Could Osceola County buy construction materials tax-free for its courthouse and government-center project?

Subject

Local Government Contract for Courthouse and Government Center

Plain-English summary

Osceola County could purchase construction materials tax-free for its courthouse and government-center project under the proposed direct-purchase program. The Department concluded that the county—not the construction manager or subcontractors—would be the buyer in substance as well as form.

The county would issue purchase orders directly to vendors, include its exemption-certificate information, receive invoices, and pay vendors with county checks. It would take title and liability when materials reached the job site and maintain insurance covering loss or damage until the materials were incorporated into the project. Those facts satisfied the government-purchase exemption.

The ruling did not exempt materials manufactured or fabricated by a contractor or subcontractor for the project. For those items, the contractor remained the ultimate consumer and owed use tax on the full cost under the cited rules.

What this means for you

Calling a purchase a government purchase is not enough. The Department looked at who actually ordered, paid for, owned, and bore the risk of loss for the materials before installation. Direct government payment and government-held builder's-risk insurance were central to the result.

Common questions

Q: Could subcontractors choose the vendors? Yes. The procedures preserved the subcontractor's vendor choice, but the county itself had to issue the purchase order and be the actual purchaser.

Q: Who had to pay the vendor? The county had to receive the invoice and send its check directly to the vendor.

Q: Why did insurance matter? The governing statute and rule treated assumption of risk of loss as a paramount factor. The county took that risk and bought coverage from the time it acquired title until installation.

Q: Were contractor-fabricated materials also exempt? No. The ruling expressly excluded materials manufactured or fabricated by contractors or subcontractors; they were treated as the consumers of those items.

Citations and references

• Fla. Stat. § 212.08(6) — governmental sales-tax exemption and substance-over-form test
• Fla. Admin. Code r. 12A-1.001(9) — documentation and direct-payment rules for governmental units
• Fla. Admin. Code r. 12A-1.094 — public-works materials, title, payment, and risk-of-loss factors
• 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-082

Original ruling text

SUMMARY

Materials for a county courthouse and government center
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 county will provide the vendor with
certificate exemption; (3) the vendors invoice the county
directly; (4) the county issues it checks directly to the
vendors in payment of the invoices; (5) the county takes
title to the materials from the vendor and assumes
liability for the materials upon their delivery to the job
site; (6) the county assumes the rick of loss of the
materials upon delivery, which is clearly established by
the county's being required to and actually purchasing
insurance against loss or damage; and (7) the remaining
terms of the documents do not prevent concluding that the
county rather than the contractor is in substance as well
as in form the purchaser of the materials.

Nov 09, 1998

Re: Technical Assistance Advisement (98A-082)
XXX ("Board")
Sales and Use Tax -- Local Government Contract for
Courthouse and Government Center
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 September 18, 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

Board is the governing body of Osceola County. Board has
undertaken the construction of a new courthouse, demolition of
part and renovation of the remainder of the existing courthouse,
and additions/renovations to administrative office buildings,
and related work to develop local government center (the
"Project"). Board and XXX, a joint venture (the "Construction
Manager") entered into an agreement on April 13, 1998 (the
"Agreement"), pursuant to which Construction Manager was engaged
to manage the planning, design and construction of the Project.

Under the Agreement, Construction Manager is to pay all costs of
the Project, as described in Article 9. Board will reimburse
those costs and also pay management fees, up to a guaranteed
maximum price to be agreed upon before construction begins.
Among the items included in reimbursable costs are all materials
incorporated into the Project, premiums on all insurance and
bonds Construction Manager is required to obtain for the
Project, any insurance deductibles Construction Manager may be
required to pay upon any losses in regard to the Project, and
sales or use taxes related to costs of the Project.

Article 13 of the Agreement deals with insurance. It provides
that Construction Manager shall carry liability insurance,
including insurance for property damage resulting from
Construction Manager's operations. Board is required to provide
Builder's risk coverage based on the completed value of the
Project and covering all risks, including theft. Because the
Project includes both new construction and renovations of
existing buildings, the builder's risk coverage must remain in
effect despite partial occupancy and must cover all existing
structures and contents.

Article 18 of the Agreement provides for a direct purchase
program pursuant to which Board will buy materials for the
Project. That Article provides as follows:

1. Subcontractors will include all applicable sales taxes
   in their bids.

2. If Board receives a favorable Technical Assistance

Advisory from the state, Board may exercise an option to
purchase materials directly. Direct purchases will be
governed by "Sales Tax Exempt Purchasing Procedures for
Public Projects" (the "Procedures") included as section 2
of Article 18. The Procedures "shall take precedence over
other conditions and terms of this Agreement where
inconsistencies or conflicts exist."

3. Board will issue purchase orders directly to the vendors
   selected by the subcontractors at the negotiated prices.
   The purchase orders must contain Board'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 Board for processing and
   direct payment by Board to vendors.

6. Board will retain title to all materials it purchases.

7. Board 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 Board takes title until they are incorporated into the
   Project.

8. If the state assesses any sales taxes, penalties or
   interest against Construction Manager or a subcontractor
   for materials purchased by Board as provided, Board 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. Board 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 Board chooses to purchase
   materials directly from the vendor, but the subcontractor's
   choice of vendor will not be disturbed.

3. Seven days prior to the date on which materials Board
   has elected to purchase must be ordered, the subcontractor
   will provide a Purchase Order Requisition Form so that
   Board can process it and issue its own purchase order to
   the vendor. Board's purchase order will identify Board as
   purchaser, be accompanied by a copy of Board's consumer's
   certificate of exemption, and contain Board's consumer's
   exemption certificate number, issue date and expiration
   date. Purchase orders will require vendors to provide
   shipping, and deliveries will be F.O.B. jobsite

4. The subcontractor and Construction Manager will inspect
   all deliveries to the job site, and the invoices will be
   forwarded to Board for payment after verification of
   delivery.

5. Subcontractors shall maintain records of all Boardpurchased materials in their possession, including those
   which have been incorporated into the Project.

6. Board shall retain title to all materials it purchases
   and subcontractors shall act as bailees as to all Boardpurchased materials in their possession, which shall be
   stored and safeguarded by the subcontractors for Board
   until returned to Board through incorporation into the
   Project.

7. Board shall purchase and maintain insurance to protect
against any loss of or damage to Board-purchased materials,
in an amount sufficient to cover the value of any materials
not yet incorporated into the Project from the time Board
first takes title.

8. Upon submission by the subcontractor of appropriate
   documentation, Board will prepare checks to vendors for
   payment and deliver such checks directly to the vendors.

9. Board 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.

On February 4, 1997, Construction Manager submitted to the
Department a document entitled "Sales Tax Exempt Purchasing
Procedures for Public Projects" as revised on January 24, 1997.
The provisions of that document were identical to the Procedures
except that there was no provision in that document similar to
Item 9 above. Construction Manager requested advice on whether
the procedures in that document would provide for tax-exempt
transactions. Construction Manager's request did not mention
Board, the Project or any other specific undertaking. On
February 18, 1997, the Department issued to Construction Manager
a letter of technical assistance that concluded that
transactions conducted in accordance with the document would,
subject to certain limitations, be exempt from sales tax.

Law

Sales to governmental units are exempt from sales tax pursuant
to section 212.08(6), F.S., as amended by Chapter 98-144, Laws
of Florida, 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. A determination 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 department
shall adopt rules that give special consideration to
factors that govern the status of the tangible personal
property before its affixation to real property. In
developing these rules, assumption of the risk of damage or
loss is of paramount consideration in the determination....

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.

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 o 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.,
states 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 Article 18 of the Agreement,
including the Procedures, appear to satisfy the requirements for
exemption of transactions as sales to a governmental entity.
Board will make direct purchases of various construction
materials. After receiving requisition forms from the
subcontractors, Board will prepare purchase orders for direct
purchases. After receiving the approved invoices from the
subcontractors, Board will pay the vendors directly. Board 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 Article 18, 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
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.

Closing Statement

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 that 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 #: 35465