Was an FDOT contract for a statewide electronic toll-collection system a public-works construction contract or a tax-exempt sale of equipment to the state?

Subject

Public Works Contract vs. Sale of Tangible Personal Property

Plain-English summary

The Department concluded that FDOT's toll-system request for proposals produced a public-works construction contract, not a tax-exempt retail sale of equipment to the state. The project combined software and design, computers and roadside peripherals, signs and pavement markings, radio-frequency tags, civil work, installation, training, documentation, and maintenance.

Florida exempted direct sales to government, but excluded property sold to contractors when it went into or became part of government-owned public works. For this project, the contractor was the ultimate consumer and owed sales or use tax on the tangible personal property incorporated into or used in performing the state-owned toll system contract.

The Department rejected the contractor's argument that the project was primarily a sale of tangible personal property with only minor installation work. It relied instead on a Florida Supreme Court decision treating relocatable classroom buildings as public works because the contractor fabricated, transported, and installed them for state ownership.

What this means for you

Government ownership and government funds did not automatically make a contractor's purchases exempt. The public-works rule looked at the substance of the transaction and whether the contractor had an independent purchasing and performance role.

Relevant factors included bidding, delivery, inspection, acceptance, payment, storage, indemnification, risk of loss, insurance or bonding, purchasing authority, and vendor relationships. The rule described risk of loss as especially important.

Common questions

Q: Did title passing to FDOT make the contractor's purchases exempt? Not by itself. The rule said government title and payment alone could not establish an exempt government purchase.

Q: Why was this project considered public works? It was a state-authorized, bonded project for public purposes that implemented and installed a statewide toll-collection system owned by Florida.

Q: Who was responsible for tax on incorporated materials? The contractor, as ultimate consumer.

Q: Did the Department apply the case about a mostly tangible-property private contract? No. It distinguished that case because it did not involve a government contract and relied on the public-works precedent instead.

Citations and references

• Fla. Stat. § 212.08(6) — government-sales exemption and exception for contractor property entering public works
• Fla. Admin. Code R. 12A-1.094(1)-(5) and (7) — public-works taxation, transaction-substance factors, manufactured materials, and use tax
• Fla. Admin. Code R. 12A-1.051(5)-(6) — contractor-manufactured materials referenced by the public-works rule
• Housing by Vogue, Inc. v. Department of Revenue, 422 So. 2d 3 (Fla. 1982) — state-owned relocatable classrooms treated as public works
• Kings Bay Yacht Club, Inc. v. Green, 173 So. 2d 509 (Fla. 1st DCA 1965) — private-contract decision distinguished by the Department
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-014

Original ruling text

SUMMARY

Tangible personal property, going into and becoming a part of public works owned by the State of Florida, under the completion of a contract, issued pursuant to a Request for Proposal (RFP) by the Florida Department of Transportation for the implementation of a sophisticated system to collect tolls at sites throughout Florida, is taxable under Chapter 212, F.S., for sales or use tax to the contractor, as the ultimate consumer of such Tangible personal property. Contractor asserted that the decision in Kings Bay Yacht Club, Inc. v. Green, 173 So.2d 509 (Fla. 1 DCA 1965), was controlling. Department determined that Kings Bay Yacht, supra, was not controlling, as that decision did not involve a contract with a governmental agency, and other factors relative to the contract under review in that case were not pertinent to the contract provisions under the RFP. Rather, the Department determined that the Supreme Court decision in Housing by Vogue, Inc. v. Department of Revenue, 422 So.2d 3 (Fla. 1982) is dispositive, which held that relocatable classroom buildings were "public works" within meaning of the sales and use tax statute, and thus materials purchased by builders for the fabrication, transportation and installation of the portable classroom units were taxable to the builders as tangible personal property which went into or became part of public works owned by the state.

Mar 04, 1997

Re: TAA 97A-014
Sales and Use Tax; Public Works Contract vs. Sale of Tangible Personal Property Section 212.08(6), F.S. Rule 12A-1.094, F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to

your letter dated September 18, 1996, in which you asked whether the XXX, Florida Department of Transportation, Request for Proposal (RFP) (submitted with your request for review), is a construction contract or one involving primarily the sale of tangible personal property.

Your letter of request provided the following information and estimates for consideration in this matter:

XXX ["Contractor"] is submitting the [RFP] proposal to the Florida Department of Transportation (FDOT) for the implementation of a sophisticated system to collect tolls at sites throughout Florida. Outlined below are descriptions of the major categories of work involved in the project references to the RFP technical descriptions, and the approximation of percent of the total project they each comprise.

1. Software, Design, Management -28%...

Comprises the project management and completion of the software development and hardware design, training, documentation, and one-year maintenance. This also includes Civil Inspection and Design.

2. Furnish and Install Computers and Peripherals -37%...

More than 90% of this area is involved with supplying ruggedized PC's in toll booths, cameras above the roadway, and microwave transmitters above the roadway, and PC workstations in FDOT offices. Approximately 10% of this is related to the civil and electrical work to place conduit and cable between the devices. In essence this is a sophisticated and ruggedized outdoor PC network.

3. Furnish and Install Signs and Pavement Marking -6%...

Supply and mount roadway signs in and around the plaza. Approximately 50% material.

4. Supply Radio Frequency ID Tags - 29%...

These tags are sold or given away by the FDOT and placed on motorist windshields. They allow the car to pass through the toll plaza non-stop, be identified via microwave radio and charge their credit card for the toll. No services are provided by the contractor other than shipping to a FDOT site.

The taxpayer believes that the decision in Kings Bay Yacht Club, Inc. v. Green, 173 So.2d 509 (Fla 1 DCA 1965), is applicable to the instant RFP. In that decision, the court held that where a contract is one primarily involving the sale of tangible personal property, the owner and not the contractor is the ultimate consumer obligated for payment of sales tax, even though the contract requires the contractor to furnish labor and materials necessary to do minor amounts of repairs, alterations, improvements, or construction on real property in which the tangible personal property is to be located.

In reviewing the above facts and the attached RFP, please advise if the contractor is the ultimate consumer of and as such responsible for the sales or use tax, or the RFP is considered the sale of tangible personal property whereby the owner and not the contractor is the ultimate consumer obligated for payment of sales tax. Also, please advise the statutory authority. LAW

Definitions contained within Section 212.02, F.S., ascribe the meaning of "Use" as the exercise of any right or power over tangible personal property incident to the ownership thereof, or interest therein, except that it does not include the sale at retail of that tangible personal property in the regular course of business. The term "use tax" includes the use, the consumption, the distribution, and the storage as those terms are so defined.

Section 212.08(6), F.S., 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, except public works in progress or for which bonds or revenue certificates have been validated on or before August 1, 1959.... (Emphasis supplied)

Rule 12A-1.094, F.A.C., 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....

(7) Contractors who purchase tangible personal property outside the State of Florida, or inside the State but fail to pay sales tax, and use such property in a public works project shall be presumed to have the beneficial use of such property because the property is being used in furtherance of the contractor's essentially independent commercial enterprise. Accordingly, such contractors shall be liable for the use tax.

DISCUSSION, ANALYSIS AND CONCLUSION

The Department disagrees with your conclusion that Kings Bay Yacht, supra, is controlling under the facts and circumstances applicable to the RFP. Kings Bay Yacht did not involve a contract with a governmental agency, and other factors relative

to the contract under review in that case are not pertinent to the contract provisions under the RFP. Rather, the Department considers the decision reached by the Florida Supreme Court in Housing by Vogue, Inc. v. Department of Revenue, 422 So.2d 3 (Fla. 1982) as dispositive.

In Housing by Vogue, the Court held that the relocatable classroom buildings were "public works" within meaning of the sales tax statute, and thus materials purchased by builders for the fabrication, transportation, and installation of the portable classroom units were taxable under Chapter 212, F.S., as tangible personal property which went into or became part of public works owned by the state. In that case, the Court cited a definition of public works contained in American Jurisprudence, Second Edition: "... Such buildings, structures, and other works which by statute are authorized to be constructed for public purposes by the state or public agencies therein are generally to be regarded as public works." 64 Am.Jur.2d, Public Works and Contracts, s. 1. The RFP and subsequent contract issued by FDOT, pursuant to successful bid, is authorized by state law for public purposes, administered, and bonded as any fixed works constructed for public use. Thus, the exclusion from the exemption of tax on sales made to governmental entities or political subdivisions, for the sale of tangible personal property made to contractors when such tangible personal property goes into or becomes a part of public works, found in s. 212.08(6), F.S., and the Department's interpretation of the statute found Rule 12A-1.094, F.A.C., are controlling in this instant case. Therefore, the XXX RFP is for a construction contract which becomes a part of public works. Accordingly, the contractor is the ultimate consumer and is responsible for the sales or use tax on the tangible personal property going into or becoming a part of the performance of that contract as public works owned by the State of Florida.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. 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,

Horace Royals
Tax Law Specialist

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