Could a tax-exempt museum association buy construction materials tax-free for a new center while using a construction manager and subcontractors?

Plain-English summary

Construction materials were exempt when the museum association itself made the direct purchase under the approved procedures. The association had to issue the purchase order with its exemption number, take title and liability at delivery, receive the vendor's invoice, pay the vendor directly, and bear the risk of loss or damage until incorporation into the project.

The construction manager and subcontractors could help identify, inspect, and handle the materials, but their possession was treated as a bailment. The association retained title and maintained insurance covering its purchased materials.

The exemption did not cover materials bought by contractors or subcontractors. It also did not protect a contractor that took association-purchased materials and manufactured or fabricated them into a different item; the cited rule treated the contractor as consumer of the fabricated article.

What this means for you

An exempt organization's certificate cannot simply be passed through to a contractor. The exempt entity must be the real purchaser, with the contract documents and payment trail matching that role.

The ruling approved the association's procedures because every key ownership and payment step stayed with the association. Purchase orders and bid requests were also expected to carry the required exemption-certificate information.

Common questions

Q: Who had to issue the purchase order? The exempt association, using its consumer's certificate of exemption number.

Q: Who had to receive the invoice and pay the vendor? The vendor had to invoice the association, and the association had to deliver its own payment directly to the vendor.

Q: Who bore title and risk before installation? The association held title, assumed liability and risk of loss, and maintained insurance until the materials became part of the project.

Q: Could contractors buy materials tax-free using the association's exemption? No. Contractor and subcontractor purchases were expressly outside the exemption.

Q: What if a contractor fabricated the association's materials into another item? The ruling warned that the contractor could become the taxable consumer of the manufactured or fabricated article under the cited rule.

Citations and references

• Fla. Stat. § 212.08(7)(o) — exemption for qualifying educational institutions and public museums
• Fla. Admin. Code r. 12A-1.001(3) — direct sales to exempt organizations
• Fla. Admin. Code r. 12A-1.038 — exemption certificates and limits on construction contracts
• 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-061

Original ruling text

SUMMARY

An exempt entity submitted copies of its construction management agreement and certificate of exemption for a determination of whether the project to build a museum would qualify as a "public works" under Rule 12A-1.094, Fla. Admin. Code. The agreement provided that the entity had the right to purchase materials directly; the entity would prepare purchase orders for those items it chose to purchase directly, and these orders would contain the entity's exemption number; the entity would retain title to all entity-purchased materials until they were incorporated into the project; the entity would purchase and maintain insurance sufficient to protect against loss and damage to entity-purchased materials; and, after receipt of invoices, the entity would prepare checks drawn to the vendors for payment, and would remit and deliver these checks directly to the vendors. The Department concluded that all purchases of materials made in accordance with this agreement would be exempt from sales tax.

Sep 17, 1997

Re: Technical Assistance Advisement 97A-061 XXX ("Association") Sales and Use Tax -- Exempt Entity Contract to Construct Center Fla. Admin. Code rules 12A-1.001(3) & 12A-1.038 Fla. Stat. s. 212.08(7)(o) (1995)

Dear :

This is in response to your letter to the Florida Department of Revenue dated May 5, 1997, in which you asked for a technical assistance advisement indicating that the procedures proposed in your letter would provide for a tax exempt transaction.

Facts

The Association holds a consumer's certificate of exemption as an educational institution, specifically as a museum. The Association is developing a new center, which will be a museum open to the public. According to your letter, the Association will be using a construction management firm that has been delegated certain purchasing authority by the Association. Your letter also advises that the Association intends to purchase directly certain construction materials, supplies, and equipment for the project. Enclosed with your letter are copies of the Construction Management Agreement, Change Order #1 to the Agreement, and the Association's Consumer's Certificate of Exemption.

Change Order #1 contains an "Attachment #1" which is subtitled as "Sales Tax Exempt Purchasing Procedures." Attached to "Attachment #1" is "Attachment `A.'" These two documents provide, among other things, that: (1) The Association reserves the right to make direct purchases of various construction materials, equipment, and supplies; (2) the subcontractor will prepare standard purchase order requisition forms to identify those materials which the Association has elected to purchase directly; (3) the Association will prepare purchase orders for those items it elects to purchase directly, said orders containing the Association's certificate of exemption number; (4) the subcontractor and construction manager will inspect all shipments delivered to the job site, and the subcontractor will forward invoices to the Association for payment; (5) despite delivery of materials into the subcontractor's possession, the Association will retain title to all Association-purchased materials; (6) the possession of the Association-purchased materials by the subcontractor will be considered a bailment, and the Association-purchased materials will be considered as returned to the Association at the time they are incorporated into the project or consumed in the process of completing the project; (7) the Association will purchase and maintain insurance sufficient to protect against any loss of or damage to the Association-purchased materials; such insurance will cover the value of any materials not yet incorporated into the project from the time the Association first takes possession; and (8) the subcontractor will provide the Association with appropriate

documentation (purchase orders, invoices, delivery tickets, etc.), and the Association will prepare checks drawn to the vendors for payment; these checks will be remitted and delivered directly to the vendors.

Law

Section 212.08(7)(o), Fla. Stat. (1995), provides:

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....
   ....
2. The provisions of this section authorizing exemptions
   from tax shall be strictly defined, limited, and applied in each category as follows:
   ....
   d. "Educational institutions".... Nonprofit libraries, art galleries, and museums open to the public are defined as educational institutions and are eligible for exemption....

Rule 12A-1.001, Fla. Admin. Code, provides:

(3) RELIGIOUS, EDUCATIONAL, CHARITABLE, VETERANS' AND SCIENTIFIC ORGANIZATIONS, HOMES FOR THE AGED, NURSING HOMES OR HOSPICES, FEDERAL AND STATE CHARTERED CREDIT UNIONS, FLORIDA RETIRED EDUCATORS ASSOCIATION AND LOCAL CHAPTERS, ORGANIZATIONS PROVIDING SPECIAL EDUCATIONAL AND SOCIAL BENEFITS TO MINORS, STATE THEATER CONTRACT ORGANIZATIONS, MILITARY MUSEUM FUNDRAISERS, COAST GUARD AUXILIARIES, AND CEMETERY ASSOCIATIONS.

(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.... 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, Fla. Admin. Code, provides:

(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....
....
(7)(a) Any chartered nonprofit religious, charitable, scientific, or educational institution, governmental agency, or other nonprofit organization desiring to qualify for exemption must file a Sales and Use Tax Application for Consumer's Certificate of Exemption (Form DR-5,

incorporated by reference in Rule 12A-1.097, F.A.C.) and documentation sufficient to substantiate the institution's claim for exemption with the Department. Upon final approval, the Department is authorized to issue the qualified religious, charitable, scientific, or educational institution, governmental agency, or other nonprofit organization a Consumer's Certificate of Exemption (Form DR-14, incorporated by reference in Rule 12A-1.097, F.A.C.). See Rule 12A-1.001, F.A.C., for chartered nonprofit religious, charitable, scientific, or educational institutions, governmental agencies, or other nonprofit organizations which qualify for a consumer's certificate of exemption.
....
(9) A consumer's certificate of exemption may be used on the purchase of tangible personal property, and may not be applied to contracts for the construction or improvement of real property.

Discussion, Analysis and Conclusion

Under Fla. Stat. s. 212.08(7)(o) (1995) and Rule 12A1.001(3)(a), Fla. Admin. Code, sales tax does not apply to the purchase of tangible personal property, including construction materials, where payment is made directly to the vendor by the tax exempt entity and such purchases will be used to carry out the exempt entity's customary nonprofit activities. The exempt entity is required by Rule 12A-1.038(7), Fla. Admin. Code, to present the vendor with a properly completed certificate of exemption at the time of the purchase to establish the tax exempt status of the transaction.

Based on your letter and documentation, the Association qualifies to purchase building materials directly from third party vendors tax exempt, provided the Association extends its Consumer's Certificate of Exemption at the time the sale of such materials takes place and the Association complies with the following provisions:

1. The Association must execute the purchase orders for the
   tangible personal property involved in the contract, which

must include the Association's consumer's certificate of exemption number;

2. The Association 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 Association for
   supplies;

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

5. The Association must assume all risk of loss or damage
   for the tangible personal property involved in the contract. The Association should acquire, or be the insured party under, liability insurance on the building materials.

The circumstances recounted in your letter and "Sales Tax Exempt Purchasing Procedures" appear to satisfy the requirements for exemption of the transaction as a sale to an exempt entity: The Association has the right to make direct purchases of all materials to be used in the project; the Association will pay the vendors directly and include its certificate of exemption number on purchase orders; the Association will take title to all materials prior to their incorporation into the project; the Association will assume all risk of loss for materials; and the Association will purchase and maintain insurance to protect against loss and damage of Association-purchased materials. Thus, all purchases of materials which are made in accordance with these 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, Fla. Admin. Code, a copy of which is enclosed. You have provided a copy of the Association's Certificate of Exemption, which notes that it is for museum and library use only. 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 be aware that this tax exemption does not apply to purchases made by contractors or subcontractors providing construction services for the project. Further, if the Association purchases the building materials, and the contractor or subcontractors then fabricate such materials into other items of tangible personal property for incorporation into the project, the contractor or subcontractors are subject to Rule 12A-1.051(5), Fla. Admin. Code. Under this rule, the contractor or subcontractors, not the Association, are the ultimate consumers of the articles of tangible personal property they manufacture or fabricate to perform the contract. 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), Fla. Admin. Code.

This response constitutes a Technical Assistance Advisement under Fla. Stat. s. 213.22 (1995), 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. 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, Fla. Stat. (1995), which are subject to disclosure to the public under the conditions of Fla. Stat. s. 213.22 (1995). 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,

Gypsy Bailey
Senior Attorney
Technical Assistance and Dispute Resolution (850) 922-9411

/gcb
Control #: 29270
Encl.: Rule 12A-1.039

NOTICE UNDER THE AMERICANS WITH DISABILITIES ACT

Persons needing accommodations to participate in any proceeding before the Department of Revenue should contact the Department at (904)488-0717 or 1-800-DOR-8331 (TDD), at least five (5) working days before such proceeding. You may also call via the Florida Relay System at 1-800-9558770.