Could a public port agency buy construction materials tax-free for a terminal renovation through a direct-purchase procedure?

Plain-English summary

Florida approved a public port agency's proposed direct-purchase procedure for materials used in a terminal renovation. The transactions were exempt sales to the government agency because the agency—not the contractor—was the purchaser in substance as well as form.

The agency would issue its own purchase orders with its exemption-certificate number, receive invoices from vendors, pay the vendors directly, and take title when the materials arrived at the job site. It also assumed the risk of loss before installation by purchasing insurance covering the materials. The ruling called risk of loss the paramount consideration and also reviewed bidding, inspection, acceptance, delivery, payment, storage, and indemnification terms.

The exemption required a properly completed exemption certificate to be given to each vendor at purchase. It did not extend to articles that a contractor or subcontractor manufactured or fabricated for its own contract work; the ruling treated that contractor as the taxable ultimate consumer under the cited rules.

Common questions

Was direct government payment enough by itself? No. The ruling considered the transaction as a whole, including title and risk of loss.

When did the agency take title and risk? Upon delivery of the materials to the job site, before their incorporation into the project.

Why did insurance matter? The agency's obligation to insure the materials showed that it bore the risk of damage or loss.

Could a subcontractor manufacture an item and sell it tax-free through the procedure? No. The TAA said contractors manufacturing or fabricating their own contract materials remained taxable on the fabricated articles' full cost.

Citations and references

• Fla. Stat. § 212.08(6)
• Fla. Admin. Code r. 12A-1.001(9)
• Fla. Admin. Code r. 12A-1.094
• Fla. Admin. Code rr. 12A-1.039 and 12A-1.051(5)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-101

Original ruling text

SUMMARY

Material for a public port renovation project can be
purchased tax exempt where under the terms of the
controlling documents: (1) the public agency issues its
purchase orders directly to the vendors; (2) the purchase
orders include the public agency's consumer's certificate

of exemption number and the public agency will provide the
vendor with a certificate of exemption; (3) the vendors
invoice the public agency directly; (4) the public agency
issues its checks directly to the vendors in payment of the
invoices; (5) the public agency takes title to the

materials from the vendor and assumes liability for the
materials upon their delivery to the job site; (6) the

public agency assumes the risk of loss of the materials
upon delivery, which is clearly established by the public
agency being required to and actually purchasing insurance
against loss of damage; and (7) the remaining terms of the
documents do not prevent concluding that the public agency
rather than the contractor is in substance as well as in

form the purchaser of the materials.

Dec 31, 1998

Re: Technical Assistance Advisement (98A-101)
XXX ("Agency")
Sales and Use Tax -- Contract to Renovate Terminals
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 November 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

Agency is a political subdivision of the state and holds a
consumer's certificate of exemption issued by the Department.
Agency owns and operates the XXX (the "Port"). XXX ("Line")
currently operates vessels from certain terminals at the Port

and proposes to operate additional, larger vessels if those
terminals and parking areas and roadways that serve those
terminals are expanded and renovated. Agency wishes to encourage
Line to expand its operations at the Port and has undertaken the
expansion and renovation (the "Project"). On XXX, the XXX (the
"Board") authorized the Project, and the County Manager executed
a Master Agreement and a Terminal Usage Agreement with Line.
The total maximum projected cost of the Project was set at $60

million.

Under the Master Agreement, Line undertakes the development of
the Project. Line is initially required to pay the costs of the
Project. The Master Agreement provides that Agency will
reimburse one-half of the construction costs as incurred.

Funding for this half of the construction costs is being

provided by the (XXX). XXX was created by section XXX, and
provides matching funds to approved deepwater port projects.
Under the Master Agreement, Agency was to repay Line for the
other half of the costs over five years. Agency's obligation to
repay was secured by future parking revenues. No lien against
any Port facilities, including those resulting from the Project,

was granted to Line or any other party under the Master
Agreement. You informed me by telephone on November 20, 1998,
that Agency had elected not to accept financing from Line under
the Master Agreement. Agency has instead borrowed its half of
the Project funding from the Sunshine Loan Program and is

reimbursing Line for all Project costs as incurred.

On July 23, 1998, the Board authorized execution of an amendment
to the Master Agreement (the "Amendment"), which was executed on
September 8, 1998. The Amendment provides for direct purchase
procedures (the "Procedures") to take advantage of Agency's
exemption from sales and use taxes. The Procedures provide the

following:

1. Agency reserves the right to purchase directly materials

included in bids of subcontractors. Subcontractors will
provide lists of materials and suppliers for review by

Agency to determine whether to make direct purchases.

2. Subcontractor bids will be reduced through change orders
   to subtract the cost and related sales/use taxes for

materials that Agency chooses to purchase directly. In

such cases, Agency will purchase from the same vendor that
the subcontractor would have purchased from and at the same
price, and on the same terms, as the vendor extended to the

subcontractor.

3. Seven days prior to the date on which direct purchase
   materials must be ordered, the subcontractor must provide a
   Purchase Order Requisition Form so that Agency can process
   it and issue its own Purchase Order to the vendor, which
   purchase order shall identify Agency as purchaser and
   contain Agency's consumer's exemption certificate number,

issue date and expiration date.

4. Upon delivery, subcontractors will inspect all materials
   purchased pursuant to the Procedures and verify the
   correctness of the delivery and the lack of defects in the
   materials. Invoices will be forwarded to Agency for

payment after such verification.

5. Agency will take title upon delivery and shall retain

title to all materials it purchases. Subcontractors will

act as bailees as to all Agency-purchased materials in

their possession, which shall be stored and safeguarded by
the subcontractors for Agency during the period of bailment
until returned to Agency through incorporation into the
Project. Subcontractors shall be liable for loss or damage
to Agency-purchased materials in their possession if such
loss or damage results from the subcontractor's negligence.
Subcontractors shall be liable for obtaining any warranties
on such materials as required by the contract and for
managing any such warranties while the materials are in

their possession.

6. Upon verification by the subcontractor of receipt and

inspection of materials, Agency will prepare its own checks
to vendors for payment and deliver such checks directly to

the vendors.

7. Agency will purchase and maintain insurance pursuant to
   the requirements set forth in the Master Agreement
   sufficient to protect against any loss of or damage to
   Agency-purchased materials. The insurance will cover the
   full value of such materials from the time Agency takes

title until they are incorporated into the Project.

The Amendment also contains a provision pursuant to which Line
is to require the general contractor and all subcontractors to
indemnify Agency and Line against any claims or losses arising
from or connected to Agency's direct purchases under the
Procedures. You assured me in our telephone conversation of
November 20, 1998, that this provision does not protect Agency
against losses related to its obligation to pay vendors for
materials, to purchase insurance against loss or damage to those
materials, or to bear the risk of casualty loss to those

materials. You stated that it is intended to protect Agency
against claims arising from the selection of vendors, defects in
materials, delays in delivery, or similar matters related to the

decisions and actions of subcontractors or vendors.

Line issued a request for proposals for the Project as a public
works project. Line entered a Final Design and Construction
Agreement (the "Construction Agreement") with a general
contractor (the "Builder") on October 21, 1998. That agreement
was a standard construction contract form with an Addendum and
various exhibits. The Addendum states that Builder will deliver

the Project on a turnkey basis for a guaranteed maximum price.
Line will reimburse Builder for costs, including the cost of
materials. Builder must furnish payment and performance bonds
for the benefit of both Line and Agency. Both Line and Agency
are to be third-party beneficiaries of any subcontracts Builder
enters. Under section 14 of the Master Agreement and sections 4
and 30 of the Addendum to the Construction Agreement, Builder is
required to provide, as a reimbursable cost, builder's risk
insurance in the name of Agency, Line, and Builder. Under

section 34 of the Addendum, Builder acknowledges the existence

of the Master Agreement and agrees to cooperate as necessary to

enable Line to comply with its terms.

The Terminal Usage Agreement provides that for ten years after
completion of the Project, Line will be entitled to preferential

use of the expanded terminals included in the Project. Line will
pay reduced harbor fees and will be given preferential access to
those terminals. Line is required to inform Agency once each
year of Line's projected schedule and the days Line will be

using the terminals. Line can add additional days with six
months notice. Agency is free to allow others access to the
terminals whenever Line is not using them. Line guarantees that
over the period of the Terminal Usage Agreement, Line will pay
at least $6,000,000 in harbor fees annually. Line may extend
the Terminal Usage Agreement for two five-year periods, subject
to the parties reaching an agreement as to terms for any

extension period.

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 shall not inure to any
transaction otherwise taxable under this chapter when
payment is made by a government employee by any means,
including, but not limited to, cash, check, or credit card
when that employee is subsequently reimbursed 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.

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 asa

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 fora sale toa
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 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 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
   (which must include the governmental entity's consumer's
   certificate of exemption number) for the tangible personal
   property involved in the contract, although 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 circumstances outlined in the Procedures appear to satisfy
the foregoing requirements for exemption of transactions as

sales to a governmental entity. Agency will make direct
purchases of various construction materials. After receiving
requisition forms from the subcontractors, Agency will prepare
purchase orders for direct purchases. After receiving the
approved invoices from the subcontractors, Agency will pay the
vendors directly. Agency will retain legal and equitable title

to all materials it purchases and will be responsible for

maintaining builder's risk insurance on those materials. The
Procedures require Agency to purchase such insurance on
materials it furnishes for the project. In addition, if the

Procedures had not imposed the burden of obtaining such
insurance directly on Agency, Agency would have had to pay for

it under the Master Agreement and the Construction Agreement as
a cost that is reimbursed to Line. Agency will receive the
economic benefits of the proceeds of insurance it purchases

under the Procedures and as a named insured party under any such

insurance Builder purchases.

Based upon the conclusion that Agency is the purchaser, all
purchases of materials that 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. For example, if a

subcontractor purchases elevator cars from the manufacturer and
has them delivered for installation by the subcontractor, those

cars could instead be purchased by Agency from the manufacturer
pursuant to the Procedures. If the manufacturer also acts as
installation subcontractor, the fabricated cost of the cars is

taxable to the manufacturer. In that case, neither the cars nor

the materials used at the manufacturing plant to assemble the

cars can be acquired under a direct purchase plan.

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 #: 35749