Could a county buy stadium construction materials tax-free when its development consultant and contractor identified what the project needed?

Subject

Local Government Contract to Construct Baseball Stadium and Spring Training Facilities

Plain-English summary

The Department concluded that materials purchased under the county's proposed owner-furnished-material procedure would be exempt direct government purchases. The county planned to build a baseball stadium and spring-training facilities for two major-league teams while a development consultant administered design and construction.

The contractor would identify material needs, but the county would remain the actual purchaser. It would issue purchase orders directly to vendors, attach its exemption certificate, pay vendors directly, take title and possession before incorporation, assume risk of loss, reduce the contractor's bond coverage for those goods, and obtain its own insurance.

Those facts placed the county in the purchaser's role rather than merely giving a private contractor government funds or title. The Department approved purchases made in accordance with the submitted contract exhibits, provided a properly completed exemption certificate was given to each vendor at purchase.

The ruling did not exempt contractor-manufactured or fabricated materials. For those items, the contractor or subcontractor remained the ultimate consumer and owed use tax on full manufactured cost under the separate rule.

What this means for you

For public-works materials, the exemption depended on substance rather than labels. Government title and payment alone were insufficient unless the government also controlled the purchase and bore the economic risk before the materials became part of the project.

Purchase orders and bid documents needed to preserve the county's direct role and include the required exemption-certificate information.

Common questions

Q: Could the contractor specify which materials were needed? Yes. The contractor could compile requirements, but the county had to issue and control the actual purchase order.

Q: Who paid the vendors? The county paid them directly.

Q: Who bore risk if materials were lost before installation? The county assumed the risk and maintained insurance for county-furnished materials.

Q: Were materials fabricated by the contractor also exempt? No. The contractor remained taxable on the manufactured cost of its own fabricated items.

Citations and references

• Fla. Stat. § 212.08(6) — direct government-sales exemption and contractor exception for public works
• Fla. Admin. Code R. 12A-1.001(9) — direct payment and government exemption documentation
• Fla. Admin. Code R. 12A-1.094(1)-(5) — public-works purchasing factors, including title, possession, payment, and risk of loss
• Fla. Admin. Code R. 12A-1.039 — exemption-certificate format referenced by the Department
• Fla. Admin. Code R. 12A-1.051(5) — contractor-manufactured property tax base
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-012

Original ruling text

Mar 03, 1997

Re: Technical Assistance Advisement (97A-012) XXX ("County") XXX ("Development Consultant") Sales and Use Tax -- Local Government Contract to Construct Baseball Stadium and Spring Training Facilities 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 November 21, 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. On September 10, 1996, you requested a letter of technical assistance on this identical issue, and were provided with same on October 14, 1996.

Facts

As recounted in your letter, the County

is preparing to build a new major league spring training baseball facility. This project will include the construction of a baseball stadium as well as training facilities for two major league baseball teams. [The] County has entered contracts with entities representing
[two such teams] to use those spring training facilities.

We have structured the construction of this facility to create a quicker design and construction process than is normal. [The County] has hired a Development Consultant [] to administer the design and construction of the project.... [The Development Consultant] will hire the Designer and Contractor for the construction of the project. The Designer and Contractor will submit their invoices and statements to [the Development Consultant] who

will certify them and pass them on to the County. Upon receipt the County will pay [the Development Consultant] for the services rendered by [the Development Consultant], the Designer, and the Contractor.

....

The contract between the County and [the Development Consultant] provides that the County will purchase certain major systems or elements of the construction directly and will supply these to [the Development Consultant] and the Contractor for use in the project. The terms of this provision are contained in Exhibit "K" to the County/
[Development Consultant] agreement [a]nd are attached to this letter. The proposed construction agreement between
[the Development Consultant] and the Contractor incorporates these same provisions as Exhibit "R" to that agreement condition.

As you can see from reviewing the attached copy of Exhibit "K", the Contractor will designate the materials to be purchased and [the] County will, then, issue its own purchase order for those materials. The County will insure, take delivery of, and take title to those materials. The vendor of the materials will be paid directly by the County. The County understands that this procedure will result in a tax exempt transaction.

Letter at 1-2.

Exhibit K, entitled "Provisions Governing State of Florida Sales and Use Tax Exemption Owner-Furnished Materials,"(FN 1) and Exhibit R, entitled "Provisions Governing State of Florida Sales and Use Tax Exemption County-Furnished Materials," provide, among other things, that: (1) the County shall make direct purchases of all materials and equipment purchased for, or to be incorporated into, the facility; (2) after the Contractor compiles the itemized requirements for materials and submits same to the Project Representative, the Project Representative will forward same to the County, which will issue a purchase order directly to the vendor of the materials; the County will

include with such purchase orders a copy of its sales and use tax exemption certificate; (3) after the Contractor verifies the conformity of the materials, the County will take title and possession of same prior to their being incorporated in the facility; (4) the County will assume all risk of loss on all materials and equipment; (5) the Contractor will reduce the penal sum of its public construction bond by the cost of the materials purchased directly by the County, and will modify its insurance provision to reflect that loss of the materials purchased directly by the County shall be excluded from coverage under the Contractor's policies of insurance; and (6) the County will purchase and maintain insurance sufficient to protect against any loss to County-furnished materials.

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 Exhibits "K" and "R" appear to satisfy the requirements for exemption of the transaction as a sale to a governmental entity: The County will make direct purchases of all materials to be used in the project; the County will pay vendors directly and include a copy of its sales and use tax exemption certificate; the County will take title and possession of all materials prior to their incorporation into the project; the County will assume all risk of loss for materials; and the County will purchase and maintain insurance to protect against loss and damage of County-furnished materials. 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, Fla. Stat. (1995), which are subject to disclosure to the public under the conditions of Fla. Stat. s. 213.22 (1995). 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,

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

Control #: 27113
/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.

FOOTNOTE 1 Also referred to as "Developer Agreement" in a footer.