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

NOTICE UNDER THE AMERICANS WITH DISABILITIES ACT

Persons needing accommodations to participate in any proceeding
before the Department of Revenue should contact the Department at
(904)488-0717 or 1-800-DOR-8331 (TDD), at least five (5) working
days before such proceeding. You may also call via the Florida
Relay System at 1-800-955-8770.