Could a county buy arena construction materials tax-free through a direct-purchase program managed by its contractor?

Subject

Contract to Construct Arena

Plain-English summary

Arena construction materials could be purchased without Florida sales tax only if the county's direct-purchase program was amended exactly as represented to the Department. The county would issue purchase orders carrying its exemption number, receive vendor invoices, pay vendors directly with public funds, and take legal and equitable title when materials arrived.

The program initially did not clearly put the risk of loss on the county. It required the project manager to hold the county harmless from casualty losses, reimburse insurance premiums, replace materials when insurance was insufficient, and receive the benefit of insurance proceeds. Florida said those terms undermined the claim that the county was the true purchaser.

The parties represented that they would amend the program so the county paid for full replacement-value builder's-risk insurance, retained the benefit of that coverage, and bore casualty risk before installation. The manager's protection would be limited to losses caused by vendor or material decisions, contractual failures, or negligence. Exemption was expressly conditioned on those amendments becoming effective and on the other project documents matching the represented facts.

What this means for you

Direct government payment and title were not enough. Florida called pre-installation risk of loss the paramount factor and examined who paid for insurance, who received the proceeds, and who had to cover any shortfall.

For a public-works direct-purchase program, the signed contract package—not a planned future practice—must actually place ordering, payment, title, liability, and genuine economic risk with the governmental entity.

Common questions

Q: Did the Department approve the program as originally submitted? No. The original indemnity and insurance terms did not clearly make the county bear casualty risk.

Q: What changes were required? The county had to pay for full replacement-value insurance, retain the insurance benefit, and stop requiring the manager to cover casualty losses or insurance shortfalls except for the manager's specified decisions, breaches, or negligence.

Q: Could contractors still identify vendors and materials? Yes on the represented facts, while the county itself issued purchase orders, took title, received invoices, and paid vendors.

Q: Were contractor-manufactured materials covered? No. The advisement expressly excluded materials manufactured or fabricated by contractors or subcontractors.

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-unit purchases and exemption documentation
• Fla. Admin. Code r. 12A-1.094 — public-works materials and the government-versus-contractor purchaser analysis
• Fla. Admin. Code r. 12A-1.039 — exemption-certificate format
• 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-041

Original ruling text

SUMMARY

Materials for a county arena project can be purchased tax exempt where under the terms of the controlling documents: (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; (2) the vendors invoice the county directly; (3) the county issues its checks directly to the vendors in payment of the invoices; (4) the county takes title to the materials from the vendor and assumes liability for the materials upon their delivery to the job site; and (5) the county assumes the risk of loss of the materials upon delivery, which is clearly established by the county's being required to purchase insurance against loss or damage.

Jun 03, 1998

Re: Technical Assistance Advisement 98A-041 XXX ("Entity") XXX ("Manager") Sales and Use Tax -- Contract to Construct Arena Section 212.08(6), F.S. Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear XXX:

This is in response to your letter to the Florida Department of Revenue dated January 8, 1998, in which you asked for a technical assistance advisement indicating that the procedures proposed in your letter would provide for a tax exempt transaction.

Facts

As recounted in your letter, Entity and Manager have entered into a series of contracts concerning the planning, design,

construction, and management of a multi-purpose sports and entertainment facility (the "Project"). Entity owns the land and will hold title to the Project as constructed. The contract for the construction of the Project required Manager to pay all contractors and vendors involved in the construction of the Project. Pursuant to Composite Amendment One (the "Amendment"), Manager and Entity have adopted procedures (the "Program") pursuant to which Entity will instead issue its purchase orders to vendors of materials and supplies and pay those vendors with Entity checks or warrants.

The Program as submitted contains the following relevant provisions:

1. Manager will cause contractors to provide an Entity
   representative with a list of materials to be purchased under the Program.
2. Entity will issue its purchase order for the materials on
   the terms and to the vendors identified by the contractor and Manager. Manager will review the form of the purchase orders prior to their issuance. A deductive change order to the original contract will be issued to reflect the purchase of the materials pursuant to the Program.
3. Title to materials purchased pursuant to the Program will
   vest in Entity upon receipt from the vendor.
4. Manager holds Entity harmless for any claims arising from
   selection of the materials or vendors, price changes, coordination of delivery dates, suitability of the materials, or similar matters related to Manager's or the contractor's decisions, acts, or omissions. The Program as submitted also provides that Entity is held harmless from losses of materials due to theft, vandalism, or similar casualty losses. In such cases, Entity would, however, be required to transfer any insurance proceeds it might receive to Manager for use in replacing the lost materials. Manager would be required to replace any such lost materials, irrespective of whether the insurance proceeds were sufficient to meet the cost.
5. Vendors shall invoice Entity directly for any materials
   purchased pursuant to the Program. Entity shall pay the vendors directly. An Entity representative shall

acknowledge receipt of materials and the Manager's approval for payment prior to Entity issuing its warrant to the vendor.

6. Purchase orders shall state that the purchase is exempt
   from sales tax and shall include the Entity's sales tax consumer's certificate of exemption number. A copy of Entity's certificate of exemption shall be provided to each vendor.
7. Entity is to bear the risk the loss for materials purchased
   pursuant to the Program between the time the materials are delivered until they are incorporated into the Project. Entity is to insure against such loss. As submitted, the Amendment provides that Entity shall insure "under such terms and conditions" as it deems reasonable in its discretion and that Manager shall reimburse Entity for the cost of insurance.

We have discussed the fact that Entity does not clearly bear the risk of loss under the Program in the form submitted. In particular, Manager is required to hold Entity harmless from any loss whatsoever, including casualty damage or loss. Entity only has to procure such insurance as it deems reasonable, and if that insurance is not sufficient to replace lost materials, Manager is required to pay the difference. In addition, Entity does not bear the economic burden of obtaining insurance, since Manager is required to reimburse any premiums. Neither does Entity enjoy the benefits of the proceeds, since they must be turned over to Manager to fund Manager's obligation to replace damaged or lost materials.

You have represented that the Program will be amended to address these issues. Manager will not hold Entity harmless for casualty-type losses but only for losses related to Manager's or the contractors' decisions relating to vendors or materials, for failures of Manager or contractors to fulfill their contractual obligations in regard to handling materials while in their possession, or for negligence on the part of Manager or any contractor. Manager will not reimburse Entity for the cost of builder's risk insurance on the materials. Entity will be required to carry such insurance for the full replacement value of the materials prior to their incorporation into the Project.

The requirement that Manager pay the difference between the replacement cost of lost materials and insurance proceeds received by Entity will be deleted. The conclusions made in this advisement concerning the tax-exempt status of purchases made pursuant to the Program are specifically based upon such amendments having been adopted and having become effective.

The Amendment was the only document submitted with your request and the only document that has been reviewed for purposes of the analysis and conclusions set forth in this advisement. As noted, you have represented that the amendments described above will be adopted as part of the Program. You have also represented that the funds Entity will use to purchase materials for the Project as described in the Amendment are public funds. You have further represented that the Project is a public work within the meaning of section 212.08(6), F.S., the case law and rules interpreting that statute, and Rule 12A-1.094, F.A.C. In addition, you have represented that all other contracts and documents related to the Project and the financing thereof are consistent with the provisions of the Program as described above and with your representations concerning the characterization of the Project and of the funds used to purchase the construction materials. The analysis and conclusions in this advisement are specifically based and conditioned upon your representations as to all of these matters.

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 governmental 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;
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 materials;
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 circumstances outlined in the Program, if amended in accordance with your representations, appear to satisfy the foregoing requirements for exemption of transactions as sales to a governmental entity. Entity will make direct purchases of various construction materials. After receiving necessary information from contractors, Entity will prepare purchase orders for direct purchases. Vendors will invoice Entity rather

than Manager or the contractors. After receiving notification of receipt and acceptance of materials from its representative working with Manager and the contractors on the Program, Entity will issue payment directly to the vendors. Entity will retain legal and equitable title to all materials it purchases and will be responsible for maintaining adequate builder's risk insurance on those materials.

Based upon the facts and representations set forth above, purchases of materials which are made in accordance with the Program as it will be amended 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 governmental 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
Control #: 32458