Could a county buy materials tax-free for a jail expansion while a design-builder and subcontractors coordinated selection, delivery, and installation?

Plain-English summary

Materials bought under the county's direct-purchase procedures were exempt from Florida sales tax. The county, not the design-builder or subcontractors, was the purchaser in substance as well as form.

The county issued purchase orders directly to vendors with its exemption information, received the vendor invoices, paid vendors with county checks, took legal and equitable title at delivery, assumed liability and risk of loss, and maintained insurance until the materials were incorporated into the jail project.

Contractors could select vendors, provide requisitions, coordinate delivery, inspect shipments, store and safeguard materials as bailees, install them, and manage warranties. Those responsibilities did not outweigh the county's ownership, payment, and risk-bearing role under the controlling documents.

What this means for you

Government funding or a government exemption certificate alone is insufficient for a public-works material purchase. The transaction must show that the governmental entity itself is the genuine purchaser before the materials become real property.

The ruling emphasized risk of loss as a paramount factor. Here the county's obligation to buy insurance for county-owned materials supported the exemption. Purchase orders and bid requests also needed the required exemption-certificate information.

Common questions

Q: Who issued the purchase orders? The county, directly to the vendors, using its consumer's certificate of exemption information.

Q: Who paid the vendors? The county issued and delivered its own checks after invoices were verified.

Q: When did the county take title and risk? At delivery to the job site, continuing until incorporation into the project.

Q: Did contractor control over scheduling, quantities, storage, and installation defeat the exemption? No. Considering the transaction as a whole, the Department still found the county was the purchaser.

Q: Did the ruling cover contractor-manufactured or fabricated materials? No. It warned that contractors and subcontractors remained taxable consumers of articles they manufactured or fabricated for the project.

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 test for public-works materials
• 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-060

Original ruling text

SUMMARY

Materials for a county jail expansion street project can be
purchased tax exempt where under the terms of the
controlling documents: (1) the county issues its purchase
orders directly to the vendors; (2) the purchase orders
include the county's consumer's certificate of exemption
number and the county will provide the vendor with a
certificate of exemption; (2) the vendors invoice the
county directly; (3) the county issues its checks directly
to the vendors in payment of the invoices; (4) the county
takes title to the materials from the vendor and assumes
liability for the materials upon their delivery to the job
site; (5) the county assumes the risk of loss of the
materials upon delivery, which is clearly established by
the county'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
county rather than the contractor is in substance as well
as in form the purchaser of the materials.

Sep 17, 1997

Re: Technical Assistance Advisement (97A-060)
XXX ("Board")
Sales and Use Tax -- Local Government Contract for Jail
Expansion
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 April 2, 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

Board is the governing body of XXX. According to your letter,
Board is undertaking the development of a jail expansion (the
"Project"). Board and XXX (the "Design/Builder") will enter
into a Design/Build Agreement (the "Agreement") pursuant to
which Design/Builder will be engaged to manage the design and
construction of the Project. You have provided copies of
Article 9 and Exhibit G, containing provisions governing
insurance, and Exhibit M, containing provisions governing a
sales tax exempt purchasing program, of the Agreement. Although
other contract provisions unrelated to insurance of the Project
and to the purchasing program were still under negotiation when
these copies were submitted, the sections provided were in their
final form.

Article 9 provides that Board and Design/Builder will maintain
the insurance required by Exhibit G. Exhibit G provides that
Design/Builder shall purchase and maintain builder's risk
insurance covering damage to any property that is owned by or
under the control of Design/Builder and that has or will become
part of the project. Such insurance shall include the interests
of Board, Design/Builders and any subcontractors, and Board
shall be named as an additional insured party under the policy.
Exhibit G also provides that Board shall purchase and maintain
insurance to protect against any loss or damage of property
purchased by Board from the time Board takes title until the
property is incorporated into the Project.

Exhibit M is entitled "Direct Materials Acquisition by Owner."
It provides as follows:

1. Subcontractors will include all applicable sales taxes in
   their bids.
2. If Board receives a favorable Technical Assistance Advisory
   from the state, Board may exercise an option to purchase
   materials directly. Direct purchases will be governed by
   "Sales Tax Exempt Purchasing Procedures for Public
   Projects" (the "Procedures") attached to Exhibit M. The
   Procedures "shall take precedence over other conditions and
   terms of [the] Agreement where inconsistencies or conflicts
   exist."

3. Board will issue purchase orders directly to the vendors
selected by the subcontractors at the negotiated prices.
The purchase orders must contain Board's exemption
certification information. Design/Builder will provide
information necessary for preparation of purchase orders
and coordinate purchases to assure timely arrival at the
Project site.

4. Amounts due subcontractors shall be reduced by the amounts
   of direct purchase orders plus sales taxes. Design/Builder
   and subcontractors remain responsible for coordination,
   correctness of quantities, protection and storage,
   scheduling, shipping, security, receiving, installation,
   and cleaning of materials and for management of warranties.
5. Design/Builder and subcontractors shall inspect and verify
   shipments and delivery tickets before invoices are approved
   and forwarded to Board for processing and direct payment by
   Board to vendors.
6. Board will retain title to all materials it purchases.
7. Board will purchase and maintain insurance as required in
   the Agreement to protect against loss or damage to
   materials it purchases. Such insurance shall cover the
   value of those materials from the time Board takes title
   until they are incorporated into the Project.
8. If the state assesses any sales taxes, penalties or
   interest against Design/Builder or a subcontractor for
   materials purchased by Board as provided, Board shall
   reimburse such amounts.

The Procedures, which in some cases duplicate the foregoing
provisions and in other cases expand upon them, provide the
following:

1. Board reserves the right to purchase directly materials
   included in bids of subcontractors, and subcontractors will
   provide lists of materials and suppliers for review.
2. Subcontractor bids will be reduced to reflect the cost and
   related sales/use taxes if Board chooses to purchase
   materials directly from the vendor, but the subcontractor's
   choice of vendor will not be disturbed.
3. Seven days prior to the date on which materials Board has
   elected to purchase must be ordered, the subcontractor

shall provide a Purchase Order Requisition Form so that
Board can process it and issue its own Purchase Order to
the vendor, which purchase order shall identify Board as
purchaser and contain Board's consumer's exemption
certificate number, issue date and expiration date.

4. The subcontractor and Design/Builder will inspect all
   deliveries to the job site, and the invoices will be
   forwarded to Board for payment after verification of
   delivery.
5. Subcontractors shall maintain records of all Boardpurchased materials in their possession, including those
   which have been incorporated into the Project.
6. Board shall retain title to all materials it purchases and
   subcontractors shall act as bailees as to all Boardpurchased materials in their possession, which shall be
   stored and safeguarded by the subcontractors for Board
   until returned to Board through incorporation into the
   Project.
7. Board shall purchase and maintain insurance to protect
   against any loss of or damage to Board-purchased materials,
   in an amount sufficient to cover the value of any materials
   not yet incorporated into the Project from the time Board
   first takes title.
8. Upon submission by the subcontractor of appropriate
   documentation, Board will prepare checks to vendors for
   payment and deliver such checks directly to the vendors.
9. Board shall not be liable for any interruption or delay,
   for any defects in the Project, or for any cost or time
   overruns resulting from delay in delivery or defects in
   materials purchased under the direct purchase program.

On February 4, 1997, Design/Builder submitted to the Department
a document entitled "Sales Tax Exempt Purchasing Procedures for
Public Projects" as revised on January 24, 1997. The provisions
of that document were identical to the Procedures except that
there was no provision in that document similar to Item 9 above.
Design/Builder requested advice on whether the procedures in
that document would provide for tax-exempt transactions.
Design/ Builder's request did not mention Board, the Project or
any other specific undertaking. On February 18, 1997, the
Department issued to Design/Builder a letter of technical

assistance that concluded that transactions conducted in
accordance with the document would, subject to certain
limitations, be exempt from sales tax.

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. Rule 12A-1.001(9)(d)(2), F.A.C., suggests the
following format for a document government employees can provide
to vendors:

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.

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.

Other factors of Rule 12A-1.094, F.A.C., that must be satisfied
to insure the exempt status of the contract, 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. The governmental entity should acquire, or be the
   insured party under, insurance on the building materials.

The circumstances outlined in Exhibit M and the Procedures
appear to satisfy the requirements for exemption of transactions
as sales to a governmental entity. Board will make direct

purchases of various construction materials. After receiving
requisition forms from the subcontractors, Board will prepare
purchase orders for direct purchases. After receiving the
approved invoices from the subcontractors, Board will pay the
vendors directly. Board will retain legal and equitable title
to all materials it purchases and will be responsible for
maintaining builder's risk insurance on those materials. Thus,
all purchases of materials which are made in accordance with
Exhibit M and 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.
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
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.

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 #: 28653