Could a Florida school board buy materials tax-free for a school construction project managed by a private contractor?

Subject

School Board Contract to Construct School Addition

Plain-English summary

Materials for the school project could be purchased without Florida sales tax when the school board followed its binding direct-purchase program. Although a construction manager selected suppliers and coordinated requisitions, the board itself issued purchase orders carrying its consumer's certificate of exemption number, received invoices in its own name, paid vendors directly, took title and liability when materials reached the job site, and bore the cost and benefit of insurance against loss.

Those facts made the school board—not the contractor—the purchaser in substance as well as form. Florida's public-works rule treats contractor purchases as taxable because the contractor is the ultimate consumer, even when the property ultimately becomes part of government-owned real estate. The governmental exemption applies only when the government directly buys the materials and genuinely controls the purchase before installation.

The ruling was limited in two important ways. It applied only to purchases made after the direct-purchase program became a binding part of the construction agreement. It also did not cover materials a contractor or subcontractor manufactured or fabricated itself; the ruling said those businesses remained taxable on the full cost under the separate fabrication rule.

What this means for you

A government project's tax-exempt status does not automatically exempt a contractor's material purchases. The purchasing documents and actual transaction must show that the government issued and controlled the order, paid the supplier, took title and liability, and carried the risk of loss before the materials became real property.

Risk of loss was especially important here. The school board paid the reimbursable builder's-risk insurance cost, was an additional insured, and was entitled to insurance proceeds for its purchased materials. Florida described assumption of that risk as a paramount factor.

Common questions

Q: Was direct vendor payment by the school board enough by itself? No. The Department considered the transaction as a whole, including purchase orders, title, liability, delivery, invoices, insurance, and risk of loss.

Q: Could the contractor prepare requisitions and select suppliers? Yes on these facts. The contractor's coordination did not prevent exemption because the school board approved and issued its own purchase orders and otherwise acted as the purchaser.

Q: Did the ruling approve purchases made before the contract amendment? Not necessarily. It said earlier purchases might not qualify because the original agreement did not clearly establish that the board held title or assumed the risk of loss.

Q: Were contractor-fabricated materials covered? No. The ruling 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 direct payment
• Fla. Admin. Code r. 12A-1.094 — public-works materials and 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-049

Original ruling text

SUMMARY

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

Jul 02, 1998

Re: Technical Assistance Advisement (98A-049)
XXX ("School Board")
Sales and Use Tax -- School Board Contract to Construct
School Addition
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 February 4, 1998, as supplemented on March 23 and
June 12, 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

On April 1, 1997, School Board and XXX ("Construction Manager")
entered into a Construction Management Agreement (the
"Agreement"), pursuant to which Construction Manager was engaged
to manage the construction of the addition of a Ninth Grade
Center and other renovations to a high school (the "Project").
Under the Agreement, Construction Manager is required to pay
enumerated costs of the Project, including the cost of materials
and builder's risk insurance on those materials. School Board
is required to reimburse Construction Manager for the enumerated
costs plus pay certain fees. The Agreement provides a
guaranteed maximum price ("GMP") that caps the cost of the
Project to School Board.

School Board is entitled to make purchases without paying
Florida sales and use tax under a consumer's certificate of
exemption. Section 10.3 of the Agreement provides that
Construction Manager will cooperate with School Board in
implementing a direct purchase program to permit School Board to
take advantage of its tax exempt status in purchasing
construction materials. The procedures to be implemented under
section 10.3 will require School Board to issue its own purchase
orders to the suppliers selected by Construction Manager or by
subcontractors, subject to School Board approval, based on rough
drafts to be provided by Construction Manager. Section 10.3.6
provides that Construction Manager will be liable for materials
purchased under the program as if it had made the purchases
itself. Under Section 10.3.9, Construction Manager's bonding
and builder's risk insurance obligations under the Agreement are
not to be reduced by virtue of the program. School Board will
pay vendors directly for materials purchased under the program
and indemnify Construction Manager and subcontractors for any
sales and use tax the state may impose in regard to those
materials.

Subsequent to signing the Agreement, but before incurring any
costs for construction materials, School Board and Construction
Manager developed a comprehensive document entitled The [School
Board] Direct Purchased Materials Program (the "Program"). You

enclosed a copy of the Program with your February 4, 1998 letter
and indicated it governed purchases under the Agreement. I
called and asked you to provide evidence that the Program had
been formally made part of, and superseded any conflicting
provisions in, the Agreement. You responded on March 23, 1998,
with copies of additional exhibits to the Agreement. None of
the additional materials you provided amended the Agreement to
incorporate the Program. At your instruction, I spoke with Mary
Van Leuven of the Osceola County Attorney's office on April 15,
1998. She stated that the parties believed the Program had been
adopted, and that they were abiding by it. She had been unable,
however, to find any record of the Agreement having been amended
to incorporate the Program. She prepared such an amendment (the
"Amendment"), which was executed by School Board on May 19,
1998, and by Construction Manager on May 28, 1998. The
Amendment's effective date was May 28, 1998, but the Amendment
stated that the terms of the Program applied retroactively to
the beginning of construction. This advisement applies to
purchases made on or after the date on which the Program became
a binding part of the Agreement.

The Program provides as follows:

1. School Board may elect to purchase materials and equipment
   included in a contractor's bid directly from the supplier. Such
   items are referred to as "Owner-Purchased Materials", and School
   Board will hold full title to all such materials.

2. Contractors will select the suppliers from whom materials
   will be purchased for purposes of making up their bids and will
   submit a list of supplies and suppliers with their bids for
   consideration as Owner-Purchased Materials.

3. Contractors will furnish Construction Manager with detailed
   Purchasing Order Requisition Forms ("Requisitions") for all
   Owner-Purchased Materials.

4. Upon receipt of a Requisition, School Board will review the
   Requisition and, if approved, issue its own purchase order
   directly to the supplier, with delivery to be F.O.B. job site,
   where all Owner-Purchased Materials are to be stored.

5. Although School Board will take title to Owner-Purchased
Materials upon delivery to the job site, contractors will have
contractual obligations to inspect, accept delivery of, and
store the materials pending incorporation into the project and
will remain liable for their negligence while the materials are
in their possession.

6. After verifying that delivery is in accordance with the
   purchase order, contractors will forward approved invoices to
   Construction Manager, who will deliver them to School Board.
   School Board will process the invoices and issue payment
   directly to the supplier.

7. The amount of builder's risk insurance to be carried under
   the Agreement by Construction Manager will be sufficient to
   cover Owner-Purchased Materials. School Board will bear the
   cost of that coverage as a reimbursable cost under the
   Agreement. School Board is to be named as an additional insured
   on the builder's risk insurance and to receive any proceeds
   related to School Board-Purchased Materials.

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
proper documentation of the exempt status of the sale for their
records.

By its terms, section 212.08(6), F.S., exempts only direct
purchases by governmental entities. The exemption does not
apply when a contractor, employed by the governmental entity,
purchases tangible personal property which is to be incorporated
into public works owned by the entity. Administrative
guidelines governing the taxability of materials purchased for
public works contracts, such as that involved in the instant
case, 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 for public works contracts
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 tax exempt 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 a 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. 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 the tangible personal property;
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 procedures outlined in the Program appear to satisfy the
foregoing requirements for exemption of transactions as sales to
a governmental entity. School Board will make direct purchases
of various construction materials. After receiving requisition
forms from the subcontractors, School Board will prepare
purchase orders for direct purchases. After receiving the
approved invoices from the contractors, School Board will pay
the vendors directly. School Board will retain legal, and
equitable, title to all materials it purchases and will be

responsible for the cost of builder's risk insurance on those
materials as a reimbursable cost under the Agreement. School
Board will receive any insurance proceeds related to the loss or
destruction of those materials.

Based upon the conclusion that School Board is the purchaser,
all purchases of materials which are made in accordance with the
Program will be exempt from sales tax. It is necessary,
however, 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 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.

In addition, if any purchases were made pursuant to the terms of
section 10.3 of the Agreement prior to the effective date of the
incorporation of the Program into the Agreement, such purchases
may not qualify as exempt because it is not clear that School
Board would hold title or assume the risk of loss as to
materials purchased under that section.

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
(850) 922-9412

LWB/
Enclosure.: Rule 12A-1.039
Control #: 32990