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.