Could a municipal airport authority buy construction materials tax-free for a replacement terminal managed by a contractor?

Subject

Local Government Contract for Airport Terminal

Plain-English summary

The municipal airport authority could purchase terminal construction materials without Florida sales tax under its amended direct-purchase program. The authority issued purchase orders carrying its exemption information, received invoices in its own name, paid vendors directly, took legal and equitable title, and insured materials against loss from delivery until incorporation into the project.

Construction managers and subcontractors still selected or coordinated vendors, quantities, delivery, storage, installation, warranties, and shipment review. Those operational duties did not make them the buyers because the amended procedures placed the actual purchase, title, payment, and casualty risk with the authority.

Subcontractor contract amounts were reduced by the direct-purchase cost and related tax. The authority also maintained builder's-risk coverage for its materials, which supported the Department's conclusion that it bore the risk of loss before installation.

What this means for you

A public owner's direct-purchase program can coexist with contractor coordination, but the government must be the purchaser in substance. Purchase orders, invoices, checks, title, liability, insurance, and exemption documents should all point to the public entity.

The ruling did not cover materials manufactured or fabricated by contractors or subcontractors. For those articles, the businesses remained the taxable consumers under the cited rules.

Common questions

Q: Could subcontractors choose vendors? Yes on these facts. The authority still issued the actual purchase order and directly paid the selected vendor.

Q: Who took title and risk after delivery? The airport authority, supported by insurance it purchased and maintained for the materials.

Q: Did vendor invoices go through contractors for approval? Contractors inspected shipments and forwarded approved documents, but invoices and payment remained directly between vendor and authority.

Q: Were contractor-fabricated materials exempt? No. The advisement expressly excluded them from the direct-purchase result.

Citations and references

• Fla. Stat. § 212.08(6) — exemption for qualifying direct sales to governmental entities
• Fla. Admin. Code r. 12A-1.001(9) — governmental purchases and exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works contracts and purchaser analysis
• Fla. Admin. Code r. 12A-1.039 — exemption-certificate form and required information
• Fla. Admin. Code r. 12A-1.051(5) — contractor-manufactured or fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-031

Original ruling text

SUMMARY

Materials for a municipal airport project can be purchased tax exempt where under the terms of the controlling documents: (1) the airport authority issues its purchase orders directly to the vendors; (2) the purchase orders include the authority's consumer's certificate of exemption number and the authority will provide the vendor with a certificate of exemption; (2) the vendors invoice the authority directly; (3) the authority issues its checks directly to the vendors in payment of the invoices; (4) the authority takes title to the materials from the vendor and assumes liability for the materials upon their delivery to the job site; (5) the authority assumes the risk of loss of the materials upon delivery, which is clearly established by the authority's being required to purchase insurance against loss or damage; and (6) the remaining terms of the documents do not prevent concluding that the authority rather than the contractor is in substance as well as form the purchaser of the materials.

Apr 30, 1998

Re: Technical Assistance Advisement (98A-031) XXX ("Authority") Sales and Use Tax - Local Government Contract for Airport Terminal 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 March 13, 1998, in which you asked for a technical assistance advisement indicating that the procedures proposed in your letter would provide for tax-exempt purchases.

Facts

Authority is a municipal government agency. Authority is undertaking the development of a replacement general aviation terminal (the "Project"). Authority and XXX ("Construction Manager") entered into a Construction Management Agreement (the "Agreement") in 1997, pursuant to which Construction Manager is managing construction of the Project. The Agreement provides in section 5 that Construction Manager will be reimbursed by Authority for the costs of the work. Those costs include materials and supplies that are incorporated into the Project. Authority is required to reimburse Construction Manager for any sales or use tax imposed on Construction Manager in connection with the Project as well. Reimbursable costs also include any premiums for bonds or insurance that Construction Manager incurs for the Project. Section 13 of Exhibit A to the Agreement contains further provisions governing insurance. Construction Manager is to obtain insurance, and Authority is to be a named insured party on all policies other than workers compensation. The issuers must look to Construction Manager, not Authority, for payment of premiums and deductibles. (Authority would be required to reimburse Construction Manager for the premiums and for costs of materials and supplies under the Agreement.) Exhibit D to the Agreement describes the coverage to be maintained. Builder's risk insurance is to be obtained in an amount determined by Owner up to the full contract price. Authority is to be a named insured, and the issuer is required to issue a check directly to Authority if its interests are subject to a claim. Construction Manager is required to cover deductibles other than windstorm as a cost of the Project (subject therefore to reimbursement by Authority under the Agreement). The premium for builder's risk coverage is included in Construction Manager's line item breakdown of the cost to Authority of the Project provided in Exhibit K to the Agreement.

In January of 1998, Authority and Construction Manager executed an Amendment (the "Amendment") to the Agreement. The Amendment provides as follows:

1. Subcontractors will include all applicable sales taxes in

their bids.

2. If Authority receives a favorable Technical Assistance
   Advisory, Authority may elect to purchase materials directly. Direct purchases will be governed by "Sales Tax Exempt Purchasing Procedures for Public Projects" (the "Procedures") attached to the Amendment. The Procedures take precedence over inconsistent or conflicting terms of the Agreement.
3. Authority will issue purchase orders directly to vendors
   selected by the subcontractors at the negotiated prices. The purchase orders must contain Authority's exemption certification information. Construction Manager will provide information necessary for preparation of purchase orders and coordinate purchases to assure timely arrival at the Project site.
4. Amounts due subcontractors shall be reduced by the amounts
   of direct purchase orders plus sales taxes. Construction Manager and subcontractors remain responsible for coordination, correctness of quantities, protection and storage, scheduling, shipping, security, receiving, installation, and cleaning of materials and for management of warranties.
5. Construction Manager and subcontractors shall inspect and
   verify shipments and delivery tickets before invoices are approved and forwarded to Authority for processing and direct payment by Authority to vendors.
6. Authority will retain title to all materials it purchases.
7. Authority will purchase and maintain insurance to protect
   against loss or damage to materials it purchases. Such insurance shall cover the value of those materials from the time Authority takes title until they are incorporated into the Project.
8. Authority may, at its option, require vendors to provide
   supply bonds at Authority's expense.
9. If the state assesses any sales taxes, penalties or
   interest against Construction Manager or a subcontractor for materials purchased by Authority as provided, Authority shall reimburse such amounts.

The Procedures, which in some cases duplicate the foregoing provisions and in other cases expand upon them, provide the

following:

1. Authority reserves the right to purchase directly materials
   included in bids of subcontractors, and subcontractors will provide lists of materials and suppliers for review.
2. Subcontractor bids will be reduced to reflect the cost and
   related sales/use taxes if Authority chooses to purchase materials directly from the vendor, but the subcontractor's choice of vendor will not be disturbed.
3. The subcontractor shall provide a Purchase Order
   Requisition Form so that Authority can process it and issue its own Purchase Order to the vendor, which purchase order shall identify Authority as purchaser, be accompanied by Authority's consumer's exemption certificate, and contain Authority's exemption certificate number, issue date and expiration date.
4. The subcontractor and Construction Manager will inspect all
   deliveries to the Project site, and the invoices will be forwarded to Authority for payment after verification of delivery.
5. Subcontractors shall maintain records of all Authoritypurchased materials in their possession, including those
   which have been incorporated into the Project.
6. Authority shall retain title to all materials it purchases
   and subcontractors shall act as bailees as to all Authority-purchased materials in their possession, which shall be stored and safeguarded by the subcontractors for Authority until returned to Authority through incorporation into the Project.
7. Authority shall purchase and maintain insurance to protect
   against any loss of or damage to Authority-purchased materials, in an amount sufficient to cover the value of any materials not yet incorporated into the Project from the time Authority first takes title.
8. Upon submission by the subcontractor of appropriate
   documentation, Authority will prepare checks to vendors for payment and deliver such checks directly to the vendors.
9. Authority shall not be liable for any interruption or
   delay, for any defects in the Project, or for any cost or time overruns resulting from delay in delivery or defects in materials purchased under the direct purchase 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.

Other factors of Rule 12A-1.094, F.A.C., that must be satisfied to insure the exempt status of the contract, 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, insurance on the building materials.

The circumstances outlined in the Amendment and the Procedures appear to satisfy the requirements for exemption of transactions as sales to a governmental entity. Authority will make direct purchases of various construction materials. After receiving requisition forms from the subcontractors, Authority will prepare purchase orders for direct purchases. After receiving the approved invoices from the subcontractors, Authority will pay the vendors directly. Authority will retain legal and equitable title to all materials it purchases and will be

responsible for maintaining builder's risk insurance on those materials. Thus, all purchases of materials which are made in accordance with the Amendment and the Procedures 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. 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 note that this response does not apply to a contractor or subcontractor 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.

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 (904) 922-9412

LWB/
Enclosure.: Rule 12A-1.039, F.A.C.
Control #: 33473

12A-1.039 Suggested Forms.
(1) Purchaser's Blanket Resale and Exemption Certificate: This is to certify that all real property leased or tangible personal property purchased or leased after ___ (date) from __ (name) is purchased or leased for the following purposes as checked in the space provided: ( ) Resale or rental as tangible personal property. ( ) Re-rental as real property. ( ) Re-rental as transient rental property. ( ) To be incorporated as a material or part of other tangible personal property to be produced for sale by manufacturing, assembling, processing, or refining. ( ) To be incorporated into items of tangible personal property manufactured, produced, compounded, processed, or fabricated for one's own use. ( ) Export under the provisions of Rule 12A-1.064, F.A.C. ( ) Use by a religious, educational, scientific, or charitable institution, or other qualified nonprofit organization under the provisions of Rule 12A-1.001, F.A.C. ( ) Use by a governmental unit under the provisions of Rule 12A-1.001(9), F.A.C.* ( ) Use as fertilizers (including peat, topsoil, and manure, but not fill dirt), insecticides, fungicides, pesticides, and weed killers used for application on or in the cultivation of crops, groves, home vegetable gardens, and commercial nurseries. ( ) Portable containers used for processing farm products.

( ) For use as field and garden seeds, nursery stock, seedlings, cuttings, or other propagative material for growing on or growing stock. ( ) Use as cloth, plastic, or similar material used for shade, mulch, protection from frost or insects on a farm. ( ) Use as insecticides and fungicides, including disinfectants used in dairy barns or on poultry farms for the purpose of protecting cows or poultry or used directly on animals. ( ) Self-propelled and power drawn farm equipment, when purchased by a farmer for use exclusively on a farm owned, leased, or sharecropped by him, and which is taxable at 3 percent. Note: All other farm equipment is taxable at 6 percent unless specifically exempt under Rule 12A-1.087, F.A.C. ( ) Incorporation into or use by vehicles licensed by a governmental agency as common carriers to transport or move either passengers or property across state lines, subject to proration under the provisions of Rule 12A-1.064, F.A.C.* ( ) Use as nets by commercial fisheries, exempt under the provisions of Rule 12A-1.001(6), F.A.C. This certificate is to continue in force until revoked by written notice to the supplier and the Department of Revenue. Purchaser ____ Address ____ By _____ (Signature) Date ___

Certificate of Registration No. _____ Effective Date of Certificate ____ (See Rule 12A-1.038(2), F.A.C.)
*Consumer's Certificate of Exemption No. ______ Effective Date of the Consumer's Certificate of Exemption

(See Rule 12A-1.038(7), F.A.C.)
Expiration Date of the Consumer's Certificate of Exemption

(See Rule 12A-1.0955(1), F.A.C.)
(2) Purchaser's Unit Resale and Exemption Certificate: The first paragraph of the blanket certificate form may be

replaced with the following:
The undersigned hereby certifies that the property purchased or leased on the attached order is purchased or leased for the following purpose as checked in the space provided: The final paragraph may be omitted, provided the purchaser's name, address, signature, certificate of registration number or consumer's exemption certificate number, and the effective date is shown on the attached order.

Specific Authority 212.17(6), 212.18(2), 213.06(1) FS. Law Implemented 212.06(1)(b), 212.07(1)(b), 212.08(3), (5)(a), (6), (7)(o), (9), 212.17(6), 212.18(2) FS. History--Revised 10-7-68, 1-7-70, 6-16-72, 9-26-77, Amended 7-20-82, 4-12-84, Formerly 12A-1.39, Amended 1-2-89, 9-14-93, 12-13-94.