Could a Florida school board directly purchase materials for public-school construction without sales tax?

Plain-English summary

The school board could buy construction materials without sales tax under its revised direct-purchase program. The school board had to issue its own purchase orders, give vendors proper exemption documentation, receive invoices directly, pay vendors directly, and take title and liability when the materials reached the job site.

Risk of loss was the paramount factor. The revised program required the school board to maintain builder's-risk insurance for the full value of the directly purchased materials and bear deductibles and uncovered losses. Those terms supported treating the board—not the contractor—as the purchaser in both substance and form.

The conclusion did not cover materials a contractor or subcontractor manufactured or fabricated for the project. The ruling also said purchases made under the original program were not exempt because that version did not make the school board assume the risk of loss.

What this means for you

A government exemption does not automatically shelter materials used by a private contractor on a public project. The transaction must operate as a real purchase by the government entity before the materials become part of the real property.

Direct orders and payment matter, but they are not enough by themselves. The school board also needed title, liability, and genuine insured risk of loss during storage at the job site.

Common questions

Q: Did the revised school-board program qualify? Yes. Purchases following the revised procedures were exempt because the board was the substantive purchaser.

Q: What documents had to come from the school board? The board had to issue its own purchase orders with its exemption number and extend a properly completed exemption certificate to each vendor.

Q: Could vendors invoice and receive payment from the contractor? No. Vendors had to invoice the school board directly, and the school board had to pay them directly.

Q: Were contractor-fabricated materials covered? No. Contractors and subcontractors remained the taxable consumers of items they manufactured or fabricated for their contracts.

Q: Did purchases under the earlier version of the program qualify? No. That version did not require the school board to assume the risk of loss for the directly purchased items.

Citations and references

• Fla. Stat. § 212.08(6) — exemption for qualifying 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 — public-works contract purchases and purchaser factors
• Fla. Admin. Code r. 12A-1.039 — exemption-certificate format
• Fla. Admin. Code r. 12A-1.051(5) — contractor-manufactured or fabricated property
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-073

Original ruling text

SUMMARY

Materials for public school construction projects can be
purchased tax exempt where under the terms of the
controlling documents: (1) the school board issues its
purchase orders directly to the vendors; (2) the purchase
orders include the school board's consumer's certificate of
exemption number and the city will provide the vendor with
a certificate of exemption; (2) the vendors invoice the
school board directly; (3) the school board issues its
checks directly to the vendors in payment of the invoices;
(4) the school board takes title to the materials from the
vendor and assumes liability for the materials upon their
delivery to the job site; (5) the school board assumes the
risk of loss of the materials upon delivery, which is
clearly established by the school board'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 school board rather than the contractor
is in substance as well as in form the purchaser of the
materials.

Nov 21, 1997

Re: Technical Assistance Advisement (97A-073)
XXX ("School Board" or "Owner")
Sales and Use Tax -- School Board Contract to Construct
Schools
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 June 9, 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

On July 23, 1996, the School Board and XXX (the "Program
Manager" or "PM") entered into an Agreement for Program
Management Services (the "Agreement"). Pursuant to the
Agreement, the Program Manager was engaged to oversee the design
and construction of new schools in the county.

The School Board is entitled to makes purchases without paying
Florida sales and use tax under a consumer's certificate of
exemption. Section 2.1.9 of the Agreement provides as follows:

Because Owner is a sales tax exempt entity, materials and
equipment purchased for any specific Task are eligible for
exemption from state sales tax. PM shall develop, for
Owner's approval and implementation, the procedures
necessary for Owner to take advantage of its tax exempt
status.

In response to this directive in the Agreement, the Program
Manager developed a Direct Purchase Program (the "Program"). On
March 26, 1997, the Program Manager submitted the initial
version of the Program to the Department and requested advice on
whether purchases made pursuant to the Program would qualify for
tax exemption. On April 11, 1997, the Department responded that
such purchases would not qualify because of certain provisions
in the Program dealing with insurance and risk of loss. The
Program has been revised to address those provisions. This
response from the Department assumes that the provisions of the
Program as revised have been or will be formally adopted by the
School Board and the Program Manager and incorporated into the
Agreement and into contracts with general contractors and
subcontractors engaged to work on public school projects. As
revised, the Program contains the following provisions:

1. The School Board may elect to purchase materials and
   equipment included in a contractor's bid directly from the
   supplier. Such items are referred to as "Direct-Purchase
   Items."

2. Contractors will select the suppliers from whom materials

will be purchased for purposes of making up their bids (although
the School Board retains ultimate control of the selection of
contractors and suppliers through the application of procedures
governing bids on public projects).

3. Contractors shall furnish the Program Manager with detailed
   Purchasing Requisition Request Forms ("Requisitions") for all
   materials a contractor would purchase for a job.

4. Upon receipt of a Requisition, the Program Manager shall
   cause the School Board to issue its own purchase order directly
   to the supplier for any materials to be treated as DirectPurchase Items.

5. The School Board will take title to Direct-Purchase Items
   upon delivery to the job site. The Program provides that the
   School Board will assume the risk of loss at that time. The
   contractor will, however, have contractual obligations to
   inspect, accept delivery of, and store the materials pending
   incorporation into the project.

6. After verifying that delivery is in accordance with the
   purchase order, the contractor will forward approved invoices to
   the Program Manager, who will deliver them to the School Board.
   The School Board will process the invoices and issue payment
   directly to the supplier.

7. The School Board is required to buy and maintain builder's
   risk insurance covering the full value of any Direct-Purchase
   Items. The School Board will be responsible for any deductible
   under the insurance and for any loss to Direct-Purchase Items
   not covered by the insurance.

A certificate of builder's risk insurance in the amount of
$20,000,000.00 identifying the county as the customer and the
School Board as the insured party has been provided. That
certificate indicated the policy was effective for the period
July 1, 1996, to July 1, 1997. This Technical Assistance
Advisement assumes this policy or a similar policy will be
maintained throughout the term of the Agreement as required by
the Program.

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.

By its terms, section 212.08(6), F.S., exempts only direct
purchases by governmental entities and excludes sales made to
contractors of tangible personal property that becomes part of
public works owned by such entities. 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.

Under Rule 12A-1.094, F.A.C., the Department will also give
special consideration to several factors (bidding,
indemnification, inspection, acceptance, delivery, payment, and
storage) which govern the status of tangible personal property
prior to its affixation to real property when determining
whether the sale is to the tax exempt entity or to a contractor.
However, the assumption of risk of damage or loss during the
time that the building materials are physically stored at the
job site prior to their installation or incorporation into the
project is the paramount consideration. The governmental entity
must assume all risk of loss or damage for the tangible personal
property during that period. To establish that it has assumed
that risk, the governmental entity should purchase, or be the
insured party under, insurance on the building materials.

To summarize, the conditions that must be met to satisfy the
requirements of Rule 12A-1.094, F.A.C., and establish that the
governmental entity rather than the contractor is the purchaser
of materials, 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, as indicated by the entity's acquisition of or
   inclusion as the insured party under insurance on the building
   materials.

The procedures outlined in the Program appear to satisfy the
foregoing requirements for exemption of transactions as sales to
a governmental entity: The School Board will make direct
purchases of various construction materials. After receiving
requisition forms from the subcontractors, the School Board will
prepare purchase orders for direct purchases. After receiving
the approved invoices from the contractors, the School Board
will pay the vendors directly. The School 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.

Based upon the conclusion that the School Board is the
purchaser, all purchases of materials which are made in
accordance with the Program 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.

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.

In addition, if any purchases were made pursuant to the terms of

the original Program submitted to the Department on March 26,
1997, prior to its revision, such purchases would not qualify as
exempt. Prior to its revision, the Program did not contain terms
that required the School Board to assume the risk of loss for
Direct-Purchase Items.

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
(850) 922-9412

LWB/
Enclosure.: Rule 12A-1.039
Control #: 29354