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