Could a tax-exempt governmental project owner buy construction materials tax free when subcontractors coordinated the orders?

Plain-English summary

Florida allowed the tax-exempt governmental owner to buy construction materials directly without sales tax under the detailed purchasing procedure.

Subcontractors could prepare purchase requisitions and coordinate with the construction manager, but the owner issued its own purchase orders, used its own credit, received vendor invoices, and paid vendors directly. Title vested in the owner when materials reached the owner-owned job site, and the owner bore risk through the required insurance arrangement.

Those facts placed the legal incidence of tax on the exempt owner rather than on the contractors. The exemption did not extend to purchases made by contractors or subcontractors, and it did not cover equipment rentals to them.

What this means for you

• The exempt owner had to be the real purchaser in substance, not just on paper.
• Owner purchase orders, direct invoicing, and direct payment were required.
• Title, delivery, insurance, and risk of loss supported the result.
• The owner had to give vendors its exemption certificate.

Common questions

Q: Were the owner's direct material purchases exempt?
A: Yes, if the stated procedures were followed.

Q: Could subcontractors coordinate the orders?
A: Yes, but the purchases still had to be made in the owner's name and on its credit.

Q: Were contractor purchases or equipment rentals exempt?
A: No.

Citations and references

• Fla. Stat. § 212.08(6) — governmental purchases
• Fla. Admin. Code r. 12A-1.001 — sales and use tax administration
• Fla. Admin. Code r. 12A-1.094 — public works contracts
• Fla. Admin. Code rr. 12A-1.038, 12A-1.039 — exemption certificates
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-027

Original ruling text

Apr 25, 1996

Re: Technical Assistance Advisement 96(A)-027
Sales and Use Tax; Sales Tax Exempt Purchases of Building
Materials
Section: 212.08(6), F.S.
Rules: 12A-1.001, 12A-1.094, F.A.C.

Dear:

This is in response to your letter of February 27, 1996,
wherein you requested a technical assistance advisement
concerning direct purchases of construction materials, supplies,
and equipment for and by the XXXX. You confirm in your letter
that it is the XXXX intention to delegate certain purchasing
authority to a construction management firm to directly purchase
certain construction materials, supplies, and equipment from
third party suppliers for use in the construction of XXXX and
XXXX.

Your request is on behalf of the XXXX (hereafter "Owner"),
for use in the Owner's construction of XXXX (hereafter
"Project"). The Agreement referred to below is between Owner
and XXXX (hereafter "Contractor") for construction management.

According to your letter, it is your understanding that
section 212.08(6), Florida Statutes (F.S.), provides that an
exempt entity is not required to pay State sales tax when
payment is made directly to a dealer or vendor by the exempt
entity for purchases of tangible personal property.

DISCUSSION OF FACTS

You provided with and subsequent to your letter of February
27, 1996, dated and executed copies of an Agreement and
Addendum, entered into between the Owner and Contractor, as well
as other documents. The Agreement contains the planning,
design, permitting, construction and code inspection for the

Owner's development work at the Project. The Owner's
construction budget is $18,000,000, per Article 1.4 of the
Agreement.

Article 9.1 of the Agreement provides that the Owner agrees
to pay the Contractor for the cost of the Project. Cost of the
Project is defined in the same Article to mean, "costs
necessarily incurred in the Project during the Construction
Phase for Construction services and paid by the Contractor which
are not included in the construction phase fee."

Article 9.2(2) of the Agreement includes as direct cost
items all materials, supplies and equipment incorporated in the
Project, including costs of transportation and storage.

Under Article 2.4 of the Agreement, Contractor's Services Construction Phase, paragraph 5, the Contractor is required to
provide the Owner a 100% Performance Bond and a 100% Labor and
Material Payment Bond each in the amount of not less than the
total construction cost.

Article 12.1 of the Agreement provides for monthly payment
statements. This Article requires the Contractor to submit to
the Owner, a statement, along with cost reports, showing in
detail all monies paid out, costs accumulated and costs
incurred. Ten percent retainage by the Owner shall be held on
all payments to the Contractor until Project is 50% completed.
Article 12.3 requires the Contractor to pay subcontractors
within 10 days after receipt of payment from the Owner less 10%
retainage.

Article 13.2, paragraph 10, of the Agreement requires the
Contractor to take out and maintain during the life of the
Agreement, a "Builder's Risk Policy" completed value form as a
cost of the Project, issued to provide coverage on an "all risk"
basis including theft.

Also provided were excerpts from an Agreement between the
Owner and Construction Manager. Under section 514A - School
District Purchased Materials: Construction Manager at Risk,
subsection 1, paragraph 2 of this Agreement, any purchased

materials purchased by the Owner included in the subcontractor's
bid are the responsibility of both the Owner and Subcontractor.
Paragraph 4 of the same section requires the Subcontractor to
prepare a standard Purchase Order Requisition Form in an
acceptable form, to specifically identify the materials which
the Owner has at its option elected to purchase.

In addition, the Owner provided an Addendum containing the
following provisions:

Pursuant to section 212.08(6), F.S., sales tax does not
apply to sales of tangible personal property, including
construction materials to be incorporated in the Facility,
where payment for such purchases will be made directly to
the vendors by the Owner.

After reviewing the terms of the revised Procedures
supplied by the Owner, the Department has determined that
in those cases where the Owner delegates its authority to
the subcontractors in coordination with the Construction
Manager to make purchases of equipment or materials in the
Owner's own name and using the Owner's purchase orders and
using the Owner's credit where the Owner is invoiced
directly for the purchases, the legal incidence of the
sales tax would be directly upon the Owner.

It is determined that building material purchases by the
Owner for the construction of the Facility may be made
exempt from sales tax in that:

1. A Purchase Order Requisition Form in a form acceptable
   to the Owner and Construction Manager shall be prepared by
   subcontractors and submitted to the Owner prior to ordering
   Owner purchased materials. The requisition form will
   provide the name, address, telephone number and contact
   person for the materials supplier; a list of required
   items, the quantity needed, the price and sales tax
   associated with the materials, and delivery dates
   established by the subcontractor.

2. The Owner will prepare and issue standard Owner purchase

order forms to the vendors.

3. In conjunction with the execution of the Owner's
   Purchase Orders by the suppliers, the Subcontractor shall
   execute and deliver to the Owner, through the Construction
   Manager, deductive change orders reflecting the full value
   of all materials directly purchased by Owner, plus all
   sales tax savings associated with the materials.

4. Subcontractors will be responsible for all matters
   relating to the receipt of materials purchased by the Owner
   including verifying correct quantities, inspection and
   acceptance of the goods at the time of delivery. The
   Subcontractor will forward the invoice to the Owner through
   the Construction Manager for payment.

5. Title to the Owner purchased materials will rest in the
   Owner at the time the materials are delivered to the Owner
   owned construction site (F.O.B. job site)

6. Owner is billed directly by the selling vendor for
   purchases of building materials.

7. Payment for the building materials is made directly to
   the selling vendor by the Owner.

8. The Owner will bear the costs of all Payment and
   Performance Bonds and Owner's Insurance including Builder's
   Risk Insurance as a reimbursable expense to the
   Construction Manager. The Owner is an additional named
   insured on the Contractor's Builder's Risk insurance and,
   in the event of damage or destruction to the Owner
   purchased materials, the Owner will receive all proceeds
   derived from all claims against insurers or others to pay
   for repair or reconstruction as a result of damage or
   destruction.

Due to these facts, direct purchases of construction
materials by the Owner that will be incorporated into
Facilities are exempt from sales tax.

This tax exemption does not apply to equipment rentals to
contractors or subcontractors that provide construction
services for the construction project, even though the
economic burden of the tax, by contract or otherwise, may
ultimately be borne by the Owner.

DISCUSSION OF LAW
STATUTORY AUTHORITY:

The following passage quoted from the Florida Statutes
(F.S.) is particularly germane to the matter under
consideration:

Section 212.08, F.S.
(6) 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....
(Emphasis supplied)

REGULATORY AUTHORITY:

The following provisions of the Florida Administrative Code
(F.A.C.), found in Rule 12A-1.001(9), are pertinent to the
transactions described in your letter:

(9) GOVERNMENTAL UNITS.
(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... 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.(Emphasis supplied.)

Rule 12A-1.094, F.A.C., provides that should a contractor
purchase or manufacture supplies or materials for incorporation
into a public works project, such purchase or manufacture of
supplies or materials is taxable to the contractor since he is
the ultimate consumer. So called "cost plus", "fixed fee",
"lump sum", and "guaranteed price" contracts require the
contractor to pay tax on all contract purchases, as he is the
ultimate consumer. The contractor's customer is not required to
pay sales tax on these contracts. When a contractor purchases
materials and supplies to fulfill a lump sum, cost plus, fixed
fee or guaranteed price contract for improvements to real
property, the contractor should include these sales tax amounts
in his bid for the contract.

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. The exemption will apply provided
the exempt government entity supplies the vendor with the
appropriate exemption certificate.

In addition, Rule 12A-1.094(1), F.A.C., defines real

property to include 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.

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. 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.

Factors which govern sales tax liability on purchases of
tangible personal property employed in public works contracts
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. The governmental body may supply an exemption
certificate to vendors that make direct sales to the
governmental entity based on the factors supplied above with
reference to assumption of risk, delivery, storage, and other
factors cited above.

CONCLUSION OF LAW

Pursuant to section 212.08(6), F.S., sales tax does not
apply to sales of tangible personal property, including
construction materials to be incorporated into the Project,
where payment for such purchases will be made directly to the
vendors by the Owner.

Based on your letter, contract documentation and addendum,
the Owner qualifies to purchase materials, supplies, equipment,
and other materials directly from third party suppliers tax
exempt provided a certificate of exemption is provided to the
vendor. This tax exemption is not available to purchases made by
contractors or subcontractors providing construction services
for the Project. The Department has determined that in those
cases where the Owner delegates its authority to the
subcontractors in coordination with the Contractor to make
purchases of equipment or materials in the Owner's own name,
using the Owner's purchase orders and using the Owner's credit
where Owner is invoiced directly for the purchases, the legal
incidence of the sales tax would be directly upon the Owner.

The Owner must comply with the following provisions in
order to maintain this sales tax exemption for such material
purchases:

1. A Purchase Order Requisition Form in a form acceptable
   to the Owner and Contractor shall be prepared by
   subcontractors and submitted to the Owner prior to ordering
   Owner purchased materials. The requisition form will
   provide the name, address, telephone number and contact
   person for the materials supplier; a list of required
   items, the quantity needed, the price and sales tax
   associated with the materials, and delivery dates
   established by the subcontractor.

2. The Owner will prepare and issue standard Owner purchase
   order forms to the vendors.

3. In conjunction with the execution of the Owner's
   Purchase Orders by the suppliers, the Subcontractor shall
   execute and deliver to the Owner, through the Contractor,
   deductive change orders reflecting the full value of all
   materials directly purchased by the Owner, plus all sales
   tax savings associated with the materials.

4. Subcontractors will be responsible for all matters
   relating to the receipt of materials purchased by the Owner
   including verifying correct quantities, inspection and

acceptance of the goods at the time of delivery. The
Subcontractor will forward the invoice to the Owner through
the Contractor for payment.

5. Title to the Owner purchased materials will vest in the
   Owner at the time the materials are delivered to the Owner
   owned construction site (F.O.B. job site).

6. Owner is billed directly by the selling vendor for
   purchases of building materials.

7. Payment for the building materials is made directly to
   the selling vendor by the Owner.

8. The Owner will bear the costs of all Payment and
   Performance Bonds and Owner's Insurance including Builder's
   Risk Insurance as a reimbursable expense to the Contractor.
   The Owner is an additional named insured on the
   Contractor's Builder's Risk insurance and, in the event of
   damage or destruction to Owner purchased materials, the
   Owner will receive all proceeds derived from all claims
   against insurers or others to pay for repair or
   reconstruction as a result of damage or destruction.

If the above provisions are met, the purchases of
materials, supplies, equipment, and other materials from third
party suppliers by the Owner are exempt from tax, provided the
Owner supplies the vendor with its certificate of exemption at
the time of purchase.

This tax exemption does not apply to equipment rentals to
Contractor or subcontractors that provide construction services
for the Project, even though the economic burden of the tax, by
contract or otherwise, may ultimately be borne by Owner.

This response constitutes a Technical Assistance Advisement
under Section 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 Section 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 Section 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,

Aleda J. Marshall
Tax Law Specialist

Control #24912