Could a Florida school district buy construction materials tax exempt while contractors managed three school projects?

Plain-English summary

Florida approved the school district's direct purchases of project materials as tax exempt because the district—not the contractors—would be the purchaser in substance and form.

The district had to issue its own purchase orders bearing its consumer's certificate of exemption number, receive invoices directly, pay vendors directly, take legal and equitable title and liability at job-site delivery, and bear the risk of loss as a named insured under builder's-risk coverage.

Contractors and the construction manager could prepare requisitions, inspect deliveries, and administer the projects. The ruling did not cover materials manufactured or fabricated by contractors or subcontractors; they remained taxable consumers of those items.

What this means for you

Public funding alone did not create exemption. The district needed documented purchaser control and economic risk before materials became part of the schools.

Common questions

Q: Who issued the purchase order? The school district.

Q: Who paid the vendor? The school district directly.

Q: Did contractor-fabricated items qualify? No.

Citations and references

• Fla. Stat. § 212.08(6) — governmental-unit sales-tax exemption
• Fla. Admin. Code rr. 12A-1.001(9) and 12A-1.094 — government purchase and public-works rules
• Fla. Admin. Code rr. 12A-1.039 and 12A-1.051(5) — exemption certificates and contractor-fabricated materials
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-073

Original ruling text

SUMMARY

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

Dec 15, 1999

Re: Technical Assistance Advisement (99A-073)
XXX ("School District")
Sales and Use Tax -- School District Contracts to Construct
School Additions
Section 212.08(6), F.S.
Rules 12A-1.001(9), 12A-1.094, F.A.C.

Dear :

This is in response to your three letters to the Florida

Department of Revenue dated August 2, 1999. You asked for a
technical assistance advisement confirming that the procedures
proposed in your letters would provide for tax-exempt purchases.

Facts

The School District and XX ("Construction Manager") entered into
an Agreement between Owner and Construction Manager (the
"Agreement"), pursuant to which Construction Manager was engaged
to manage the "development" of a high school (the "Project").
The School District and an unnamed general contractor
("Construction Manager") entered into an Agreement between Owner
and Construction Manager (the "Agreement"), pursuant to which
Construction Manager was engaged to manage the addition to,
renovation of, and remodeling of existing schools in XXX (the
"Project"). The School District and XXX ("Construction
Manager") entered into an Agreement between Owner and
Construction Manager (the "Agreement"), pursuant to which
Construction Manager was engaged to manage the "development" of
a K - 8 school in XXX (the "Project").

Copies of the Agreements were not supplied with the letters.
The School District has supplied Amendment No. 2 (the
"Amendment") to each of the Agreements and "Sales Tax Exempt
Purchasing Procedures," Attachment 1 (the "Procedures") for
each. The documents are identical for each of the three
projects. Each Amendment No. 2 states (at 2.):

Any materials purchased by the Owner [School District]
shall be referred to as "Owner Purchased Materials" and the
responsibilities of both the Owner and the CM/GC relating
to such Owner Purchased Materials shall be governed by the
terms and conditions of the "Sales Tax Exempt Purchasing
Procedures" Attachment 1, which shall take precedence over
other conditions and terms of this Agreement where
inconsistencies or conflicts exist.

School District is entitled to make purchases of materials for
building projects without paying Florida sales and use tax under
a consumer's certificate of exemption. To take advantage of the
School District's exemption, the Amendment provides as follows:

1. Each Subcontractor shall include applicable sales tax
for all materials, supplies, and equipment included in
his bid.

2. The School District may elect to purchase materials
   and equipment included in a contractor's bid directly
   from the supplier. Any materials so purchased will be
   governed by the Procedures.

3. The Owner will issue its own purchase orders directly
   to the vendor, which will contain the owner's
   exemption certificate, issue and expiration date, name
   and address. Subcontractors will select the suppliers
   from whom materials will be purchased for prices
   negotiated by the Subcontractors.

4. Subcontractors will remain responsible for
   coordination of material purchases, protection,
   warranties, and installation.

5. Although School District will take title to materials
   purchased pursuant to the Procedures upon delivery to
   the job site, the contractor will have contractual
   obligations to inspect and accept delivery of
   materials pending incorporation into the project, and
   will furnish the invoice to the Owner.

6. Notwithstanding the transfer of the Owner purchased
   materials to the Subcontractor, the Owner retains
   title to the materials.

7. The Owner shall purchase and maintain insurance on the
   materials, equipment, and supplies not yet
   incorporated in the project from the time that the
   owner first takes title.

8. The materials suppliers may be required to carry a
   bond in the amount of 100% of the purchase price, the
   cost of which will be added to the purchase price.

9. If the state assesses any sales tax, penalties and/or
interest against the Construction Manager/General
Contractor or any of the Subcontractors or materials
suppliers relating to the direct acquisition of
materials and or equipment by Owner, they will be
reimbursed by the Owner to the Construction
Manager/General Contractor.

The Procedures provide substantially what the Amendment provides
plus what follows:

2. Contractors will select the suppliers from whom
   materials will be purchased.

3. Subcontractors shall provide the Construction Manager
   with a list of all intended suppliers, vendors, and
   materialmen, as well as materials to be supplied, estimated
   quantities, and prices.

4. Upon request of the Construction Manager, the
   Subcontractor shall prepare a standard purchase order
   requisition form acceptable to the Owner to specifically
   identify the materials that the Owner, at its sole option,
   elected to purchase. This requisition form shall be
   submitted to Owner seven (7) days prior to the date
   necessary to order for timely delivery, in order to give
   Owner time to review and approve the purchase.

5. Upon receipt of a Requisition, School District shall
   review the Requisition and, if approved, issue its own
   purchase order and forward it to the Subcontractor for
   verification prior to its issuance to the supplier, with
   delivery to be made to the Project location on an F.O.B.
   jobsite basis. The purchase order shall provide the
   owner's name, address, exemption number, and issuance and
   expiration date, and shall provide for insurance. It shall
   be accompanied by the Owner's exemption certificate.
   ...

6. The Subcontractor is responsible for risk of loss of the
   materials due to its own actions or negligence.
   ...

13. Notwithstanding transfer of possession of the materials
from the Owner to the Subcontractor, the Owner shall retain
title to the materials.

14. Such transfer of possession shall be deemed a bailment
    until the materials are incorporated into the project.

15. The Owner shall purchase and maintain insurance on the
    materials.
    ...

16. & 18. The Subcontractor shall review invoices to be
    certain that the materials delivered are satisfactory and
    meet the specifications of the purchase order and shall
    advise the Owner of conforming invoices, which the Owner
    shall pay directly to the supplier.

The Amendments and the Procedures are similar in most respects.
It is not necessary to address those instances in which the
Amendments differ from the Procedures for purposes of this
advisement, because the Amendments provide that the Procedures
prevail over the Agreement in case of conflict or inconsistency.
The School District and Construction Manager have not yet
executed the Amendments to the Agreements, and the sales tax
exemption will not be available until each Agreement has a fully
executed Amendment incorporating the two additional Exhibits
into the Agreement. The conclusions set out in this advisement
are contingent on such executions.

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 appear to satisfy the foregoing requirements for
exemption of transactions as sales to a governmental entity.
School District will make direct purchases of various
construction materials. After receiving requisition forms from
the contractors, School District will prepare purchase orders
for direct purchases. After receiving the approved invoices from
Construction Manager, School District will pay the vendors
directly. School District 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 Agreements, and will be a named
insured party on the builder's risk policy.

Based upon the conclusion that School District 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.

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, F.A.C.
Control #: 38599