purchases from its checking

account.

These criteria identified above must be clearly evident in
a contract covering construction, improvement, or maintenance of
a public works to result in direct purchases (tax exempt) of

materials by the governmental entity.

The provisions in the "Instruction to Bidder" and
"Proposal" documents convey the intent of the City to purchase
specific equipment for the "Facility" construction project
directly from the manufacturers/suppliers. However, the
contract between City and Contractor does not clearly embody the
above stated conditions and lacks clear and convincing evidence
to substantiate that City will make direct purchases of

equipment from manufacturers or suppliers.

If an addendum to the contract is prepared by and between
City and Contractor which embodies the 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 the equipment by the City pursuant to the
contract 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. Otherwise, equipment or materials which are or will be

incorporated into the "Facility" under the contract are taxable.

Any amendment to the contract would be subject to audit
review by the Department. In the event such an audit were to
occur and reveal that the contract had not been amended by
addendum so as to bring the contract as a whole into full
compliance and conformity with the six criteria set forth above,
then tax on the purchase of the materials or equipment will be

assessed with interest and penalty.

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
Tax Policy and Dispute

Resolution

sg
Cont. #23061