Could a county's direct purchases of materials for a design-build governmental-center renovation qualify for Florida's government-sales exemption?

Subject

Local Government Contract to Renovate/Expand Governmental Center

Plain-English summary

The Department concluded that construction materials purchased under the county's proposed direct-purchase procedure would be exempt from sales tax. The county planned a design-build renovation and expansion of its governmental center and reserved the right to buy selected systems and materials itself.

The contractor would prepare requisitions and inspect deliveries, but the county would decide which items to purchase, issue its own purchase orders, pay vendors directly, retain legal and equitable title, and maintain builder's-risk insurance. The county also bore the risk of loss while the materials were in the contractor's possession and before incorporation into the project.

Those facts made the county the substantive purchaser. Purchases following the contract exhibit were exempt when the county delivered a properly completed exemption certificate to each vendor at the time of purchase.

The approval did not extend to materials the contractor or subcontractors manufactured or fabricated themselves. Those businesses remained ultimate consumers and owed use tax on the full manufactured cost.

What this means for you

An owner-furnished-material clause could support exemption only when the government actually controlled and bore the economic consequences of the purchase. Contractor assistance with requisitions, inspection, and invoice approval did not defeat exemption on these facts.

The purchase orders and bid documents needed to contain the exemption information and preserve the county's title, payment, and risk-of-loss responsibilities.

Common questions

Q: Did the contractor choose what the county bought? The contractor identified possible purchases, but the county chose which items to buy and issued the purchase orders.

Q: Who paid vendors? The county paid them directly after contractor review of the invoices.

Q: Who owned materials while they were at the job site? The county retained legal and equitable title even when the materials were delivered into the contractor's possession.

Q: Were contractor-fabricated items exempt? No. The contractor or subcontractor owed use tax on full manufactured cost.

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 and contractor-manufactured property
• Fla. Admin. Code R. 12A-1.039 — exemption-certificate format referenced by the Department
• Fla. Admin. Code R. 12A-1.051(5) — manufactured-cost tax for contractor-fabricated items
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-013

Original ruling text

Mar 03, 1997

Re: Technical Assistance Advisement (97A-013)
XXX ("County")
Sales and Use Tax -- Local Government Contract to
Renovate/Expand Governmental Center
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.

Facts

As recounted in your letter, the County

is preparing to renovate and expand its existing [] County
Governmental Center. The Court will prosecute this work as
a design/build project. This means that the County will
hire one firm to design and build the renovations and
expansion.

The contract between the County and the Design/Build
Contractor will require that the County purchase certain
major systems or elements of the construction directly and
supply these to the Contractor for use in the project.
Attached to this letter as Exhibit "A" are the terms of
this contractual requirement.

As you can see from reviewing the attached copy of Exhibit
"A", 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. After the Contractor verifies the conformity of
the materials, the County will take possession of the
materials prior to their being incorporated into the
project. All risk of loss will be borne by the County and
the Contractor will reduce the penal sum of its public
construction bond by the cost of materials purchased
directly by the County. Materials purchased by the County
will not be covered by the Contractor's insurance. The
County will pay the vendor of the materials directly.
[The] County understands that this procedure will result in
a tax exempt transaction.

Letter at 1-2.

Exhibit A, which consists of pages four through 10 of a 67 page
contract, provides, among other things, that: (1) the County
reserves the right to make direct purchases of various
construction materials; (2) any materials purchased by the
County pursuant to an assignment of a material supply
subcontract or agreement will be referred to as "CountyFurnished Materials"; (3) the contractor will prepare purchasing
requisition forms, in a form acceptable to the County, which
specifically identify the materials the County may elect to
purchase directly; (4) after receipt of purchasing requisition
forms, the County will prepare purchase orders for items or
materials the County chooses to purchase directly; (5) the
contractor will inspect all shipments to the job site, approve
vendors' invoices, and forward the invoices to the County for
payment; (6) although the county-furnished materials will be
delivered into the contractor's possession, the County will
retain legal and equitable title to any and all county-furnished
materials; (7) county-furnished materials will be considered
"returned to the County" for purposes of their bailment at such
time as they are incorporated into the project or consumed in
the process of completing the project; and (8) the County will
purchase and maintain builder's risk insurance to protect
against loss of or damage to county-furnished materials, such
insurance covering the full value of materials not yet
incorporated into the project.

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 Exhibit "A"
appear to satisfy the requirements for exemption of the
transaction as a sale to a governmental entity: The County will
make direct purchases of various construction materials; after
receiving purchasing requisition forms from the contractor, the
County will prepare purchase orders for direct purchase; after
receiving the approved invoices from the contractor, the County
will pay same; the County will retain legal and equitable title
to all materials; and the County will be responsible for
maintaining builder's risk insurance. 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 #: 27114
/gcb
Encl.: Rule 12A-1.039

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