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

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