Could a school board make tax-exempt direct purchases for a project managed through a government agent and construction manager?

Subject

School Board Contract to Construct School Additions

Plain-English summary

The school board could buy project materials without Florida sales tax under the amended direct-purchase procedures. A separate government management agency and a private construction manager coordinated the elementary-school project, but the board reviewed requisitions, issued its own purchase orders to suppliers, paid vendors directly, took title when materials arrived at the job site, and was named as an additional insured under the builder's-risk policy.

Florida distinguished a government's own exempt purchases from a contractor's taxable purchases for public works. A government project does not make every material purchase exempt: the government must be the buyer in substance, not merely fund or reimburse a contractor. Here, the contract amendment incorporated procedures showing that the board directly controlled the purchases and bore the material risk of loss before installation.

The ruling did not extend to materials a contractor or subcontractor manufactured or fabricated for the project. For those articles, the contractor remained the ultimate consumer and owed use tax on the full cost under the separate fabrication rule.

What this means for you

A project can remain eligible for direct government purchasing even when multiple managers sit between the public owner and the construction site. The decisive documents and conduct must still make the government the vendor's customer: the government approves and issues the order, receives the invoice, makes payment, takes title and liability, and carries the risk of loss.

The Department called risk of loss a paramount consideration. Naming the school board as an insured party under coverage sufficient for its materials supported the conclusion that the board—not the contractor—bore that risk.

Common questions

Q: Did using a government management agent and private construction manager destroy the exemption? No. Their coordination did not prevent the school board from being the purchaser under the specific amended procedures.

Q: Could contractors select suppliers and prepare requisitions? Yes on these facts. The school board still reviewed the requisitions and issued its own purchase orders directly to the suppliers.

Q: Who had to pay the vendors? The school board. Direct payment by the governmental entity was one of the required conditions for exemption.

Q: Were contractor-fabricated materials exempt under this ruling? 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 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-050

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 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 pay for
insurance against loss or damage as a reimbursed cost under
the contract and being named as an insured party on the
insurance policy ; 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-050)
XXX ("School Board")
Sales and Use Tax -- School Board Contract to Construct
School Additions
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 16, 1998. That letter has been supplemented
by telephone conversations with XXX of your office and XXX of

the XXX ("DMS") and by a telecopy of a contract amendment from
DMS on May 20, 1998. You have asked for a technical assistance
advisement indicating that the procedures proposed in your
letter would provide for tax-exempt purchases.

Facts

On July 24, 1997, School Board and the XXX of DMS entered into
an Agreement for Services concerning construction of an
exceptional education suite and media center at an elementary
school (the "Project"). School Board authorized and requested
DMS to act as its agent and provide management services for the
Project. The Agreement for Services provided that School Board
would provide all the funding for the Project and would be bound
by the contracts DMS would enter as its agent with architects,
engineers and contractors. On September 30, 1997, DMS entered
into a Facilities Agreement Between Owner and Contractor (the
"Contract") with XXX ("Construction Manager"), pursuant to which
Construction Manager was engaged as general
contractor/construction manager for the Project. Under the
Contract, Construction Manager is required to pay enumerated
costs of the Project, including the cost of materials and
premiums for builder's risk insurance on those materials.
School Board is required to reimburse Construction Manager for
the enumerated costs plus pay certain fees. The Contract
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. School Board has adopted the [School Board]
Procedures, which pertain to School District Purchased Materials
(the "Procedures"). The Procedures provide as follows:

1. The School Board may elect to purchase materials and
   equipment included in a contractor's bid directly from the
   supplier.
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.

3. Contractors shall furnish Construction Manager with
detailed Purchase Order Requisition Forms ("Requisitions")
for all School Board purchased materials.

4. Upon receipt of a Requisition, School Board shall review
   the Requisition and, if approved, issue its own purchase
   order directly to the supplier, with delivery to be made to
   the Project location on an F.O.B. jobsite basis.
5. Although School Board will take title to materials
   purchased pursuant to the Procedures upon delivery to the
   job site, the contractor will have contractual obligations
   to inspect, accept delivery of, and store the materials
   pending incorporation into the project. The contractors'
   possession of the materials will constitute a bailment.
   The contractor, as bailee, will have the duty to safeguard,
   store and protect the materials while in its possession
   until returned to School Board through incorporation into
   the Project.
6. After verifying that delivery is in accordance with the
   purchase order, the contractor will forward approved
   invoices to Construction Manager, who will deliver them to
   DMS for review and approval. DMS will then forward the
   invoices 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 Contract by the Construction Manager will be sufficient
   to cover School Board purchased materials. School Board is
   to be named as an additional insured on the builder's risk
   insurance.

On March 31, 1998, School Board, DMS, and Construction Manager
executed an Amendment to the Contract. The Amendment
incorporated two additional Exhibits into the Contract. The
first was a set of guidelines to provide for direct purchases of
materials for the Project by School Board. The second Exhibit
to be incorporated was the Procedures. The guidelines and the
Procedures are similar in most respects. It is not necessary to
address those instances in which the guidelines differ from the
Procedures for purposes of this advisement, because the
Amendment provides that the Procedures prevail over the
guidelines in case of conflict or inconsistency.

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. The exemption does not
apply when a contractor, employed by a 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
situation, 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 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, as indicated by the entity's acquisition of, or
   inclusion as the insured party under, insurance on the building
   materials.

The Procedures 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
contractors, School Board will prepare purchase orders for
direct purchases. After receiving the approved invoices from
DMS, School Board will pay the vendors directly. School Board
will retain legal, and equitable, title to all materials it
purchases, will be responsible for the cost of builder's risk
insurance on those materials as a reimbursable cost under the
Contract, and will be a named insured party on the builder's
risk policy.

Based upon the conclusion that School Board is the purchaser,
all purchases of materials which are made in accordance with 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.

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.

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 #: 33417