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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