Could a Florida school district directly buy materials for an elementary-school project without sales tax while using a construction manager?

Plain-English summary

The school district's direct purchases of construction materials were exempt from sales tax under the submitted procedures. The district prepared its own purchase orders, retained legal and equitable title, received the approved invoices and paid suppliers directly. Materials transferred to a subcontractor remained in bailment rather than becoming the subcontractor's property.

Risk of loss also supported the result. The construction manager's builder's-risk policy covered the full value of district-purchased materials before incorporation into the project, and the district was named as an insured party.

Each vendor still needed a properly completed exemption certificate. The ruling did not cover purchases made by contractors or subcontractors, and use tax applied when they fabricated district-purchased materials into other items for the project.

What this means for you

Using a construction manager did not prevent exemption, but the district had to remain the true purchaser in substance. Direct payment, continuing title, and insured risk before installation were central facts.

Government purchase procedures should be reflected consistently in bids, purchase orders, contracts, invoices, insurance, and exemption documentation.

Common questions

Q: Who issued the purchase orders? The school district did, after receiving requisitions for materials it elected to buy directly.

Q: Who paid the vendors? The district prepared checks payable to suppliers and remitted them directly.

Q: Did the construction manager's builder's-risk policy help? Yes. It covered district-purchased materials, and the district was an additional insured.

Q: Did contractor purchases qualify? No. The ruling was limited to district purchases following the submitted procedures.

Q: What if a contractor fabricated the district's materials? The contractor or subcontractor became the taxable ultimate consumer of the fabricated articles.

Citations and references

• Fla. Stat. § 212.08(6) — government purchases and contractor exclusion
• Fla. Admin. Code r. 12A-1.001(9) — government direct-payment and documentation rules
• Fla. Admin. Code r. 12A-1.094 — public-works purchaser and risk-of-loss factors
• Fla. Admin. Code r. 12A-1.039 — exemption-certificate format
• Fla. Admin. Code r. 12A-1.051(5) — contractor-fabricated property
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-071

Original ruling text

SUMMARY

A school district submitted copies of construction
contracts in its request for a TAA concerning whether
construction of an elementary school campus would qualify
as public works as defined in Rule 12A-1.094, Fla. Admin.
Code. Key provisions of the contracts provided that the
School District would prepare purchase orders for
equipment, materials, and supplies for direct purchase; the
School District would hold full title to all ownerpurchased materials from the time they are delivered to the
job site until they are incorporated into the project or
consumed in the completion of the project; the construction
manager would forward invoices to the School District for
payment; the School District would issue and remit checks
directly to the vendors; and the School District would be
listed as an insured party on the builder's risk insurance
policy purchased by the construction manager. Accordingly,
all purchases of materials which made in accordance with
the contracts submitted would be exempt from sales tax,
provided that a properly completed exemption certificate is
extended at the time of purchase to all vendors.

Nov 07, 1997

Re: Technical Assistance Advisement 97A-071
XXX ("School District")
Sales and Use Tax -- Local Government Contract to Develop
Elementary School Campus
Fla. Admin. Code rules 12A-1.001(9) & 12A-1.094
Fla. Stat. s. 212.08(6) (Supp. 1996)

Dear :

This is in response to your letter to the Florida Department of
Revenue dated July 31, 1997, in which you asked for a technical
assistance advisement indicating that the procedures proposed in
your letter and attached documents would provide for a tax

exempt transaction.

Facts

The School District is "currently undertaking the development of
one elementary school campus, using a construction management
firm that has been delegated certain purchasing authorities by
the Owner.... It is the intention of the Owner to directly
purchase certain construction materials, supplies and equipment
for this Project." Letter at 1.

The "Agreement between Owner and Contractor" designates an agent
for the School District, and provides that the School District
will occupy, use, and own the project upon substantial
completion, and the funds for payment are under the School
District's control. The July 28, 1997 "Proposed New School
Board Policy 6.141, School District Purchased Materials:
Construction Manager at Risk" provides the following: (1) the
subcontractor will prepare standard purchase order requisition
forms to identify specifically those materials the School
District has elected to purchase directly; (2) the School
District will prepare purchase orders for equipment, materials,
and supplies that it chooses to purchase directly; (3) the
subcontractor will forward invoices to the School District for
payment; (4) the School District will retain title to all School
District-purchased materials; any transfer of such materials to
the subcontractor's possession constitutes a bailment; (5)
insurance purchased and maintained by the construction manager
will be sufficient to protect against loss of or damage to
School District-purchased materials, and will cover the full
value of such materials not yet incorporated in the project from
the time the School District first takes title; the School
District will be named as an additional insured party on such
insurance;(FN 1) and (6) upon receipt of appropriate
documentation, the School District will prepare a check drawn to
the supplier; this check will be released, delivered, and
remitted directly to the supplier.

Law

Section 212.08(6), Fla. Stat. (Supp. 1996), 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), Fla. Admin. Code, entitled "Governmental
Units," provides:

(a) All sales made directly to the United States
Government, a state, or any county, municipality, or
political subdivision of a state are exempt.... Payment
must be made directly to the dealer by the governmental
entity of a state, or any county, municipality, or
political subdivision of a state.... Such governmental
entities desiring to qualify for the exemption must obtain
from the Department of Revenue a consumer's certificate of
exemption (see Rules 12A-1.038 and 12A-1.039, F.A.C.). The
exemption provided in this subsection shall be strictly
defined, limited, and applied to each entity as provided
herein....
....
(d) Vendors are required to document exempt sales.
Federal employees, other government employees, and
employees of nonprofit organizations described in
subsection (3) of this rule shall provide the vendor with
proper documentation of the exempt nature of the sale....
....

2. A suggested format of the document to be provided by
   other government employees or employees of nonprofit
   organizations to their vendors is the following:

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.

Rule 12A-1.094, Fla. Admin. Code, provides:

(1) This rule shall govern the taxability of transactions
in which contractors manufacture or purchase supplies and
materials for use in public works, as that term is referred
to in Section 212.08(6), F.S.....

(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. The applicable tax rate shall be
determined on the basis of the invoice date, not the date
of the contract....
....
(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. The exception
in subsection [(2)] is a specific exception for sales to
contractors. 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)] 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-1.094(2) and (3), Fla. Admin. Code, state that the
purchase of materials is taxable to the contractor as the
ultimate consumer where the contractor is deemed to be the
purchaser. On the other hand, Rule 12A-1.001(9), Fla. Admin.
Code, states that, 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...."
Accordingly, for there to be an exempt transaction, the
governmental entity must directly purchase, hold title to,
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, Fla. Admin. Code.

Other factors of Rule 12A-1.094, F.A.C., which must be satisfied
to insure an exempt transaction, 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, liability insurance on the building
   materials.

The circumstances recounted in the attachment entitled "Proposed
New School Board Policy 6.141, School District Purchased
Materials: Construction Manager at Risk" appear to satisfy the
requirements for exemption of the transaction as a sale to a
governmental entity: The School District will make direct
purchases of various construction materials; after receiving
purchasing requisition forms from the contractor, the School
District will prepare purchase orders for direct purchase; after
receiving the approved invoices from the contractor, the School
District will pay them; the School District will retain legal
and equitable title to all materials; and the School District is
named as an insured on the builder's risk insurance policy.
Thus, all purchases of materials which are made in accordance
with this document will be exempt from sales tax.

Further, a properly completed exemption certificate must 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.
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 response does not apply to purchases
made by the contractor or subcontractors who provide
construction services for the project. Further, if the School
District purchases the building materials, and the contractor
and subcontractors then fabricate these materials into other
items of tangible personal property, the contractor and
subcontractors, not the governmental entity, are deemed to be
the ultimate consumers of the articles of tangible personal

property they fabricate to perform the contract. See Rule 12A1.094(5), Fla. Admin. Code. As the ultimate consumers, 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 #:
Encl.:

30415
Rule 12A-1.039

NOTICE UNDER THE AMERICANS WITH DISABILITIES ACT

Persons needing an accommodation to participate in any
proceeding before the Technical Assistance and Dispute
Resolution Office should contact the office at 904-488-0717
(voice), or 1-800-DOR-8331 (TDD), at least five working
days before such proceeding. You may also call via the
Florida Relay System at 1-800-955-8770 (voice), or 1-800955-8771 (TDD).

FOOTNOTE 1: Article 13, section 10, of the "Agreement between
Owner and Contractor" provides that the contractor will "take
out and maintain... a Builder's Risk Policy'... to provide coverages on anall risk' basis including theft".