When could a Florida county buy elevator and escalator materials tax-free for a civic-arena project?

Subject

Direct County Purchases for a Civic-Arena Project

Plain-English summary

Materials bought directly by the county for the civic-arena project were exempt from Florida sales tax when the county was the real purchaser in substance as well as form. The approved arrangement required the county to issue its own purchase orders bearing its consumer's certificate of exemption number, provide exemption documentation, receive vendor invoices, pay vendors directly, take title at delivery, and bear the risk of loss through insurance.

The ruling did not exempt everything connected with the public project. Materials purchased by the elevator and escalator subcontractor remained taxable to it. And when the subcontractor used raw materials to manufacture or fabricate elevators or escalators before delivery to the job site, it was the ultimate consumer and owed use tax on the full fabricated cost under the cited rules.

The Department allowed a credit if use tax had lawfully been paid to another state. It also said no tax was due where completed units manufactured by someone else were sold directly to the county and the subcontractor merely supplied installation labor.

What this means for you

A public owner's tax exemption does not automatically pass through to its contractors. For a direct-purchase program to qualify, the government must actually control the purchase: ordering in its own name, documenting its exemption, receiving the invoice, paying the supplier, holding title, and assuming the economic risk of damage or loss before installation.

Manufacturing is a separate issue. Even when the government buys installed equipment, a contractor that fabricates the equipment for use in the public project may owe use tax on manufactured cost. Calling the arrangement a labor subcontract or using government purchase paperwork does not erase that fabrication rule.

Common questions

Q: What made the county's material purchases exempt? The county issued the purchase orders, supplied its exemption certificate information, was invoiced by vendors, paid them directly, held title, and insured the materials against loss or damage before incorporation into the project.

Q: Were materials bought by the subcontractor exempt because the arena was publicly owned? No. The ruling expressly excluded purchases made by the subcontractor.

Q: What tax applied to elevators and escalators fabricated by the subcontractor? The subcontractor owed use tax on the full cost of the fabricated articles under the cited manufactured-cost rules.

Q: Was there credit for tax paid outside Florida? Yes. The ruling stated that use tax lawfully paid to another state could be credited under section 212.06(7).

Q: What if another manufacturer sold completed units directly to the county? If the subcontractor merely provided labor to install those directly purchased units, the Department said no tax was due on that labor arrangement.

Q: Can another public project rely on this ruling? No. The advisement is binding only for the taxpayer and the particular documents and facts described.

Citations and references

• Fla. Stat. § 212.06(1)(b), (7) — fabricated property used by its manufacturer and credit for tax paid elsewhere
• Fla. Stat. § 212.08(6), (7)(v)1 — government sales and inconsequential-service exemptions
• Fla. Admin. Code r. 12A-1.001(9), (16) — governmental-unit purchases and service transactions
• Fla. Admin. Code r. 12A-1.094(2)-(5), (7) — public-works materials and contractor manufacturing
• Fla. Admin. Code r. 12A-1.051(5) — use tax on manufactured cost
• Fla. Admin. Code r. 12A-1.039 — exemption-certificate documentation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-014

Original ruling text

SUMMARY

Materials for a county project can be purchased tax exempt
where under the terms of the subcontract with the
elevator/escalator subcontractor: (1) the county issues its
purchase orders directly to the vendors; (2) the purchase
orders include the county's consumer's certificate of
exemption number and the county will provide the vendor
with a certificate of exemption; (3) the vendors invoice
the county directly; (4) the county issues its checks
directly to the vendors in payment of the invoices; (5) the
county takes title to the materials from the vendor and
assumes liability for the materials upon their delivery to
the job site; (6) the county assumes the risk of loss of
the materials upon delivery, which is clearly established
by the county's being required to and actually purchasing
insurance against loss of damage; and (7) the remaining
terms of the documents do not prevent concluding that the
county rather than the subcontractor is in substance as
well as in form the purchaser of the materials. The
exemption will not apply to any materials purchased by the
subcontractor. In addition, the exemption will not apply
to any materials that the subcontractor uses in fabricating
or manufacturing elevators or escalators prior to delivery
to the job site. The subcontractor is liable for use tax
on the full fabricated cost of such elevators and
escalators.

Mar 20, 1998

Re: Technical Assistance Advisement 98A-014
XXX ("Subcontractor")
XXX ("General Contractor")
XXX ("Developer")
XXX ("Governmental Entity")
Sales and Use Tax -- Local Government Contract to Develop
Civic Arena
Fla. Admin. Code rules 12A-1.001 & 12A-1.094

Fla. Stat. s. 212.06 & 212.08 (1997)

Dear :

This is in response to your letter to the Florida Department of
Revenue dated December 19, 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

You relate that the General Contractor and Governmental Entity
entered into a contract to build a civic arena.(FN 1) The
Subcontractor subsequently entered into a $4,151,000.00 lump sum
subcontract with the General Contractor for vertical
transportation, to include both materials and labor; the
Subcontractor understood that this subcontract would "only be
for labor and other non-material costs required to further
assemble and install the components purchased by" the
Governmental Entity.

You state that the General Contractor will initiate the approval
and scheduling of the Subcontractor's equipment; that the
Governmental Entity will issue a purchase order to the
Subcontractor for delivery of the elevator and escalator
products to the jobsite; that the Subcontractor will ship the
materials to the jobsite and invoice the Governmental Entity for
the material costs; that the Governmental Entity will pay the
Subcontractor directly; that the General Contractor will issue a
deductive change order to remove the cost of the material from
the subcontract after receipt of an approved invoice; and that a
local branch of the Subcontractor will provide the labor to
assemble and install the components purchased by the
Governmental Entity.

You provide the following "general overview" of your business in
Florida:

1. We are an elevator/escalator manufacturer based
   [outside Florida].

2. We do not have any manufacturing facilities in
Florida.

3. We do have sales offices in Florida that bid the jobs
   and secure the sales.
4. We are registered with the State and file sales and
   use tax returns in Florida.
5. We install elevators and escalators in new and
   renovated buildings.
6. We are usually a subcontractor on a project, but
   occasionally are the general contractor.
7. We purchase raw materials in large quantities, such as
   steel, that we then manufacture and turn into
   elevators and escalators. We purchase these raw
   materials tax exempt under a reseller's exemption.
8. We cannot specifically identify which raw materials
   are going into which units.
9. We do purchase some material from outside vendors for
   use in our construction jobs, but most of the
   completed units installed are manufactured by us.
10. We do not sell our products at retail in the normal
    course of business. We generally contract to furnish
    and install the units that we have manufactured.
11. We deliver our products from outside of Florida to the
    jobsite by common carrier for further assembly and
    installation.

Letter at 1-2.

Enclosed with your letter is a copy of the subcontract entered
into by the General Contractor and the Subcontractor. Exhibit D
to this contract lists the General Contractor, the Developer,
and the Governmental Entity as insureds. Exhibit K to this
contract addresses purchases by the Governmental Entity, and
provides that: (1) the Governmental Entity reserves the right to
purchase materials directly; (2) the Developer or General
Contractor will furnish a list of intended vendors to the
Governmental Entity, a description of the materials to be
supplied, and estimated quantities and price quotes; (3) the
Developer or General Contractor will prepare purchasing
requisition request forms which will identify the materials the
Governmental Entity may elect to purchase directly; (4) the

Governmental Entity then will prepare a purchase order for each
item of material which the entity elects to purchase directly;
each purchase order will contain the entity's certificate of
exemption number; (5) the materials purchased directly by the
Governmental Entity will be delivered to the jobsite and
inspected by the General Contractor; (6) the General Contractor
will ensure that deliveries are accompanied by appropriate
documentation, and will forward invoices to the Governmental
Entity for payment; (7) the Governmental Entity will retain
legal and equitable title to all materials purchased directly;
(8) transfer of possession from the Governmental Entity to the
General Contractor will constitute only a bailment; materials
purchased directly by the Governmental Entity will be considered
returned to the entity when incorporated into the project; (9)
the Governmental Entity will purchase and maintain sufficient
insurance to protect against any loss or damage to materials
purchased directly; this insurance will cover the replacement
cost of such materials not yet incorporated into the project
between the time the entity first takes title to the materials
and the time when the last of such materials is incorporated
into, or consumed during, the process of completing the project;
and (10) the General Contractor will provide the Governmental
Entity a requisition for payment, and the entity will prepare a
check to the supplier; the check will be released, delivered,
and remitted directly to the supplier.

Law

Section 212.06(1)(b), Fla. Stat. (1997), provides:

Except as otherwise provided, any person who manufactures,
produces, compounds, processes, or fabricates in any manner
tangible personal property for his or her own use shall pay
a tax upon the cost of the product manufactured, produced,
compounded, processed, or fabricated without any deduction
therefrom on account of the cost of material used, labor or
service costs, or transportation charges, notwithstanding
the provisions of s. 212.02 defining "cost price."...

Section 212.06(7), Fla. Stat. (1997), provides:

The provisions of this chapter do not apply in respect to
the use or consumption of tangible personal property, or
distribution or storage of tangible personal property for
use or consumption in this state, upon which a like tax
equal to or greater than the amount imposed by this chapter
has been lawfully imposed and paid in another state,
territory of the United States, or the District of
Columbia. The proof of payment of such tax shall be made
according to rules and regulations of the department. If
the amount of tax paid in another state, territory of the
United States, or the District of Columbia is not equal to
or greater than the amount of tax imposed by this chapter,
then the dealer shall pay to the department an amount
sufficient to make the tax paid in the other state,
territory of the United States, or the District of Columbia
and in this state equal to the amount imposed by this
chapter.

Section 212.08, Fla. Stat. (1997), provides:

(6) 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....
....
(7)(v)1. Also exempted are professional, insurance, or
personal service transactions that involve sales as
inconsequential elements for which no separate charges are
made.
....

Rule 12A-1.001, Fla. Admin. Code, entitled "Governmental Units,"
provides:

(9)(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.

....
(16)(a) Professional, insurance or personal service transactions
which involve sales as inconsequential elements for which no
separate charges are made are exempt.
....

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.
....
(7) Contractors who purchase tangible personal property
outside the State of Florida... and use such property in a
public works project shall be presumed to have the beneficial
use of such property because the property is being used in
furtherance of the contractor's essentially independent
commercial enterprise. Accordingly, such contractors shall be
liable for the use tax.

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. 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 Exhibit K to the subcontract meet
these requirements: The Governmental Entity has the right to
purchase materials directly; the Governmental Entity will

prepare its own purchase orders; the Governmental Entity will
retain title to all materials purchased directly, despite
possession by the General Contractor or Subcontractor; the
Governmental Entity will purchase and maintain sufficient
builder's risk insurance to cover loss of or damage to materials
purchased directly; the vendors' invoices will be forwarded by
the General Contractor to the Governmental Entity; and the
Governmental Entity will pay suppliers directly. 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 Subcontractor. Further, despite the fact that the
Governmental Entity is purchasing installed vertical
transportation, because the Subcontractor fabricates materials
into elevators and escalators for incorporation into the Civic
Arena, the Subcontractor is, under Florida law, the ultimate
consumer of these articles of tangible personal property. See
Rule 12A-1.094(5), Fla. Admin. Code. As the ultimate consumer,
the Subcontractor would be subject to use tax on the full cost
of the fabricated articles as detailed in Rule 12A-1.051(5),
Fla. Admin. Code. See Rule 12A-1.094(7), Fla. Admin. Code.
Although you advise that the Subcontractor purchased the raw
materials tax exempt under a reseller's certificate, you do not
indicate whether a use tax has been paid in another state. If
use tax has been paid lawfully in another state, the
Subcontractor would be entitled to credit for same pursuant to
Fla. Stat. s. 212.06(7) (1997).

Finally, you state that "most of the completed units installed
are manufactured" by the Subcontractor. Letter at 2. If the
Subcontractor installs completed units that are manufactured by
another entity and which are sold directly to the Governmental

entity, then if the subcontractor is merely providing labor, no
tax is due.

This response constitutes a Technical Assistance Advisement
under Fla. Stat. s. 213.22 (1997), 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. (1997), which are
subject to disclosure to the public under the conditions of Fla.
Stat. s. 213.22 (1997). 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 #: 32303
Encl.: 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 In TAA 97A-009, Local Government Contract to
Construct Civic Arena (Feb. 6, 1997, the Department found the
purchases made by the Governmental Entity, pursuant to the
contract between the Governmental Entity and the General
Contractor, would be tax exempt.