Could a Florida county buy construction materials tax-free for its county-owned civic arena while a private developer and contractor built the project?

Plain-English summary

The Florida Department of Revenue concluded that materials purchased under a county's arena-development agreement would be exempt from sales tax when the stated procedures were followed. Although a private project developer and general contractor would construct the county-owned civic arena, the county itself would be the purchaser of the designated materials.

The county would issue purchase orders bearing its consumer's certificate of exemption number, retain legal and equitable title from delivery through incorporation or consumption, pay suppliers directly, and insure the materials against loss or damage. Those facts made the purchases exempt sales to the government rather than taxable purchases by a contractor.

The county also had to give each vendor a properly completed exemption certificate at the time of purchase. The ruling did not extend to materials manufactured or fabricated by a contractor or subcontractor; for those articles, the contractor remained the ultimate consumer and owed use tax on the full cost.

What this means for you

Counties and other local governments

A public project does not by itself make contractor purchases exempt. The governmental entity must substantively act as the purchaser, including ordering the goods, taking title, paying the vendor, and bearing the risk of loss.

Construction contractors and project developers

The agreement allowed the contractor to prepare requisition requests and forward invoices, but the county retained the decisive purchasing functions. Contractor-manufactured or fabricated materials remained taxable under the separate rule cited in the advisement.

Vendors and accounting teams

The vendor needed exemption documentation at the time of sale. The ruling recommended putting all required certificate elements in both the purchase orders and bid requests.

Common questions

Q: Were all materials used in the arena automatically exempt? A: No. The result covered materials purchased in accordance with the agreement's direct-purchase procedures.

Q: Who had to pay the suppliers?
A: The county had to remit payment directly to each supplier.

Q: Who bore the risk before installation? A: The county retained title and provided insurance covering loss or damage from the time it took title until the materials were incorporated or consumed.

Q: Did the ruling cover materials made by the contractor? A: No. The advisement said contractors and subcontractors manufacturing or fabricating their own materials were the ultimate consumers and 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-009

Original ruling text

SUMMARY

A county submitted a copy of its Arena Development Agreement for a determination of whether the project would qualify as a public works under Rule 12A-1.094, Fla. Admin. Code. The agreement provided that the County had the right to purchase materials directly; the County would prepare purchase orders, which would include its consumer's certificate of exemption number, for materials; the County would retain legal title to all County Furnished Materials from the time they were delivered to the job site until incorporated into the project or consumed in completion of the project; the suppliers would provide invoices to the General Contractor, who would forward same to the County for payment; the County would remit payment directly to the suppliers; and the County would provide insurance to cover all risk of loss or damage. Thus, all purchases of materials made in accordance with this agreement would be exempt from sales tax.

Feb 06, 1997

Re: Technical Assistance Advisement 97A-009 XXX ("County") XXX ("Project Developer") Sales and Use Tax -- Local Government Contract to Construct Civic Arena 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 20, 1996, in which you asked for a technical assistance advisement indicating that the procedures proposed in your letter would provide for a tax exempt transaction.

Facts

As recounted in your letter, the County

issued $184,100,000 [in]... Tax and Revenue Bond[s] for the purpose of acquiring land and constructing a Civic Arena. The land and arena are owned by [the] County. The arena is to be constructed pursuant to the Arena Development Agreement by the... Project Developer.

Pursuant to Section 2.6 of the Arena Development Agreement, the County has the option to purchase certain materials for the construction of the Arena, hereinafter referred to as "County-Furnished Materials."... This section was drafted with the intent that the County purchase certain materials directly from vendors to lower the cost of building the Arena Project. This office took into consideration Section 12A-1.094(4), F.A.C., and a similar agreement for purchase of materials for the County's Convention Center which was approved by your Department in 1989.

Letter at 1.

Section 2.6 of the Arena Development Agreement provides, among other things, that: (1) the County reserves the right to require the Project Developer to assign some or all of its agreements with material suppliers directly to the County; (2) the Project Developer will prepare purchasing requisition request forms which specifically identify materials which the County may elect to purchase directly; (3) the County will prepare purchase orders for each item the County chooses to purchase directly; such orders will contain the County's consumer certificate of exemption number; (4) the General Contractor will be responsible for obtaining delivery tickets and invoices from suppliers, and forwarding such invoices to the County for payment; (5) the General Contractor will account monthly to the County for all County Furnished Materials which have been delivered into the General Contractor's possession and the portions of such materials incorporated into the project; (6) although the General Contractor may have possession of County Furnished Materials, the County will retain legal and equitable title to all such materials; (7) the County will purchase and maintain

insurance sufficient to protect against any loss of or damage to County Furnished Materials; this insurance will cover the replacement cost of County Furnished Materials not yet incorporated into the project during the time between the date the County first takes title and the date such materials are incorporated into the project or consumed in completing the project; (8) the Project Developer will direct the General Contractor to provide the County with a requisition for payment within 15 days after receipt and acceptance of materials; and (9) the County will then prepare a check from the Construction Fund to the supplier, and release, deliver and remit the check directly to the supplier.

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 your letter and Section 2.6 of the Arena Development Agreement appear to satisfy the requirements for exemption of the transaction as a sale to a governmental entity: The County has the right to purchase materials directly; the County will prepare purchase orders, which will include its consumer's certificate of exemption number, for materials; the County will retain legal title to all County Furnished Materials from the time they are delivered to the job site until incorporated into the project or consumed in completion of the

project; the suppliers will provide invoices to the General Contractor, who will forward same to the County for payment; the County will remit payment directly to the suppliers; and the County will provide insurance to cover all risk of loss or damage. Thus, all purchases of materials which are made in accordance with this exhibit 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 #: 27433
/gcb
Encl.: Rule 12A-1.039

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