Could a Florida city buy construction materials tax-free for a fire-station project under a direct-purchase contract addendum?

Plain-English summary

Florida approved tax-free purchases of construction materials for the city's fire station after all parties properly executed the direct-purchase addendum. The city—not the contractor—had to be the purchaser in substance as well as form.

That required city-issued purchase orders bearing its exemption number, direct vendor invoices and city payments, city title and liability at job-site delivery, and city assumption of the risk of loss. The addendum made the city responsible for builder's-risk insurance and named it as an insured party.

What this means for you

Government ownership on paper was not enough. The city's documents and actual conduct had to show direct purchasing, payment, title, and economic risk before the materials were incorporated into real property.

The approval did not cover materials manufactured or fabricated by the contractor or subcontractors; the ruling treated them as taxable consumers of those articles.

Common questions

Q: Could the contractor send requisitions or present purchase orders? Yes, but the city had to prepare and execute its own purchase orders and remain the actual buyer.

Q: Who had to pay the suppliers? The suppliers had to invoice the city, and the city had to pay them directly.

Q: When did the city take the risk of loss? At delivery to the job site and before incorporation, supported by builder's-risk insurance.

Q: Was an exemption certificate required? Yes. A properly completed certificate had to be furnished to each vendor at purchase.

Citations and references

• Fla. Stat. § 212.08(6) — governmental exemption
• Fla. Admin. Code r. 12A-1.001(9) — governmental purchases
• Fla. Admin. Code r. 12A-1.094 — public works contracts
• Fla. Admin. Code r. 12A-1.039 — exemption certificates
• Fla. Admin. Code r. 12A-1.051(5) — manufactured materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-040

Original ruling text

SUMMARY

Materials for a fire station building project can be
purchased tax exempt as long as the controlling documents
are properly executed and provide: (1) the city issues its
purchase orders directly to the vendors; (2) the purchase
orders include the city's consumer's certificate of
exemption number and the city will supply a copy of the
consumer's certificate of exemption to the vendor; (3) the
vendors invoice the city directly; (4) the city issues its
checks to the vendors directly; (5) the city takes title to
the materials from the vendor and assumes liability for the
materials when they are delivered to the job site; (6) the
city assumes risk of loss for the materials upon delivery
which is clearly established by the requirement in the
controlling documents that the city purchase insurance
against loss or damage; and (7) the remaining terms of the
documents do not prevent the conclusion that the city
rather than the contractor is in substance as well as form
the purchaser of the materials.

Aug 23, 1999

Re: Technical Assistance Advisement (99A-040)
XXX ("City")
Sales and Use Tax -- City Contract to Construct Fire
Station
Section 212.08(6), F.S.
Rules 12A-1.001(9), 12A-1.039, 12A-1.094, F.A.C.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated June 3, 1999. That letter has been supplemented
by telephone conversations with XXX of your Fire Department and
by a telecopy of a contract amendment on July 2, 1999. You have
asked for a technical assistance advisement indicating that the
procedures proposed in your letter and documentation would

provide for tax-exempt purchases.

Facts

On June 14, 1999, the City Council passed the "Addendum to the
Contract between the [City] and XXX for the construction of a
fire station located at XXX, [City], XXX" ("Addendum"). The
contract to which it is an Addendum is "AIA Document A101
Standard Form of Agreement Between Owner and Contractor"
("Agreement") concerning construction of a fire station on XXX
at [City], XXX (the "Project").

The Agreement provided to the Department, as documentation in
support of the request for the Technical Assistance Advisement,
is not executed. The Addendum was "read and passed" by the City
Council on June 14, 1999, and executed by the President of the
City Council and attested by the City Clerk. The Mayor did not
execute the Addendum. The Contractor has not executed the
Addendum, although there is correspondence indicating
willingness to do so. In the event that the documentation is
drafted properly to support the City's tax-exempt status, the
exemption would be effective only from the date that all
necessary parties properly executed the documents.

The Agreement between the Owner and Contractor provides that the
City pays for the Project but that the Contractor makes
materials purchases. Article 4, Contract Sum, provides in the
relevant part of Section 4.2(c):

Change orders for direct purchases by Owner shall result in
credit to the Owner in the amount of the cost of the items
purchased plus 6% sales tax.

The Addendum provides as follows:

1. That the City may elect to purchase materials and equipment
   included in the Contractor's bid directly from the
   supplier. These items are referred to as "Owner-Purchased
   Materials," and the City 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 for consideration as OwnerPurchased Materials.

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

4. When the City receives the Requisition, it is reviewed, and
   if approved, the City issues its own purchase order
   directly to the supplier. Delivery of the materials is
   F.O.B. job site, where all Owner-Purchased Materials are
   stored.

5. Even though the City will take title to Owner-Purchased
   Materials on 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. Once the contractors verify that delivery is in accordance
   with the purchase order, they forward the invoices to the
   City. The City processes the invoices and issues payment
   directly to the supplier.

7. The amount of builder's risk insurance required to be
   carried under the Agreement will be sufficient to cover
   Owner-Purchased Materials. The City will bear the
   proportionate cost of that coverage under the Agreement.
   The City is to be named as an additional insured on the
   builder's risk insurance and to receive any proceeds
   related to City [sic]-Purchased materials.

8. The basic terms of the Program [sic] have been summarized
   and included in the form agreement used when subcontracts
   are awarded.

9. In the event that conflicts arise between this document and
   the contract documents, then the Addendum controls.

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....

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 those 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 in the Addendum appear to satisfy the foregoing
requirements for exemption of transactions as sales to a
governmental entity. The City will make direct purchases of
various construction materials. After receiving requisition
forms from the contractors, the city will prepare purchase
orders for direct purchases. After receiving the approved
invoices, the city will pay the vendors directly. The city 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 the city is the purchaser, all
purchases of materials which are made in accordance with the
procedures in the Addendum will be exempt from sales tax, once
all parties have properly executed the document. 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,

Karen Kugell
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4834

KK/
Enclosure.: Rule 12A-1.039
Control #: 38052