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