Could a city agency buy materials tax-free for parkway landscaping, lighting, utilities, and road work while a general contractor managed the project?

Plain-English summary

Materials purchased after the city agency adopted and followed its direct-purchase procedures were exempt from Florida sales tax. Under the amended documents, the agency was the purchaser in substance: it issued purchase orders, took title at delivery, paid vendors directly, and maintained insurance covering its materials until incorporation into the project.

The general contractor and subcontractors still selected vendors, supplied requisitions, inspected deliveries, stored materials as bailees, installed them, and managed warranties. Considering the full arrangement, those duties did not outweigh the agency's direct ownership, payment, and risk of loss.

Timing mattered. Purchases made before the March 4, 1997 amendment were not exempt because the original agreement required the general contractor to acquire the materials and the agency to pay the contractor rather than the vendors.

What this means for you

A public-works direct-purchase program must be embedded in the controlling contract before the purchases occur. A later amendment does not convert earlier contractor purchases into exempt government purchases.

The Department treated risk of loss as the paramount factor. The agency's builder's-risk coverage, plus its economic interest as an insured party under any overlapping contractor policy, supported the conclusion that it bore the material risk.

Common questions

Q: Who had to issue purchase orders and pay vendors? The city agency issued orders carrying its exemption information and delivered its own payments directly to vendors.

Q: When did the agency take title? Upon delivery, retaining title until the materials were incorporated into the project.

Q: Did contractor inspection, storage, installation, and warranty duties defeat the exemption? No. The agency remained the purchaser under the transaction as a whole.

Q: Were purchases made before the contract amendment exempt? No. The original terms made the general contractor the purchaser.

Q: Did the ruling cover contractor-manufactured materials? No. Contractors and subcontractors remained taxable consumers of articles they manufactured or fabricated.

Citations and references

• Fla. Stat. § 212.08(6) — exemption for direct government purchases and exclusion for contractor purchases
• Fla. Admin. Code r. 12A-1.001(9) — government exemption documentation and direct payment
• Fla. Admin. Code r. 12A-1.094 — substance-of-transaction and risk-of-loss factors for public works
• Fla. Admin. Code r. 12A-1.039 — exemption-certificate format referenced by the Department
• Fla. Admin. Code r. 12A-1.051(5) — contractor manufacturing or fabrication of materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-057

Original ruling text

SUMMARY

Materials for a city landscaping and street project can be purchased tax exempt where under the terms of the controlling documents: (1) the city issues its purchase orders directly to the vendors; (2) the purchase orders include the city's consumer's certificate of exemption number and the city will provide the vendor with a certificate of exemption; (2) the vendors invoice the city directly; (3) the city issues its checks directly to the vendors in payment of the invoices; (4) the city takes title to the materials from the vendor and assumes liability for the materials upon their delivery to the job site; (5) the city assumes the risk of loss of the materials upon delivery, which is clearly established by the city's being required to and actually purchasing insurance against loss or damage; and (6) the remaining terms of the documents do not prevent concluding that the city rather than the contractor is in substance as well as in form the purchaser of the materials.

Sep 04, 1997

Re: Technical Assistance Advisement (97A-057) XXX ("Agency") Sales and Use Tax -- Local Government Contract to Develop Landscaping, Street Lighting, Utilities and Road Improvements Section 212.08(6), F.S. Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of Revenue dated February 27, 1997, in which you asked for a technical assistance advisement indicating that the procedures proposed in your letter would provide for tax-exempt purchases.

Facts

Agency is a division within the governmental structure of XXX ("City"). According to your letter, Agency is "undertaking the development of landscaping, street lighting, utilities and road improvements" (the "Project") along a parkway. Enclosed with your letter was a copy of a contract executed on August 20, 1996 (the "Agreement"), by Agency and XXX (the "General Contractor") pursuant to which General Contractor was engaged to act as construction manager as well as general contractor for the Project. The Agreement contains the following relevant provisions:

1. The Agreement can be amended only by a written instrument
   signed by both parties. Section 1.2.

2. The construction phase will be separately authorized in
   writing by Agency and no expenditures for construction are authorized until that time. Section 2.1.3.

3. During the design phase, General Contractor will make
   recommendations to Agency in regard to dividing the work on the Project into separate subcontracts and will solicit bids and award subcontracts. Agency reserves the right to require General Contractor to assign some or all subcontractor bids or agreements to Agency. General Contractor is required to work with Agency in developing a program to allow Agency to purchase materials for the Project. Section 2.3.4.

4. General Contractor will advertise, solicit and receive bids
   and will award bids to the low qualified bidders. At least three bids will be solicited for each contract. General Contractor will, with Agency approval, establish qualification procedures for subcontract trades. Section 2.4.4.

5. General Contractor will furnish to Agency performance and
   payment bonds equal to the construction cost as defined in Article 9, which is discussed below. Section 2.4.5.

6. General Contractor shall be the only contact point with

subcontractors. All subcontracts will be between General Contractor and the subcontractor. Nothing in the documents will create a direct contractual relationship between a subcontractor and Agency. Each subcontractor is to receive a copy of the prime contract and to assume the same obligations to General Contractor in the subcontract that General Contractor has to Agency in the prime contract. All subcontracts must include the right of Agency to require General Contractor to assign some or all of the subcontract to Agency. Sections 2.4.7., 5.1, 5.3.1., 5.3.2.

7. General Contractor shall negotiate all change orders, at
   all times acting in the best interests of Agency. Agency must approve all change orders. Except in cases of hazards to health and safety, no work can begin on a change order until written authorization from Agency is received. Section 2.4.7.

8. General Contractor warrants the newness of all materials
   used, unless otherwise provided in the relevant documents, and all work performed for one year. Section 2.4.15.

9. General Contractor is liable to Agency for all acts and
   omissions of General Contractor, its agents or the subcontractors. Section 5.4.

10. Agency shall pay the lower of a guaranteed price or the sum
    of the actual costs required to be reimbursed to General Contractor by Article 9 plus General Contractor fees. Included in the costs to be reimbursed are materials and supplies purchased by the General Contractor, any sales or use taxes related to such purchases, premiums for insurance and bonds General Contractor is required to maintain for the Project, and property damage deductibles paid by General Contractor. Sections 7.1., 9.1., 9.2.2, 9.2.6, 9.2.7., 9.6.

11. If Agency furnishes any materials for the Project, it will
    retain legal and equitable title to those materials even though possession may be transferred to General Contractor. Agency is required to purchase Builder's Risk insurance sufficient to protect against any loss of or damage to such materials. The insurance is to cover the full value of the materials from the

time Agency takes title until they are incorporated into the Project or consumed in the process of completing the Project. Section 12.7.

12. General Contractor indemnifies Agency against any claims or
    losses for personal injury or destruction of tangible property (other than the work itself) arising out of the performance of the work if such claim or loss is caused by the negligence of General Contractor or a subcontractor. The indemnification obligation is void if the cause of the claim or loss is negligence of Agency or City. Sections 13.1.l, 13.1.3.

13. General Contractor is required to obtain builder's risk
    insurance covering the project, including unincorporated materials, against damage or loss due to fire, lightning, vandalism, weather conditions, riots and similar incidents. Such insurance is to cover the full value of the respective interests of General Contractor, City and Agency and to name City and Agency as additional insured parties. Section 13.2.2.

On February 4, 1997, General Contractor submitted to the Department a document entitled "Sales Tax Exempt Purchasing Procedures for Public Projects" as revised on January 24, 1997 (the "Procedures") and requested advice on whether the Procedures would provide for tax-exempt transactions. General Contractor's request did not mention Agency, the Project or any other specific undertaking, and no copy of the Agreement was submitted with the request. On February 18, 1997, the Department issued to General Contractor a letter of technical assistance that concluded that transactions conducted in accordance with the Procedures would, subject to certain limitations, be exempt from sales tax. The Procedures provide the following:

1. Agency reserves the right to purchase directly materials
   included in bids of subcontractors, and subcontractors will provide lists of materials and suppliers for review by Agency to determine whether to make direct purchases.

2. Subcontractor bids will be reduced through change orders to
   reflect that the subcontract does not include materials that

Agency chooses to purchase directly and to subtract from the contract price their cost and related sales/use taxes. In such case, Agency will purchase from the same vendor that the subcontractor would have purchased from and at the same price and on the same terms as the vendor extended to the subcontractor.

3. Seven days prior to the date on which materials Agency has
   elected to purchase must be ordered, the subcontractor shall provide a Purchase Order Requisition Form so that Agency can process it and issue its own Purchase Order to the vendor, which purchase order shall identify Agency as purchaser and contain Agency's consumer's exemption certificate number, issue date and expiration date.

4. The subcontractor and General Contractor will inspect all
   materials purchased pursuant to the Procedures upon their delivery and shall verify the correctness of the delivery and the lack of defects in the materials. Invoices will be forwarded to Agency for payment after such verification.

5. Agency shall take title upon delivery and shall retain
   title to all materials it purchases and subcontractors shall act as bailees as to all Agency-purchased materials in their possession, which shall be stored and safeguarded by the subcontractors for Agency during the period of bailment until returned to Agency through incorporation into the Project. Subcontractors shall be liable for loss or damage to Agencypurchased materials in their possession if such loss or damage results from the subcontractor's negligence. Subcontractors shall be liable for obtaining any warranties on such materials as required by the contract and for managing any such warranties while the materials are in their possession.

6. Upon verification by the subcontractor of receipt and
   inspection of materials, Agency (or City) will prepare its own checks to vendors for payment and deliver such checks directly to the vendors.

7. Agency shall purchase and maintain insurance pursuant to
   the requirements set forth in the Agreement sufficient to

protect against any loss of or damage to Agency-purchased materials. The insurance shall cover the full value of such materials from the time Agency takes title until they are incorporated into the Project. (This provision basically echoes the requirement of Section 12.7 of the Agreement that Agency is required to purchase and maintain builder's risk insurance on any materials it furnishes for use in the Project.)

On March 4, 1997, Agency and General Contractor executed Amendment No. 1 (the "Amendment") to the Agreement. A copy of the Amendment was provided to us on March 12, 1997. In relevant part, the Amendment provides that work on the construction phase of the Project will begin March 31, 1997, and that General Contractor will coordinate direct purchases of materials for the Project by Agency in accordance with the Procedures, which are attached to the Amendment as an exhibit. Pursuant to section 2.1.3 of the Agreement itself, cited above, no construction phase expenditures could be incurred prior to March 4 when Agency authorized its commencement in writing. Agency has also provided the Department with a certificate of insurance and relevant provisions of the insurance policy to establish that City and Agency have obtained builder's risk insurance covering materials purchased for the Project through City's risk management office.

Law

Sales to governmental units are exempt from sales tax pursuant to section 212.08(6), F.S., which 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), F.A.C., entitled "Governmental Units," contains guidelines for claiming and documenting the exemption. Governmental entities must obtain a consumer's certificate of exemption from the Department. Vendors are required to obtain for their records proper documentation of the exempt status of the sale.

By its terms, section 212.08(6), F.S., exempts only direct purchases by governmental entities and excludes sales made to contractors of tangible personal property that becomes part of public works owned by such entities. Administrative guidelines governing the taxability of materials purchased for public works contracts are contained in Rule 12A-1.094, F.A.C., which provides:

(1) This rule shall govern the taxability of transactions in which contractors manufacture or purchase supplies and materials for use in public works,....

(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....

(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.... 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), F.A.C., states that in order 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), F.A.C., state that the purchase of materials is taxable to the contractor as the ultimate consumer where the contractor is deemed to be the purchaser. If the purchaser of the materials is the governmental entity, however, the transaction is exempt. For there to be an exempt transaction, the governmental entity must directly purchase, hold title to and 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, F.A.C.

Under Rule 12A-1.094, F.A.C., 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 during the time that the building materials are physically stored at the job site prior to their installation or incorporation into the project is the paramount consideration. The governmental entity must assume all risk of loss or damage for the tangible personal property during that period. To establish that it has assumed that risk, the governmental entity should purchase, or be the insured party under, insurance on the building materials.

To summarize, the conditions that must be met to satisfy the requirements of Rule 12A-1.094, F.A.C., and establish that the governmental entity rather than the contractor is the purchaser of materials, include:

1. The governmental entity must execute the purchase orders
   for the tangible personal property involved in the contract, which must include the governmental entity's consumer's certificate of exemption number. The contractor may present the governmental entity's purchase orders to the vendors of the tangible personal property;

2. The governmental 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 governmental entity
   for supplies;

4. The governmental entity must directly pay the vendors
   for the tangible personal property; and

5. The governmental entity must assume all risk of loss or
   damage for the tangible personal property involved in the contract, as indicated by the entity's acquisition of or inclusion as the insured party under insurance on the building materials.

The circumstances outlined in the Procedures appear to satisfy the foregoing requirements for exemption of transactions as sales to a governmental entity: Agency will make direct

purchases of various construction materials. After receiving requisition forms from the subcontractors, Agency will prepare purchase orders for direct purchases. After receiving the approved invoices from the subcontractors, Agency will pay the vendors directly. Agency will retain legal and equitable title to all materials it purchases and will be responsible for maintaining builder's risk insurance on those materials. Both Section 12.7 of the original Agreement and the Procedures require Agency to purchase such insurance on materials it furnishes for the project. In addition, if Section 13.2.2 of the Agreement is interpreted to require General Contractor to carry additional, duplicative builder's risk insurance on materials purchased and furnished by Agency, Agency would pay for that insurance as a cost that is reimbursed to contractor and would receive the economic benefits of the proceeds as a named insured party under such insurance to the extent of its interest in any damaged or lost materials.

Based upon the conclusion that Agency is the purchaser, all purchases of materials which are made in accordance with the Procedures 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, F.A.C., a copy of which is enclosed.

Please note that this response does not apply to a contractor that manufactures or fabricates its own materials as specified in Rule 12A-1.094(5), F.A.C. Under the rule, 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 their contracts. 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), F.A.C.

In addition, if any purchases were made pursuant to the terms of the original Agreement prior to March 4, 1997, when it was amended to incorporate the Procedures, such purchases would not qualify as exempt. Prior to amendment, the Agreement required General Contractor to acquire all materials needed for the

Project and for Agency to pay General Contractor rather than the vendors. Therefore, in its unamended form, the Agreement did not contain provisions that satisfied the requirements of Section 212.08(6), F.S., and Rule 12A-1.094, F.A.C.

This response constitutes a Technical Assistance Advisement under section 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 section 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 section 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 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,

Linda W. Bridges
Tax Law Specialist
Technical Assistance and Dispute Resolution (904) 922-9412

LWB/
Enclosure.: Rule 12A-1.039
Control #: 28107