Could a Florida nonprofit directly buy building materials tax-free for contractor-built low-cost farmworker housing?

Subject

Construction for Nonprofit Corporation

Plain-English summary

The nonprofit could use its Florida exemption to buy qualifying building materials directly for the low-cost housing project. The approved procedure made the nonprofit the purchaser: it issued its own purchase orders and exemption certificates, vendors billed it directly, it paid vendors directly, title passed to it at delivery to its construction site, and it bore the risk of loss before installation.

The construction documents also required subcontractor requisitions, deductive change orders for the material cost and related tax savings, and nonprofit-funded payment and performance bonds and builder's-risk insurance. The exemption did not extend to purchases by the contractor or subcontractors, or to their equipment rentals.

What this means for you

An exempt organization's certificate alone does not make contractor-procured materials tax-free. The ordering, billing, payment, title, delivery, contract-price adjustment, and risk-of-loss arrangements must show that the exempt organization—not the contractor—is the actual purchaser.

Common questions

Q: Could the nonprofit directly purchase building materials without sales tax? Yes, if it followed the procedures described in the ruling and gave the vendor its exemption certificate at the time of sale.

Q: Could the contractor prepare purchase information or handle delivery? Yes. The contractor could act as purchasing agent, and subcontractors could inspect and accept deliveries, while the nonprofit remained the purchaser through its own orders, credit, invoices, payments, title, and risk.

Q: Did the exemption cover contractor or subcontractor purchases? No.

Q: Did it cover equipment rentals used for construction? No, even if the nonprofit ultimately bore the economic cost.

Citations and references

• Fla. Stat. § 212.08(7)(o) — nonprofit charitable institution exemption
• Fla. Admin. Code r. 12A-1.001(3)(a) — direct nonprofit purchases and payment
• Fla. Admin. Code r. 12A-1.038(1) — exemption-certificate requirement
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-046

Original ruling text

SUMMARY

Exempt Entity which holds a Consumer's Certificate of
Exemption, and which engaged a contractor for the
construction and expansion of low cost housing, is eligible
to purchase building materials exempt from sales tax where
certain conditions are met. These conditions are:

1. A Purchase Order Requisition Form in a form acceptable
   to the Exempt Entity and Contractor shall be prepared by
   subcontractors and submitted to the Exempt Entity prior to
   ordering Exempt Entity purchased materials.

2. The Exempt Entity will prepare and issue standard Exempt
   Entity purchase order forms to the vendors.

3. In conjunction with the execution of the Exempt Entity's
   Purchase Orders by the suppliers, the Subcontractor shall
   execute and deliver to the Exempt Entity, through the
   Contractor, deductive change orders reflecting the full
   value of all materials directly purchased by the Exempt
   Entity, plus all sales tax savings associated with the
   materials.

4. Subcontractors will be responsible for all matters
   relating to the receipt of materials purchased by the
   Exempt Entity including verifying correct quantities,
   inspection and acceptance of the goods at the time of
   delivery. The Subcontractor will forward the invoice to
   the Exempt Entity through the Contractor for payment.

5. Title to the Exempt Entity purchased materials will vest
   in the Exempt Entity at the time the materials are
   delivered to the Exempt Entity owned construction site
   (F.O.B. job site).

6. Exempt Entity is billed directly by the selling vendor
   for purchases of building materials.

7. Payment for the building materials is made directly to
   the selling vendor by the Exempt Entity.

8. The Exempt Entity will bear the costs of all Payment and
Performance Bonds and Exempt Entity Insurance including
Builder's Risk Insurance as a reimbursable expense to the
Contractor.

Jul 09, 1997

Re: TAA 97A-046
Sales Tax; Construction for Nonprofit Corporation
Section 212.08, Florida Statutes
Rule 12A-1.001, Florida Administrative Code
XXX (Exempt Entity)

Dear :

This response is in reply to your letter dated September
19, 1996, in which you request, on behalf of your client, Exempt
Entity, the issuance of a Technical Assistance Advisement
pursuant to s. 213.22, F.S., concerning the taxability of
purchases made by Exempt Entity for the construction of low cost
housing for migrant and seasonal farm workers. On September 19,
1996, a Letter of Technical Advice was issued regarding the same
issue. Your request has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. Therefore, the
Department is herewith granting your request for the issuance of
a TAA and the ensuing discourse shall embody said ruling.

In addition to the facts presented in your letter of
October 23, 1995, you have also submitted copies of a sanitized
copy of the contract between the owner (Exempt Entity) and the
Contractor, a sanitized copy of the Commercial Insurance Policy
obtained by the Owner (Exempt Entity), and a copy of the
exemption certificate presented to vendors by the Owner. You
have indicated that the authorized signature on behalf of the
Exempt Entity is that of the Executive Director of the Exempt
Entity.

By your letter of September 18, 1996, you have provided a
written statement that Exempt Entity is the owner of the land
and houses and construction thereon.

You have presented the following facts:

(Exempt Entity) is a Florida Non-Profit Corporation
organized exclusively for charitable purposes within the
meaning of Section 501(c)(3) of the Internal Revenue Code
of 1954, as amended. The corporation was formed for the
purposes of management, operation, maintenance,
construction and expansion of low cost housing (for)
migrant and seasonal farm workers. Construction of the low
cost housing is performed by an outside contractor
(hereinafter referred to as Contractor') pursuant to a Standard Form of Agreement Between Owner and Contractor (Agreement').

As part of the Agreement, (Exempt Entity) may elect to
exercise its right to sales tax savings by directly
purchasing building materials. As a non-profit
corporation, (Exempt Entity) holds a Florida Consumer's
Certificate of Exemption. Most building materials are
currently being purchased utilizing an (")Employer's
Authorization to Purchase on Behalf of an Exempt
Governmental or Nonprofit Organization(") which displays
its Exemption Number.

Contractor and (Exempt Entity) wish to avoid the numerous
change orders which would be required to reflect (Exempt
Entity's) sales tax savings on material it directly
purchases. Therefore, when monthly construction draws are
submitted by Contractor to (Exempt Entity), Contractor
reimburses (Exempt Entity) for materials which have been
purchased by (Exempt Entity), plus sales tax, less the
negotiated administrative costs associated with its
responsibilities as purchasing agent. The end result is
that the contract price is reduced by the sales tax savings
less the administrative costs associated with Contractor
acting as the purchasing agent.

Additional information provided in your discussion reveals
the procedure followed in making major purchases:

By contractual agreement, Contractor and (Exempt Entity)
have mutually selected vendors to provide building
materials based upon product specifications, price and
business/vendor reputation. (Exempt Entity) has established
lines of credit with such vendors, as required. When
materials are required, (Exempt Entity) issues a numbered
purchase order which is prepared by Contractor. Contractor
acts as purchasing agent for (Exempt Entity) since it is
the party most knowledgeable of sizes, quantities, etc.
The purchase order is approved by the Executive Director of
(Exempt Entity) who then prepares and issues an `Employer's
Authorization to Make Purchases on Behalf of an Exempt
Governmental or Nonprofit Organization.'

Materials delivered to the construction site are inspected
by employees of both [Exempt Entity] and Contractor.
((Exempt Entity) employs a full time clerk of the works who
is charged with acceptance and inspection of materials as
part of his duties.) Likewise, invoices received by (Exempt
Entity) are reviewed by both (Exempt Entity) and Contractor
to verify quantities. Contractor, as purchasing agent for
(Exempt Entity), prepares a partial release to be submitted
to the Supplier and a Requisition for Payment based on
approved invoices. (Exempt Entity) then issues a check
drawn on its local bank to supplier.

(Exempt Entity) has purchased Builder's Risk Insurance
covering loss or damage to the construction project,
including materials but excluding Contractor's machinery,
equipment and tools. (Exempt Entity) has purchased
replacement building materials to date for instances of
theft from the construction site.

An examination of the Contract discloses the following
pertinent information:

Article 2 Site lighting, telephone, cable television and

landscaping... installation and materials shall be the
responsibility of the Owner.... The Owner shall provide
the Builder's Risk Insurance and provide copy to
Contractor....

Attachment 7.3 provides in part:

7.3.0. The Owner, a nonprofit corporation organized in the
State of Florida and previously qualified as exempt from
sales tax, may elect to exercise its right to sales tax
savings throughout the Scope of Services.
...
7.3.1. The Owner or its purchasing agent has the right to
issue purchase orders for equipment and materials which are
included in the Contract Sum. The Contractor shall supply
to the Owner a Schedule of Materials that the Owner and
Contractor mutually agree may be purchased by the Owner.
This purchase order shall specify the quantity, technical
specifications, name of supplier and price and terms under
which the Owner shall purchase said materials and
equipment.
7.3.2. Materials and equipment purchased and paid for by
Owner through its purchasing agent will be assigned to the
Contractor for the period of the Work. Notwithstanding the
Owner purchase of any equipment, the Contractor shall
assume responsibility for all manufacturer warranties.
...
7.3.5. The Owner shall be responsible for its
administrative costs or fees associated with its hiring of
a purchasing agent, if any, related to its exercise of the
right to purchase materials.

In regards to subparagraph 7.3.2. of the Agreement which
presented some question, you provided the following:

The Executive Director of (Exempt Entity) has explained to
me that the only significance of that provision is to hold
the Contractor responsible for any mishandling of materials
which may void the manufacturer warranties. For example,
manufacturer warranties require proper installation (i.e.,
electrical material must be installed by a licensed

electrician). If the contractor or subcontractor were to
improperly install or mishandle any electrical materials,
the manufacturer could refuse to honor its warranty.
Otherwise, there is no possible way that the Contractor
could be held responsible for manufacturer warranties which
are a legal liability of the manufacturers.

At issue is "Whether Exempt Entity is the ultimate consumer
of building materials it purchases under the terms of the
construction agreement executed with its general contractor and
purchasing agent, and therefore entitled to purchase building
materials tax-exempt utilizing an `Employer's Authorization to
Make Purchases on Behalf of an Exempt Governmental or Nonprofit
Organization.'"

Statutory Authority

Section 212.08(7)(o), F.S., provides in pertinent part:

1. There are exempt from the tax imposed by this part
   transactions involving:...

b. Sales or leases to nonprofit religious, nonprofit
charitable, nonprofit scientific, or nonprofit educational
institutions when used in carrying on their customary
nonprofit religious, nonprofit charitable, nonprofit
scientific, or nonprofit educational activities, including
church cemeteries....

Regulatory Authority

Rule 12A-1.001(3)(a), F.A.C., provides in pertinent part:

(3) RELIGIOUS, EDUCATIONAL, CHARITABLE, VETERANS' AND
SCIENTIFIC ORGANIZATIONS, FEDERAL AND STATE CHARTERED
CREDIT UNIONS, FLORIDA RETIRED EDUCATORS ASSOCIATION AND
LOCAL CHAPTERS, AND ORGANIZATIONS PROVIDING SPECIAL
EDUCATIONAL AND SOCIAL BENEFITS TO MINORS....

(a) A sale or lease directly to or sales or leases of
tangible personal property by churches, or a sale or lease

directly to nonprofit religious, nonprofit educational,
nonprofit charitable institutions, and veterans'
organizations, for use in the course of their customary
nonprofit religious, nonprofit educational, nonprofit
charitable activities, and for use by veterans'
organizations, including church cemeteries, are exempt from
the tax imposed by Part I, Chapter 212, F.S.... However,
such institutions or organizations desiring to qualify for
the exemption must obtain from the Department of Revenue a
consumer's certificate of exemption, and payment must be
made directly to the dealer by the exempt entity. See
subparagraph (9)(d)2. of this rule for a suggested document
to be provided the dealer by an employee who has been
authorized to make purchases on behalf of a nonprofit
organization when payments are made directly to the dealer
by the exempt entity. This exemption shall not inure to
any transaction otherwise taxable when payment is made by
an exempt entity's employee by any means, including but not
limited to, cash, check, or credit card, when that employee
is subsequently reimbursed by the exempt entity. See Rules
12A-1.038 and 12A-1.039, F.A.C.

Rule 12A-1.038(1), F.A.C., provides in part:

(1) It is the specific legislative intent that each and
every sale, admission, use, storage, consumption, or rental
is taxable under Chapter 212, F.S., unless such sale,
admission, use, storage, consumption, or rental is
specifically exempt. The exempt status of the transaction
must be established by the dealer. Unless the dealer shall
have taken from the purchaser a certificate signed by the
dealer or the dealer's authorized representative to the
effect that the property or service was purchased for
resale and bearing the date, the name and address of the
purchaser, the effective date of the certificate, and the
number of the dealer's certificate of registration, or a
certificate signed by an authorized representative of the
organization bearing the number of the organization's
consumer's exemption certificate, the effective date of the
certificate, and the expiration date of the certificate,
the sale shall be deemed to be a taxable sale at

retail,....

Pursuant to section 212.08(7)(o), F.S., and Rule
12A-1.001(3)(a), F.A.C., sales tax does not apply to the
purchase of tangible personal property, including building
materials, where payment is made directly to the vendor by the
exempt organization and such purchases will be used to carry out
the exempt organization's customary nonprofit activities.
Further, the exempt organization is required by Rule
12A-1.038(1), F.A.C., to present the vendor with a properly
completed exemption certificate at the time of purchase in order
to establish tax exempt status of the transaction.

In those instances where the tax exempt entity delegates
its authority to the contractor to make purchases of tangible
personal property in the tax exempt entity's own name, using the
tax exempt entity's purchase orders, and using the tax exempt
entity's line of credit, and provided that the tax exempt entity
is invoiced directly for the purchases; no sales tax is due on
such purchases.

Notwithstanding the previous paragraph, even if the tax
exempt entity has structured a contract as described above, the
tax exempt entity must assume all risk of damage or loss for the
building materials from the time of purchase and prior to their
installation or incorporation into the project in order for the
sale of building materials to be deemed a sale to the tax exempt
entity, and thus be tax exempt. Further, the Department will
also give special consideration to several factors (bidding,
indemnification, inspection, acceptance, delivery, payment, and
storage) which govern the status of tangible personal property
prior to its affixation to real property when determining
whether the sale is to the tax exempt entity or to a contractor.
However, the assumption of risk of damage or loss is the
paramount consideration. The assumption of risk would include
the period of time that the building materials are physically
stored at the job site prior to their installation or
incorporation into the project. The tax exempt entity will be
deemed to have assumed the risk of damage or loss if the tax
exempt entity 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. If
the tax exempt entity does not assume the risk of damage or
loss, the contractor will be construed to be the ultimate or
final consumer of the building materials it uses and will be
liable for the applicable tax.

Determination

It is determined that building material purchases by the
Exempt Entity for the construction of the project are exempt
from sales tax in that:

1) The Exempt Entity issues the purchase orders;
2) The Exempt Entity issues exemption certificates;
3) Materials are delivered to Exempt Entity at the job site
and title of materials is transferred to Exempt Entity;
4) Contractor is responsible for all matters relating to
the receipt of materials;
5) Exempt Entity is billed directly by the selling vendor;
6) Payment for the materials is made directly by the Exempt
Entity;
7) Exempt Entity bears all risk of loss or damage to
material from the time of purchase and prior to their
installation into the project.

Based on your letters and contract documentation, the
Exempt Entity qualifies to purchase building materials directly
from third-party vendors tax exempt, provided the Exempt Entity
extends an exemption certificate including its Consumer's
Certificate of Exemption number at the time the sale of such
materials takes place. However, this tax exemption is not
provided to purchases made by contractors or subcontractors
providing construction services for the project.

The Exempt Entity must comply with the following provisions
in order to maintain this sales tax exemption for such material
purchases:

1. A Purchase Order Requisition Form in a form acceptable
   to the Exempt Entity and Contractor shall be prepared by
   subcontractors and submitted to the Exempt Entity prior to

ordering Exempt Entity purchased materials. The requisition
form will provide the name, address, telephone number and
contact person for the materials supplier; a list of required
items, the quantity needed, the price and sales tax associated
with the materials, and delivery dates established by the
subcontractor.

2. The Exempt Entity will prepare and issue standard Exempt
   Entity purchase order forms to the vendors.
3. In conjunction with the execution of the Exempt Entity's
   Purchase Orders by the suppliers, the Subcontractor shall
   execute and deliver to the Exempt Entity, through the
   Contractor, deductive change orders reflecting the full value of
   all materials directly purchased by the Exempt Entity, plus all
   sales tax savings associated with the materials.
4. Subcontractors will be responsible for all matters
   relating to the receipt of materials purchased by the Exempt
   Entity including verifying correct quantities, inspection and
   acceptance of the goods at the time of delivery. The
   Subcontractor will forward the invoice to the Exempt Entity
   through the Contractor for payment.
5. Title to the Exempt Entity purchased materials will vest
   in the Exempt Entity at the time the materials are delivered to
   the Exempt Entity owned construction site (F.O.B. job site).
6. Exempt Entity is billed directly by the selling vendor
   for purchases of building materials.
7. Payment for the building materials is made directly to
   the selling vendor by the Exempt Entity.
8. The Exempt Entity will bear the costs of all Payment and
   Performance Bonds and Exempt Entity Insurance including
   Builder's Risk Insurance as a reimbursable expense to the
   Contractor. The Exempt Entity is an additional named insured on
   the Contractor's Builder's Risk insurance and, in the event of
   damage or destruction to Exempt Entity purchased materials, the
   Exempt Entity will receive all proceeds derived from all claims
   against insurers or others to pay for repair or reconstruction
   as a result of damage or destruction.

If the above provisions are met, the purchases of
materials, supplies, equipment, and other materials from third
party suppliers by the Exempt Entity are exempt from tax,
provided the Exempt Entity supplies the vendor with its

certificate of exemption at the time of purchase.

This tax exemption does not apply to equipment rentals to
Contractor or subcontractors that provide construction services
for the Project, even though the economic burden of the tax, by
contract or otherwise, may ultimately be borne by Exempt Entity.

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,

Bonnie Everton
Senior Tax Specialist
Technical Assistance and
Dispute Resolution

/e
Cont. #26549