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