Can a Florida governmental entity buy construction materials tax-free for a public works project using a contractor's direct-purchase procedures?

Plain-English summary

Florida approved tax-free purchases of public-works materials when the governmental entity was the purchaser in substance as well as form. The government had to issue purchase orders bearing its exemption number, receive vendor invoices, pay vendors directly, take title and liability at delivery, and bear the risk of loss before installation.

The procedures also required the government to obtain or be protected by insurance on the materials and to receive related insurance proceeds. A properly completed exemption certificate had to be given to each vendor.

What this means for you

A public project's governmental owner cannot obtain the exemption merely by routing paperwork through its name. The documents and actual conduct must show that the government—not the contractor—controlled the purchase and bore the economic risk before the materials became part of the real property.

The ruling expressly excluded materials manufactured or fabricated by the contractor or subcontractors; the cited rules treated those businesses as the taxable consumers of their own manufactured articles.

Common questions

Q: Can the contractor select materials or deliver the government's purchase order? The ruling permitted subcontractor requisitions and contractor presentation of the government's purchase orders, but the government itself had to execute the orders and remain the actual purchaser.

Q: Who must pay the vendor? The governmental entity must pay the vendor directly from its own funds.

Q: Who bears loss before installation? The government must bear the risk of loss or damage, shown by its purchase of insurance or status as the insured party and recipient of proceeds.

Q: Does the approval cover contractor-fabricated materials? No. The ruling expressly said it did not apply to materials manufactured or fabricated by the contractor.

Citations and references

• Fla. Stat. § 212.08(6) — governmental exemption
• Fla. Admin. Code r. 12A-1.001(9) — direct payment by governmental units
• Fla. Admin. Code r. 12A-1.094 — public works purchases and risk of loss
• Fla. Admin. Code r. 12A-1.039 — exemption certificates
• Fla. Admin. Code r. 12A-1.051(5) — contractor-manufactured materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-044

Original ruling text

SUMMARY

Materials for public works projects can be purchased tax
exempt where under the terms of the controlling procedures:
(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's being required to
purchase insurance against loss or 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 form the purchaser of the materials.

Sep 03, 1999

Re: Technical Assistance Advisement (99A-044)
Public Works Contract Exempt Purchasing Procedures
Sales and Use Tax -- Public Works Contracts
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 July 6, 1999, in which you asked for a technical
assistance advisement indicating that the procedures proposed in
your letter would provide for tax exempt purchases.

Facts

XXX ("Taxpayer") is a construction company that frequently
enters into contracts to act as prime contractor or construction
manager on projects for governmental entities. Taxpayer
developed Sales Tax Exempt Purchasing Procedures for Public
Projects (the "Procedures") intended to permit governmental
entities to enjoy sales tax savings by purchasing construction
materials for their projects directly from suppliers. On XXX,
Taxpayer submitted the Procedures (as revised on XX) to the
Department and requested a letter of technical assistance
indicating the procedures would provide for tax exempt
purchases. On XXX, a favorable letter of technical assistance
was issued.

Since that time, Taxpayer has required each governmental entity
with which it contracts with to obtain a technical assistance
advisement from the Department before agreeing to enter into a
tax exempt direct purchasing program. In each case, the
Procedures were incorporated into the contract between Taxpayer
and the governmental entity, and the terms of the Procedures
have been controlling as to purchases made on a tax exempt
basis. Taxpayer also requires governmental entities to
indemnify Taxpayer if the Department determines that any
purchases treated as tax exempt by the parties failed to meet
the criteria for exemption.

Each of the technical assistance advisements issued to date on
Taxpayer's contracts has been specific to a particular public
works project and has been issued to the governmental entity
involved. Some governmental entities have submitted multiple
technical assistance advisement requests, even though there was
no change in the material terms of the contracts between the
parties, and the Procedures governed the direct purchasing
program in each case. Taxpayer is requesting a technical
assistance advisement be issued to Taxpayer on the Procedures.
This will avoid the necessity of requiring governmental entities
to obtain separate technical assistance advisements on a
project-by-project basis for contract terms and procedures
identical in all material ways to those that have already been
considered by the Department.

The Procedures contain the following provisions:

1. A governmental entity may elect to purchase materials and
equipment included in a subcontractor's bid directly from
the supplier. Such items are referred to as "Owner/Public
Entity-Purchased Materials," and the governmental entity
will hold full title to all such materials.

2. Subcontractors will select the suppliers from whom
   materials will be purchased and will submit a list of
   materials and suppliers with their bids for consideration
   as Owner/Public Entity-Purchased Materials. The cost of
   the materials and applicable sales tax will be included in
   the bids. If a public entity elects to purchase any
   materials directly, the subcontract amount will be reduced
   by the cost of, and sales tax related to, those materials.

3. Subcontractors will furnish Taxpayer with detailed Purchase
   Order Requisition Forms ("Requisitions") for all
   Owner/Public Entity-Purchased Materials.

4. Upon receipt of a Requisition, the governmental entity will
   review the Requisition and, if approved, issue its own
   purchase order directly to the supplier, with delivery to
   be F.O.B. job site. The purchase order must contain or be
   accompanied by the governmental entity's consumer's
   certificate of exemption and must include the governmental
   entity's exemption number, issue date, and expiration date.

5. Although the governmental entity will take title to
   Owner/Public Entity-Purchased Materials upon delivery to
   the job site, subcontractors will be obligated to inspect,
   accept delivery of, and store the materials pending
   incorporation into the project and will remain liable for
   their negligence in meeting any of those obligations.

6. After verifying that delivery is in accordance with the
   purchase order, subcontractors will forward approved
   invoices to Taxpayer, who will deliver them to the
   governmental entity. The governmental entity will process
   the invoices and issue payment directly to the suppliers.

7. The governmental entity is required to purchase and
maintain builder's risk insurance sufficient to cover the
value of any Owner/Public Entity-Purchased Materials from
the time the governmental entity takes title through the
time the materials are incorporated into the project.

As we discussed on the telephone, in some cases the underlying
contract may provide that the governmental entity purchases the
builder's risk insurance by reimbursing Taxpayer for the
premiums Taxpayer pays to cover a project rather than by dealing
directly with the insurer. In such cases, the governmental
entity must be named as an additional insured party and receive
any proceeds of insurance related to Owner/Public EntityPurchased Materials.

It must also be noted that this advisement is based on an
assumption that the Procedures are the controlling terms of the
agreement between Taxpayer and a governmental entity. In any
case in which review of the contract documents as a whole
reveals other terms that are inconsistent in any material
respect with the terms of the Procedures and that supersede
them, this advisement shall not apply.

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. 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
proper documentation of the exempt status of the sale for their
records.

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 the 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 the contract involved in the instant case,
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 the tangible personal property;

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. A
governmental entity will make direct purchases of various
construction materials. After receiving requisition forms from
the subcontractors, the governmental entity will prepare
purchase orders for direct purchases. After receiving the
approved invoices from the contractors, the governmental entity
will pay the vendors directly. The governmental entity will
retain legal, and equitable, title to all materials it purchases
and will be responsible for paying for builder's risk insurance
on those materials. The governmental entity will receive any
insurance proceeds related to the loss or destruction of those
materials.

Based upon the conclusion that the governmental entity is the
purchaser, all purchases of materials made in accordance with
the Procedures will be exempt from sales tax. As required by
the Procedures, a properly completed exemption certificate must
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, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of section 213.22, F.S. Confidential information
must be deleted before public disclosure. In an effort to
protect confidentiality, we request you provide the undersigned
with an edited copy of your request for Technical Assistance
Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Linda W. Bridges
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 922-9412

LWB/
Enclosure.: Rule 12A-1.039
Control #: 37968