Could a Florida school district buy equipment and materials tax-free for a K-12 construction project managed by a private construction manager?

Plain-English summary

The Florida Department of Revenue concluded that equipment, materials, and supplies purchased under a school district's submitted construction documents would be exempt from sales tax. The district planned to build a K-12 school and reserved the right to make designated purchases directly rather than have the construction manager or subcontractors buy them.

The district would prepare its own purchase orders, retain full title from delivery until the goods were incorporated or consumed, and issue checks directly to vendors. The construction manager would obtain builder's risk insurance, but the district would reimburse that cost, be named as an additional insured, receive insurance proceeds, and bear the risk of loss.

Those terms made the district the substantive purchaser under the public-works rules. The exemption still required a properly completed exemption certificate for each vendor at the time of purchase. It did not cover materials manufactured or fabricated by contractors or subcontractors, who remained taxable as the ultimate consumers of those articles.

What this means for you

School districts

Direct-purchase paperwork must match the transaction's substance. The district must actually issue the order, hold title, pay the vendor, and bear the economic risk before installation.

Construction managers and subcontractors

You may prepare requisitions, negotiate prices, coordinate delivery, inspect goods, and forward invoices without necessarily becoming the purchaser. But contractor-made materials were expressly outside this result.

Vendors and accounting teams

The district's exemption certificate had to be supplied at purchase. The ruling recommended including all required certificate elements in both purchase orders and bid requests.

Common questions

Q: Did the construction manager's involvement make the purchases taxable? A: No. Under the submitted arrangement, the school district retained the decisive purchasing, title, payment, insurance, and risk-of-loss responsibilities.

Q: Could invoices pass through the construction manager? A: Yes. Vendors delivered invoices to the construction manager at the job site, which forwarded them to the district; the district verified them and paid vendors directly.

Q: Who bore the risk of loss?
A: The district reimbursed the builder's risk insurance cost, was an additional insured, would receive claim proceeds, and bore the risk.

Q: Were contractor-fabricated materials exempt? A: No. The ruling said contractors and subcontractors manufacturing or fabricating their own materials owed use tax on the full cost.

Citations and references

• Fla. Stat. §§ 212.08(6) and 213.22
• Fla. Admin. Code rr. 12A-1.001(9), 12A-1.039, 12A-1.051(5), and 12A-1.094

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-007

Original ruling text

SUMMARY

A school district submitted copies of construction contracts in its request for a TAA concerning whether construction of a K-12th grade school would qualify as public works as defined in Rule 12A-1.094, Fla. Admin. Code. Key provisions of the contracts provided that the School District would prepare purchase orders for equipment, materials, and supplies for direct purchase; the School District would hold full title to all ownerpurchased materials from the time they were delivered to the job site until they were incorporated into the project or consumed in the completion of the project; invoices would be delivered to the construction manager at the job site, and the construction manager would forward the invoices to the School District for payment; the School District would issue and remit checks directly to the vendors; and, although the construction manager would be responsible for purchasing builder's risk insurance, the School District would reimburse the construction manager for same, would be listed as an additional insured party, and would bear all risk of loss. Accordingly, all purchases of materials which made in accordance with the contracts submitted would be exempt from sales tax, provided that a properly completed exemption certificate is extended at the time of purchase to each of the vendors.

Jan 31, 1997

Re: Technical Assistant Advisement 97A-007 XXX ("School District") Sales and Use Tax -- Local Government Contract to Construct a School Fla. Admin. Code rules 12A-1.001(9) & 12A-1.094 Fla. Stat. s. 212.08(6) (1995)

Dear :

This is in response to your letter to the Florida Department of

Revenue dated December 2, 1996, in which you asked for a technical assistance advisement indicating that the documents enclosed with your letter would provide for a tax exempt transaction. On July 26, 1996, you requested a letter of technical advice, which was provided to you on August 21, 1996.

Facts

As recounted in your July 26, 1996 letter, the School District will be building a school to serve students in kindergarten through 12th grades. In undertaking this project, it is the School District's intent to have the project qualify as a tax exempt transaction through the School District's direct purchase of equipment, materials and supplies. Enclosed with your December 2, 1996 letter were three documents detailing the specifics of this project.

The "Construction Management Agreement" provides for the following: (1) the School District may designate specific persons from whom the construction manager shall obtain bids, but may not prohibit the manager from obtaining bids from other qualified buyers; (2) the School District will make payments by the 15th of every month providing that the construction manager processes and delivers the invoices by the 20th of each preceding month; (3) the construction manager is the School District's authorized representative regarding purchase orders; (4) the construction manager is responsible for establishing an accounting system that will track the direct purchases made by the School District; and (5) vendors will be paid directly by the School District for direct purchases.

Page three of the contract between the construction manager and the subcontractors and vendors provides as follows:

20. DIRECT MATERIALS ACQUISITION BY OWNER: Subcontractor
    shall include Florida State and other applicable Sales Taxes for all material, supplies, and equipment included in his Bid. The Owner may, if not prohibited by law, exercise a right to purchase directly various construction materials, supplies, and equipment that may be part of the Subcontract, provided that the Owner receivers proper

authorization from the State of Florida in the form of a Technical Assistance Advisory (TAA). If so, the Owner shall, via its Purchase Orders, purchase the materials, supplies, and equipment. The materials shall be purchased from the Vendors and Suppliers selected by the Subcontractor, for prices negotiated by the Subcontractor. The Contractor will provide all the necessary information for preparation of the Purchase Orders by the Owner and will coordinate the purchase of the materials in a timely manner so as not to negatively impact on the performance of the construction activity of the Project....

The Project Procedures Manual of the Subcontractor and Vendors provides for the following: (1) the School District reserves the right to make direct purchases of various construction equipment, materials, and supplies; (2) the School District will own and hold full title to all owner-purchased materials; (3) the subcontractor will prepare purchase order requisitions that specifically identify the materials the School District elected to purchase directly; (4) after receipt of requisitions, the School District will prepare purchase orders for equipment, materials, and supplies for direct purchase; (5) owner-purchased materials will be stored at the job site; (6) after inspecting owner-purchased materials delivered to the job site, the subcontractor will forward invoices to the School District for payment; (7) after verifying the invoices, the School District shall prepare, deliver and remit checks to the suppliers; (8) although the subcontractor may have possession of the ownerpurchased materials, the School District will retain title to all owner-purchased materials; (9) owner-purchased materials will be considered returned to the School District for the purposes of bailment at the time they are incorporated into the project or consumed in the process of completing the project; and (10) insurance

purchased and maintained by the Construction Manager shall be sufficient to protect against any loss of or damage to Owner-Purchased Equipment, Materials, or Supplies. Such insurance shall cover the full value of any Owner-Purchased Materials not yet incorporated into the Project from the time the Owner first take title. The Owner shall be named

as an Additional Insured Party on such policies of insurance. 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 [i]s an additional named insured on the Contractor's Builder's Risk Insurance and, in the event of damage or destruction to the OwnerPurchased Materials, the Owner will receive all proceed[s] derive[d] from all claims against insurers or others to pay for repair or reconstruction as a result of damage or destruction.

Manual at 4 (emphasis in original).

Law

Section 212.08(6), Fla. Stat. (1995), provides:

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), Fla. Admin. Code, entitled "Governmental Units," provides:

(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, Fla. Admin. Code, which provides the administrative guidelines for public works contracts, states:

(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... 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... 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... 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... 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....

Discussion, Analysis and Conclusion

Rule 12A-1.001(9), Fla. Admin. Code, states that, for a sale to a state or local governmental entity to be tax exempt, "payment must be made directly to the dealer by... the political subdivision of a state...." Rule 12A-1.094(2) and (3), Fla. Admin. Code, state that 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, the transaction is exempt. For there to be an exempt transaction, the government entity must directly purchase, hold title to, assume the risk of loss of the tangible personal property prior to its incorporation into realty, and satisfy various factors contained in Rule 12A-1.094, Fla. Admin. Code.

Other 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.

The circumstances recounted in the exhibits submitted with your December 2, 1996 letter appear to satisfy the requirements for exemption of the transaction as a sale to a governmental entity: The School District will prepare purchase orders for equipment, materials, and supplies for direct purchase; the School District will hold full title to all owner-purchased materials from the time they are delivered to the job site until they are

incorporated into the project or consumed in the completion of the project; invoices will be delivered to the construction manager at the job site, and the construction manager will forward the invoices to the School District for payment; the School District will issue and remit checks directly to the vendors; and, although the construction manager is responsible for purchasing builder's risk insurance, the School District will reimburse the construction manager for same, will be listed as an additional insured party, and will bear all risk of loss. Thus, all purchases of materials which are made in accordance with these exhibits 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, Fla. Admin. Code, a copy of which is enclosed. It is recommended that all of the required elements of the exemption certificate specified in this rule 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), Fla. Admin. Code. Under this 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 are subject to use tax on the full cost of the manufactured or fabricated articles as detailed in Rule 12A-1.051(5), Fla. Admin. Code.

This response constitutes a Technical Assistance Advisement under Fla. Stat. s. 213.22 (1995), 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. 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,

Gypsy Bailey
Senior Attorney
Tax Policy and Dispute Resolution
(904) 922-9411

Control #: 27212
/gcb
Encl.: Rule 12A-1.039

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