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".