Could a DOT consultant buy furniture, equipment, and software tax-free for resale when DOT later reimbursed the cost and took title?

Plain-English summary

Florida concluded that a Department of Transportation consultant owed tax when buying furniture, office equipment, and software for field offices used to perform its contract. The consultant took title from the vendors, placed the items in offices staffed by its employees, and retained possession, control, and responsibility for loss or damage during the contract.

DOT could have bought items directly from vendors using its government exemption, but it did not do so. Instead, it reimbursed approved costs as part of the consultant's compensation for services. Title transferred to DOT only after reimbursement, while the consultant continued using the property.

Because the consultant bought the items to satisfy its own contractual duty and use them in providing services, the purchases were not made exclusively for resale. Later reimbursement and title transfer did not change the taxability of the original vendor sales.

Common questions

Did DOT's eventual ownership make the original purchases exempt? No. The consultant first bought and used the items for its own contract performance.

Was reimbursement treated as a purchase price paid by DOT? No. The TAA treated it as part of the consultant's compensation for services.

Could DOT have purchased the property exempt directly? Yes. The ruling noted that DOT could issue purchase orders and provide its exemption certificate directly to vendors.

Why did the resale exemption fail? The consultant did not buy the property solely for resale; its employees used it in the field offices.

Citations and references

• Fla. Stat. § 212.02(14) and (15)
• Fla. Stat. §§ 212.05(1), 212.07(1), and 212.08(6)
• Fla. Admin. Code r. 12A-1.038
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-094

Original ruling text

SUMMARY

Purchases of furniture, equipment and software pursuant to
a consulting contract with the Florida Department of
Transportation are subject to sales tax where the contract
requires the taxpayer to maintain and furnish offices for
performing the services and permits the costs of the items
to be a factor in computing the amount of the consulting
fee if the taxpayer obtains prior approval of a purchase
and transfers title to the Department of Transportation
when the consulting fee is paid. Taxpayer takes title to
the items from the vendor and uses the items itself in
providing required services. The sales are not exempt
direct sales to the Department of Transportation by the
vendor but rather are sales to the taxpayer. The taxpayer
uses the items itself in performing contracts, and

therefore is not entitled to treat them as tax-exempt
purchases made exclusively for resale. Subsequent
reimbursement as part of its consulting fee and transfer of
title to the purchased items to the Department of
Transportation does not alter the classification of
taxpayer's purchases as made for it own use in performing

the contract.

Dec 24, 1998

Re: Technical Assistance Advisement 98A-094
XXX ("Taxpayer")
Department of Transportation Contracts
Sections 212.02, 212.05, 212.06, 212.08, F.S.

Dear:

This is in response to your letter to the Florida Department of
Revenue dated October 30, 1998, in which you asked for a
technical assistance advisement concerning the taxation of
furniture, office equipment, and software purchased pursuant to

a contract between Taxpayer and the Florida Department of

Transportation ("DOT"). Your letter and the attached
documentation was supplemented by information provided by XX,

Taxpayer's Tax Accountant, in a telephone conversation on XXX.

Facts

Taxpayer entered a contract with the DOT on XX, to provide
consulting and related services in connection with specified
operations of the Florida Turnpike. The contract is for a term

of up to five years, subject to the right of the DOT to

terminate at any time. Taxpayer is required by the contract to
establish and staff two field offices, one in XXX and another at
the XX. The offices are to be identified as Taxpayer's offices.
Taxpayer is required to furnish the field offices with furniture

and equipment, including personal computers and software. The
DOT reserves the right to furnish a portion of those items

itself. The contract goes on to provide as follows:

All office furnishings and equipment mentioned herein and
purchased by [Taxpayer] shall be for use by [Taxpayer] and
shall become the property of the Department when
reimbursement is made to [Taxpayer]. All such furnishings
shall be used by [Taxpayer] during the term of the
Agreement and [Taxpayer] shall retain responsibility for
risk of loss or damage to furnishings and equipment until

they are returned to the Department.

Taxpayer is compensated based on reimbursement of direct costs
plus percentages of certain costs to represent indirect costs

and a profit margin. The contract provides that approved
purchases of tangible personal property of a nonconsumable and
nonexpendable nature are eligible for reimbursement. If such
property is "approved for purchase by the DOT for exclusive use
by [Taxpayer] on this project,” the property becomes DOT

property at the time reimbursement is made to Taxpayer.

Taxpayer would prepare memoranda requesting approval to purchase
nonexpendable items. The appropriate DOT official would approve
the items and prepare an internal DOT approval form listing the
property with costs. Internal DOT memoranda that you have
enclosed indicate that some DOT staff who processed the forms

viewed them as involving purchases by the DOT rather than

reimbursement by the DOT. After approval of the purchase, the
DOT would notify Taxpayer that it could proceed with ordering

the property. Taxpayer ordered the items and paid the vendors.

Taxpayer paid sales tax to the vendors of office furniture but

not the vendors of computer equipment and software. Taxpayer is
also in the business of selling computer hardware and software
and regularly purchases for resale from the vendors for the

field offices purchases. Those vendors have blanket resale
exemption certificates on file from Taxpayer and did not charge
sales tax. Taxpayer did accrue use tax. Taxpayer files sales

tax returns with Florida on an annual basis, and remittance to

the state of the accrued use tax for the contract purchases has

not yet occurred.

In August 1998, Taxpayer provided an itemized invoice to the DOT
and attached supporting invoices from the vendors to Taxpayer.
The DOT instructed Taxpayer to include sales tax in its invoices

to the DOT. Upon reviewing the invoices, however, the DOT
backed out the accrued but unremitted use tax amounts that
Taxpayer had included. The DOT indicated those amounts would be

reimbursable only upon actual payment.

Requested Advisement

You have requested advice on whether, under the terms of the
contract, purchases of nonexpendable items by Taxpayer are
actually purchases for resale to the DOT on which no sales tax

is due.

Law, Discussion, and Analysis

Sales tax is imposed on retail sales of tangible personal
property in Florida. For purposes of sales and use taxation,
the term "sale" is defined to include "any transfer of title or
possession or both, exchange, barter, license, lease, or rental,
conditional or otherwise, in any manner or by any means
whatsoever, of tangible personal property for a consideration."
A "retail sale" is defined as "a sale to a consumer or to any
person for any purpose other than for resale in the form of

tangible personal property...." Dealers who make purchases

solely for resale are authorized to issue resale certificates to
their vendors. In addition, retail sales to state agencies like
the DOT are specifically exempted. In the case of sales to
governmental entities, vendors are required to obtain a copy of
the entity's consumer's certificate of exemption issued by the
Department. See sections 212.02(14), (15), 212.05(1),
212.07(1), 212.08(6), F.S., Rule 12A-1.038, F.A.C.

The issue in this case is whether Taxpayer's purchases of
nonexpendable items under the terms of the contract are exempt
sales for resale or are taxable retail sales. Taxpayer's letter
suggests Taxpayer's purchases are exempt because they are made
for resale to the DOT. The contract does not state that the DOT
will purchase any property from Taxpayer. Under the contract,
Taxpayer is required to furnish certain nonnexpendable items for
its field offices, although the DOT retains the right to furnish
nonexpendables to Taxpayer if the DOT elects to do so. The
offices could be furnished and equipped in a number of ways.
Taxpayer could bring in furniture and equipment it already
owned. The DOT could withdraw furniture and equipment from
inventory or purchase it directly from vendors and permit
Taxpayer to use it for the duration of the contract term.

Taxpayer could purchase nonexpendables without seeking DOT
reimbursement approval, retain title, and remove them at the end
of the contract term. Alternatively, Taxpayer can seek prior
approval of purchases as reimbursable direct costs. The
reimbursement is not consideration or purchase price paid for
tangible personal property but rather an additional element of
compensation for the package of services Taxpayer is required to
render. Although specific wording in the contract creates some
ambiguity and there is eventually a transfer of title from

Taxpayer to the DOT, the overall intent of the contract is not

to treat the DOT as a purchaser and Taxpayer as a seller of
nonexpendables. Use of the direct cost reimbursement process is
merely one of several alternative ways in which the Taxpayer's

obligation to furnish the field offices may be satisfied.

The DOT's instructions concerning sales taxes support this
conclusion. The DOT could make retail purchases of furniture
and equipment on a tax-exempt basis pursuant to section

212.08(6), F.S., by furnishing its consumer's certificate of

exemption. The usual procedure when a state agency purchases
tangible personal property is to issue a purchase order to the
vendor. The purchase order contains the necessary certification
of exemption so the agency can avoid sales tax. The DOT did not
do that in this case. The DOT paid Taxpayer under a consulting
agreement that authorized reimbursement of certain expenses as
part of the compensation for services rendered. The DOT
recognized that since Taxpayer was providing a service and was
not a vendor of tangible personal property, Taxpayer would incur
sales tax on any purchases it made of items to be used in
performing the contract. Those sales taxes paid by Taxpayer
were treated by the DOT as part of Taxpayer's reimbursable cost.
Refusal to reimburse the accrued use tax was not based on any
argument that Taxpayer's purchases were not taxable. The DOT
indicated it would reimburse those taxes when payment was

actually made to the state.

You have requested confirmation that the DOT interpretation of
the contract is correct under the state sales and use tax laws

and asked for an explanation of why the contract does not create
a situation in which Taxpayer makes purchases for resale. Sales
are taxable retail sales if they are made "for any purpose other
than for resale." Items must be purchased exclusively for

resale to avoid taxation. Taxpayer is required by its contract

to provide office furnishings and equipment, and the purchases
are made to satisfy that contractual obligation. The purchased
items are delivered to the field offices Taxpayer is required to
maintain under its contract with the DOT and are used

exclusively by Taxpayer's employees to perform Taxpayer's
contractual responsibilities. Taxpayer has title to the

purchased items its employees are using until at some subsequent
time Taxpayer invoices the DOT and receives reimbursement from
the DOT. Title passes to the DOT when reimbursement is made,
but Taxpayer maintains possession and control and is responsible
for loss or damage until the contract is terminated. Taxpayer
makes purchases of nonexpendables in order to fulfill its
contractual obligation to furnish the field offices and in order

to use the items to perform the services required by the

contract. Taxpayer does not purchase the items for the sole
purpose of reselling them to the DOT. Therefore, even if the

subsequent cost reimbursement and transfer of title to the DOT

were viewed as a Sale of tangible personal property, Taxpayer's

initial purchase would not be an exempt sale for resale.

Conclusion

Taxpayer 's purchases of furniture, equipment, and software to
fulfill its contractual obligation to furnish its field offices

and to use in the course of performing its contractual
responsibilities are taxable retail sales, despite the fact that
Taxpayer is subsequently reimbursed by the DOT and title to the

purchased items transfers to the DOT at that time.

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/
Control #: 35674