Were arena construction materials exempt when a governmental owner bought them directly through a developer acting as purchasing agent?

Plain-English summary

Florida exempted the arena materials purchased under the governmental entity's direct-purchase procedure.

The governmental owner and a developer planned and financed a multipurpose arena. Under a purchasing and agency agreement, the developer or subcontractors prepared orders, but the government executed each order as purchaser and ultimate owner, included its exemption number, received vendor invoices, and paid vendors directly from bond proceeds.

Title passed immediately to the governmental owner, which bore risk of loss and was protected by insurance. A deductive change order reduced the guaranteed construction price by both the direct purchase amount and the tax that otherwise would have applied. These facts showed that the government, not the contractor, was the purchaser before the materials became realty.

The exemption required a properly completed exemption certificate for each vendor. It did not cover materials manufactured or fabricated by the contractor or subcontractors; they remained the ultimate consumers and owed use tax on full fabricated cost.

What this means for you

• Government funding and title alone were not enough; direct ordering, invoicing, payment, title, and risk of loss all mattered.
• Risk of loss was the rule's paramount factor, supported here by the government's insurance interest.
• The construction contract price had to be reduced so the exempt direct purchase was not also embedded in the contractor's price.

Common questions

Q: Were vendor-supplied arena materials exempt?
A: Yes, when purchased exactly through the approved direct-purchase procedure.

Q: Who had to pay the vendor?
A: The governmental entity directly.

Q: Were contractor-fabricated materials exempt?
A: No. The contractor or subcontractor owed use tax on full manufactured or fabricated cost.

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption and public-works contractor exception
• Fla. Admin. Code r. 12A-1.001(9) — direct governmental purchases
• Fla. Admin. Code r. 12A-1.039 — exemption certificate requirements
• Fla. Admin. Code r. 12A-1.051(5) — contractor-fabricated materials
• Fla. Admin. Code r. 12A-1.094 — public works contract factors
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-035

Original ruling text

Jul 12, 1996

Re: TAA 96A-035
Sales and Use Tax; Public Works Contract.
Sections 1.01(8) and 212.08(6), Florida Statutes.
Rules 12A-1.001(9), 12A-1.039, 12A-1.051(5) and 12A-1.094,
Florida Administrative Code.

Dear :

Your letter of December 12, 1995, requested a Technical
Assistance Advisement on the application of Sales Tax to
materials purchased for use in a public works contract. This
response to your request constitutes a Technical Assistance
Advisement under Chapter 12-11, Florida Administrative Code, and
is issued to you under the authority of Section 213.22, Florida
Statutes.

FACTS

In your letter you state that your client, XXXX
(hereinafter Government Entity), "is a public agency, political
subdivision and body politic and corporate of the State of
Florida existing pursuant to Florida Laws". Your client has
entered into an agreement with XXXX (hereinafter Developer).
Under that agreement Government Entity and Developer have agreed
to develop, build, and equip a multi-purpose arena.

The agreement between Government Entity, Developer, and the
other parties involved in the constructing and financing of the
arena is an extremely complex transaction which is contained
within several documents. Among those documents are the
"Special Warrantee Deed and Bill of Sale" which transfers the
ownership of certain downtown property from Developer to
Government Entity, the "Turnkey Development Agreement" between
Developer and Government Entity, and the "Purchasing and Agency
Agreement". In addition you submitted a "Disbursement

Agreement", two "Indentures of Trust", a "Construction
Contract", and a "Trust and Security Agreement", in order to
assist the Department in fully understanding the nature of this
complex transaction.

The essence of the agreement contained in these documents
is as follows:

The real property was conveyed by Developer, who retained a
leasehold interest, to Government Entity. At the same time,
Developer also entered into an agreement stating that it would
build an arena on the site using funds provided by Government
Entity through issuance of various bonds. The bonds are to be
repaid from the proceeds of the arena once completed.

The Government Entity and Developer also entered into a
"Purchasing and Agency Agreement" in which Developer was named
Agent for the Government Entity ("Owner"). That agreement
provides, in relevant part:

1. Purchasing. Agent, either directly or through various
   subcontractors, shall negotiate and prepare purchase
   orders, as agent for and on behalf of Owner, for materials,
   equipment, services and any other items to be purchased or
   leased and incorporated into the Project ("Materials") that
   would require the payment of Florida sales or use tax if
   the purchaser or lessee was not a tax-exempt entity. Each
   purchase order shall define Owner as the purchaser or
   lessee and ultimate owner of the Materials and will include
   Owner's State of Florida sales tax exemption number set
   forth in Owner's Florida Department of Revenue certificate
   of exemption. Owner will provide Agent or subcontractors
   with purchase orders for this purpose, in the form similar
   to that attached hereto as Schedule A. Such purchase
   orders shall state that the payment of the purchase price,
   rent or any other amount in connection therewith shall be
   payable solely from the proceeds of the [Government Entity]
   Bonds and otherwise shall be without recourse to Owner.
   All purchase orders shall be approved by Agent before being
   submitted to Owner for execution as the purchaser or lessee
   and ultimate consumer of the Materials. After execution of

the purchaser order forms by Owner, Agent or subcontractor
shall submit the purchase orders to the supplier or lessor
of the Materials.

2. Invoice. Upon the submission of the bill or invoice for
   such Materials by the supplier or lessor to Agent or any
   subcontractor and the approval of the bill or invoice by
   Agent, the bill or invoice (which shall be made out to the
   Owner, and not Agent or any Subcontractor) shall be
   submitted by Developer for payment from the proceeds of the
   [Government Entity] Bonds. Developer shall process such
   payment request and deliver payment of same to Agent in
   accordance with the terms of the purchase order and the
   documents providing for the disbursements of the
   [Government Entity] Bond proceeds. Agent or its
   subcontractors shall tender Owner's payment, as agent for
   Owner, to the supplier or lessor and, if relevant, will
   obtain a release of lien in connection with the Materials
   for which such payment is made. After payment is made to
   the supplier or lessor and a release obtained, a deductive
   Change Order shall be issued by Developer and signed by
   Agent reducing the Guaranteed Maximum Construction Price
   stated in the Construction Contract by (i) the amount of
   such direct payment to the supplier or lessor and (ii) an
   amount equal to the sales tax that would have been payable
   if the purchase were not exempt.

3. Ordering. Agent, as agent for Owner, shall be
   responsible for ordering, inspecting, accepting delivery,
   storing, handling, installing, and quality control for the
   Materials purchased or leased under this Purchasing and
   Agency Agreement, all in accordance with the terms and
   conditions of the Construction Contract. This Purchasing
   and Agency Agreement shall be deemed to be supplemental to
   the Construction Contract and shall not amend, alter or
   modify the Construction Contract except to the extent
   specifically set forth herein. Without limiting the
   generality of the foregoing, this Purchasing and Agency
   Agreement shall not amend, alter or modify the obligations
   of Agent under the Construction Contract with respect to
   ordering, inspecting, accepting deliveries, storing,

handling, installing, warranties, and quality control of
the Materials.

4. Title and Risk of Loss. Title to all the Materials
   purchased under this Purchasing and Agency Agreement shall
   immediately be vested in Owner as the ultimate consumer,
   subject immediately to Developer's rights under the Arena
   Lease (as defined in the Development Agreement). Subject
   to the terms of the Construction Contract and the
   applicable purchase order, risk of loss and theft of all
   materials shall be upon Owner from the time title and/or
   possession of the Materials passes from the suppliers or
   lessors. Under the Development Agreement, Owner has
   required that Developer obtain on behalf of Owner insurance
   necessary to protect Owner in connection with the risk of
   loss.

Section 3.2(a)(ii) of the Disbursement Agreement provides
that the funds freed by any reduction in the Guaranteed Maximum
Price due to an exemption from sales and use tax "shall be
reallocated to the Hard Cost Contingency line item in the
Project Budget and shall be available for reallocation in
accordance with Section 3.3."

In our telephone conversation of May 3, 1996, you stated
that any funds reallocated to the Hard Cost Contingency Fund as
a result of an exemption from the sales tax will be used to
improve the quality of the arena and its fixtures. In
particular, you mentioned that part of the money saved through
any sales tax exemption will be used to upgrade the quality of
the seats installed in the arena.

REQUESTED ADVISEMENT

You ask if the purchase, lease, and use of Materials under
the above described contract will be exempt from Florida Sales
and Use Tax as a sale to a governmental entity.

RELEVANT AUTHORITY

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

(6) 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 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....

Rule 12A-1.001(9), F.A.C., provides in pertinent part:

(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.... 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....

(d) Vendors are required to document exempt sales. Federal
employees, other government employees, and employees of
nonprofit organizations described in subsection (3) of this
rule shall provide the vendor with proper documentation of
the exempt nature of the sale....

2. A suggested format of the document to be provided by
   other government employees or employees of nonprofit
   organizations to their vendors is the following:

EMPLOYER'S AUTHORIZATION TO MAKE

PURCHASES ON BEHALF OF AN EXEMPT
GOVERNMENTAL OR NONPROFIT
ORGANIZATION

DATE
TO: _______
SELLING DEALER'S NAME

SELLING DEALER'S ADDRESS

I, the undersigned, am a representative of the exempt
governmental or nonprofit organization identified below.
The purchase or lease of tangible personal property or
services or the rental of living accommodations made on
______ (DATE[S]) from the business identified above
is for use by the exempt governmental or nonprofit
organization identified below.

The charges for the purchase or lease of tangible personal
property or services or the rental of living accommodations
from the dealer identified above will be billed to and paid
directly by the exempt governmental or nonprofit
organization.

Under penalties of perjury, I declare that I have read the
foregoing and that the facts stated in it are true.

AUTHORIZED SIGNATURE ON
BEHALF OF EXEMPT ENTITY

NAME OF EXEMPT ENTITY

ADDRESS OF EXEMPT ENTITY

CONSUMER'S CERTIFICATE
OF EXEMPTION NUMBER

THIS CERTIFICATE MAY NOT BE USED TO MAKE PURCHASES OR
LEASES OF TANGIBLE PERSONAL PROPERTY OR SERVICES OR RENTAL
OF LIVING ACCOMMODATIONS FOR THE PERSONAL USE OF ANY
INDIVIDUAL REPRESENTING THE EXEMPT ENTITY IDENTIFIED ABOVE.

Rule 12A-1.094, F.A.C., which provides the administrative
guidelines for public works contracts, states in relevant part:

12A-1.094 Public Works Contracts.

(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....

(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. The applicable tax rate shall be
determined on the basis of the invoice date, not the date
of the contract, as follows:...

(b) If invoiced on or after February 1, 1988, the tax rate
shall be 6 percent.

(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", and "guaranteed 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....

DETERMINATION

Rule 12A-1.001(9), F.A.C., states that, in order for a sale
to a state or local governmental entity to be a tax-exempt sale,
"... payment must be made directly to the dealer by... the
political subdivision of a state.... "(Emphasis Supplied). Rule
12A-1.094(2) and (3), F.A.C., states that, with respect to
public works contracts, the purchase of materials is taxable to
the contractor as the ultimate consumer where the contractor is
deemed to be the purchaser. However, if the purchaser of the
materials is the governmental entity, then the transaction is
exempt. In order for there to be an exempt transaction, the
Government Entity must: directly purchase, hold title to, and
assume risk of loss of the tangible personal property prior to
its incorporation into realty; and satisfy various factors
contained in Rule 12A-1.094, F.A.C., specifically in subsections
(3) and (4), summarized below.

Further factors of Rule 12A-1.094, F.A.C., which must be
satisfied to insure the exempt status of the contract include:

1. The Government Entity must execute the purchase orders
   for the tangible personal property involved in the
   contract, which must include the Government Entity's
   consumer's certificate of exemption number. The contractor
   may present the Government Entity's purchase orders to the
   vendors of the tangible personal property;

2. The Government Entity must acquire title to and assume
   liability for the tangible personal property at the point
   in time when it is delivered to the job site up until the
   time it is incorporated as real property.

3. Vendors must directly invoice the Government Entity for
   supplies;

4. The Government Entity must directly pay the vendors for
   the tangible personal property; and

5. The Government Entity must assume all risk of loss or
   damage for the tangible personal property involved in the
   contract. The Government Entity should acquire, or be the
   insured party under, liability insurance on the building
   materials.

A consideration is made of all facts and circumstances to
determine whether the transaction is exempt. As stated in Rule
12A-1.094(4), F.A.C., the last stated factor, concerning the
assumption of risk on the part of the Government Entity, is of
"paramount" importance.

On the basis of a review of all documents submitted to the
Department pertaining to this transaction, the factors and
circumstances demonstrate that the requirements for exemption of
the transaction as a sale to a governmental entity are
satisfied. In this instance, the Government Entity receives the
proceeds under an insurance policy designed to protect against
risk of loss on the materials; the guaranteed price in the

construction contract is reduced, via a deductive change order,
in an amount equal to the purchase price (including sales tax
that would need to be charged if the transaction were not
exempt) of materials directly purchased by the Government
Entity; the Government Entity executes the purchase orders for
materials it desires to purchase directly from vendors; all
payments for materials are made directly by the Government
Entity to the vendors; the Government Entity acquires title to
the materials at the time the title to, or possession of, the
materials passes from the vendor or lessors; the Government
Entity has a Consumer's Certificate of Exemption number from the
Department of Revenue, and such number is incorporated into the
purchase orders issued to the vendors/lessors. Thus, all
purchases of materials which are made in accordance with the
Purchasing Agreement provided will be exempt from sales tax.
However, it is necessary that a properly completed exemption
certificate be extended, at the time of purchase, to each of the
vendors. A suggested format for an exemption certificate is
provided in Rule 12A-1.039, F.A.C., a copy of which is enclosed.
It is recommended that all of the required elements of the
exemption certificate specified in Rule 12A-1.039, F.A.C., be
incorporated in both the purchase orders and the request for
bids.

Please note that this response does not apply to a
contractor who manufactures or fabricates its own materials as
specified in Rule 12A-1.094(5), F.A.C. Under said rule
provision, the contractor and subcontractors, not the Government
Entity, are deemed to be the ultimate consumers of the articles
of tangible personal property they manufacture or fabricate to
perform the contract. As such, the contractor and
subcontractors, respectively, are subject to use tax on the full
cost of the manufactured or fabricated articles as detailed in
Rule 12A-1.051(5), 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,

Kama Schultz
Senior Tax Specialist

KDS
Control No. 24204