HomeMy WebLinkAboutSales and Use TaxTax Law Library - Search Output
Page 1 of 10
State of Florida
Department of Revenue
HomeTBusinessesIChild SupportIFormsiGovernmentfLawjPropertylTaxer
Law> Tax Law Library
Sales and Use Tax
Ail
SUMMA1(
2000-2002
QUESTION: Do the procedures set out in a city's Project
Policy and Procedures Manual for purchase of materials
exempt from sales and use taxes for a utilities expansion
project meet legal requirements for claiming the city's
exemption?
ANSWER - Based on Facts Below: Where (1) the city issues
its own purchase orders directly to the vendors; (2) the
purchase orders include the city's consumer's certificate
of exemption number; (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 is named as the insured party to
receive proceeds in case of loss of the items purchased tax
exempt; 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, the procedures meet legal requirements
for the city to purchase the materials tax exempt.
r*********************************************************
Oct 04, 2001
Re: Technical Assistance Advisement 01A-062
XXX ("Owner")
Sales and Use Tax - Government Construction Contracts
Section 212.08(6), F.S.
Rules 12A-1.001(2), 12A-1.051, 12A-1.094, F.A.C.
Dear :
This is in response to your letter to the Florida Department of
Revenue, dated May 25, 2001, that replaces your original letter
of February 7, 2000. You, through XXX, Utility Expansion
Project, have further supplemented your request with mail and
faxes on August 15, August 24, and September 6, 2001, as well as
through telephone conversations on various dates. You asked for
a technical assistance advisement confirming that the procedures
proposed in your letter would qualify for tax-exempt purchases.
Facts
http : //taxlaw. state. fl. usls earch_out. asp?r=01 A06 2+%7B V IC+%23 %5 B %7D&filename—SUT% 5 F ... 3 /24/20 06
J. ax Law Library - Search Output Page 2 of 10
Your letter of May 25, 2001, states that the City is currently
undertaking the construction of the next phase of the Utility
Expansion Project, using a Construction Manager at Risk
contract. You state further that XXX, as Construction Manager
(hereinafter "CM") has been delegated certain authority related
to purchasing by the City Public Works Department (hereafter
"Owner"). According to you, it is the intention of the Owner to
directly purchase certain construction materials, supplies, and
equipment for this project tax exempt.
You state that it is your understanding that Section 212.08(6),
provides that a City is exempt From payment of state sales
taxes when payment [for materials, supplies, and equipment
purchased for a public works contract] is made directly to a
dealer or vendor by the government entity.
You state that you have enclosed the following documentation:
That portion of the Project Policy and Procedures Manual
that addresses direct materials purchases.
A full copy of the base contract between [the Owner] and
(the Contractor].
A copy of that portion of the Project Policy and Procedures
Manual that addresses the selection and pre -qualification
of subcontractors and suppliers.
Executed Supplemental Task Authorization (STA) to add the
requirements for direct purchase of materials by (the Owner
to the Contractor's obligations].
The City Utilities Expansion Program Policy & Procedures Manual,
2.0 Procurement, sets out procedures, both for the Contractor(s)
to make purchases that will not qualify for the City's tax
exemption, and for direct purchases by the City that will
qualify for the sales tax exemption. Section 2.5, Direct
Purchase Procedure, sets out direct purchase procedures.
Subcontractors are required to include sales tax on their
materials in their bids for the project. Once the Contract is
awarded, the City, also referred to as "Owner", is to be
provided with the name of the vendor selected by the
Subcontractor, a list of materials to be purchased and their
cost, the delivery schedule for the items, and all information
necessary for the City to place the order. When the order is
filled, the Subcontractor gives the City credit from the amount
due for the work performed for the price of the item and the
sales tax that would have been paid from what is due for the
work performed.
A City Public Works Department Procurement Division Supplemental
Task Authorization (STA) sets out the Direct Purchase Agreement
as follows:
The OWNER may elect to contract delivery for certain parts
of the work. The OWNER may directly purchase materials,
equipment, supplies, etc. from Subcontractor's suppliers.
The Subcontractor shall perform all bidding, solicitation,
qualification, receipt, and inspection of those materials
purchased under this the Direct Purchase Agreement. The CM
[Construction Manager] shall prepare all data and materials
http://taxlaw.state.fl.us/search out.asp?r=01A062+%7BVIC+%23%5B%7D&filename=SUT%5F... 3/24/2006
i ax Law Lunary - 6earch Output Page 3 of 10
necessary and suitable for the OWNER to issue a purchase
order to the Subcontractor -selected supplier.
The OWNER shall prepare and submit to the Florida
Department of Revenue a request for a Technical Assistance
Advisory, which shall stipulate the guidelines for exempt
direct purchases to be followed and the OWNER and CM shall
conform to these guidelines.
CM, via the Subcontractor, shall retain responsibility for
ordering, expediting, on -site transit, inspection,
receiving, on -site storage, maintenance, handling
installation, and warranty work just the same as if the
Subcontractor had purchased the material directly from the
supplier. The costs of the above listed services by the
Subcontractor are understood to be included in the
Subcontractor's price for the Work.
The OWNER reserves the right to procure, under OWNER'S name
and on OWNER'S forms, equipment, and materials as deemed
necessary to benefit OWNER in overall Project savings. Such
equipment and material will be provided directly to the
Subcontractor by the Supplier for installation in a timely
manner to support the overall Project construction
schedule.
A section titled City Furnished Materials, ("CFM"), follows the
opening provisions of the Direct Purchase Agreement and provides
that (paraphrased):
The Subcontractor has included Florida State Sales Tax in
his bid for material, supplies and equipment. The Owner, a
tax exempt entity, reserves the right to effect direct
purchases of various construction equipment, materials, or
supplies included in the Subcontractor's bid, called City
Furnished Materials ("CFM"). The responsibilities of the
Owner and Subcontractor are governed by the terms of this
agreement.
Subcontractors will select the materials suppliers. If the
Owner purchases any materials directly, the cost of the
materials and applicable sai.es tax will be administered on
a change order basis.
Subcontractors will provide CM a list of suppliers,
vendors, and materialmen for consideration as CFM,
coincident with the award of the Subcontract, with a
description of the materials to be supplied, estimated
quantities, and prices.
Upon request from CM, Subcontractors shall prepare a
purchase requisition in the form provided in the procedure,
to specifically identify the materials that Owner has
elected to purchase directly. The requisition shall contain
all information called for in the accompanying procedure
and is submitted to the Owner in time for the order to be
placed and the materials to be received timely for
incorporation into the construction.
Upon receipt of the requisition, the Owner will issue its
own purchase order(PN 1) that specifies the delivery
http://taxlaw.state.fl.us/search out.asp?r=01 A062+%7BVIC+%23%5B%7D&filename=SUT%5F,.. 3/24/2006
'.1'ax Law Library - Search Output - Page 4 of 10
location and states that the shipper insures the items.
When each purchase order is completed, the CM issues a
deductive change order to the Subcontractor to credit the
Owner with the amount of the purchase and applicable sales
tax toward the contract price.
The Subcontractor is responsible for the receipt of CFM,
verifying that quantities are correct, verifying
documentation of orders timely, coordinating purchases,
providing and obtaining warranties and guarantees required
by the contract documents inspection and acceptance of CFM
at the time of delivery, and loss or damage to equipment
and materials or failure of the Owner to pay for the CFM
following acceptance by the Owner, if any such failings are
due to the negligence of the Subcontractor. The
Subcontractor will indemnify the Owner for any such
damages.
As CFM is delivered to the job site, the Subcontractor and
the CM shall visually inspect all shipments from the
suppliers, insure that the materials conform to the
specifications and requirements outlined on the purchase
order, and approve the vendor's invoice for materials
delivered. The Subcontractor and the CM are responsible for
finding any defective materials and not using them in the
Project.
After verifying the accuracy of the documentation supplied
with CFM, the Subcontractor forwards the invoice and other
documentation to the Owner through the CM for payment
processing. The Owner prepares a check drawn to the
Supplier. The Subcontractor agrees to assist the Owner to
obtain releases of lien waivers as appropriate.
The Subcontractor maintains records of CFM and supplies
monthly reports of CFM inventory and incorporation into the
Project to the Owner.
The Owner retains
possession of the
Subcontractor, as
store and protect
until returned to
Project.
title to the CFM, so the Subcontractor's
materials constitutes a bailment. The
bailee, will have the duty to safeguard,
the materials while in its possession
Owner through incorporation into the
The CM is required to purchase and maintain builder's risk
insurance sufficient to cover the value of any CFM from the
time that the Owner takes title through the time the
materials are incorporated into the project. The Owner will
be named as an Additional Insured Party on any such
insurance policy.
The Subcontractor will negotiate blanket supply agreements
with selected Suppliers and issue incremental releases to
obtain materials in amounts necessary for no more than one
and one half -months projected material requirement.
The Owner is not liable for delay in the project or for any
extra costs or time resulting from delay in delivery or
defects in CFM.
http ://taxlaw. state. fl.us/search_out. asp?r=01 A062+%7BVIC+%23%5B%7D&filename=SUT%5F... 3/24/2006
ax Law Library - Nearch Output Page 5 of 10
At the end of the Project, any refund, less applicable
restocking fee, plus any applicable sales tax, is credited
to the Owner. Salvage materials shall remain the property
of the Owner and be safeguarded by the Subcontractor until
disposition is received from the Owner.
On September 6, 2001, you supplied a copy of City Public Works
Department Procurement Division Supplemental Task Authorization
(STA) To: [CM] Contract for Construction Management Services
##PW052698-45, Dated April 20, 1999. Direct Purchase Agreement,
Modification No. 1, states where relevant:
Whenever the provisions or requirements of the "Agreement
for Construction Management Services", Contract No.
PW052698-45, Dated April 20, 1999, and referenced []
subsidiary documents and attachments, conflict with the
provisions of any Supplemental Task Authorization, the
provisions or requirements of the Supplemental Task
Authorization shall govern. When the provisions or
requirements of multiple Supplemental Task Authorizations
are in conflict, the provisions or requirements of that
Supplemental Task Authorization last issued shall govern.
It should be noted that Supplemental Task Authorizations are
meant to be issued to amend the provisions of the Contracts
relating to the Project. As a result of the fact that
Supplemental Task Authorizations not yet issued may take
precedence over the Direct Purchase Procedures reviewed for the
issuance of this Technical Assistance Advisement, in subsequent
telephone conversation, a representation has made that each
Supplemental Task Authorization issued will incorporate by
reference all of the Direct Purchase Procedures provided with
your request for this Technical Assistance Advisement. In
addition, it is represented that each City purchase order will
contain or be accompanied by the City 's consumer's certificate
of exemption and will include the City's sales tax exemption
certificate number, issue date, and expiration date.
Requested Advisements
You request the following advisement:
Do the City's Direct Purchase Procedures qualify for tax exempt
purchases, as provided in Section 212.08(6), F.S., and Rule 12A-
1.094, F.A.C.?
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
http:l/taxlaw.state.fl.us/search out.asp?r=01A062+%7BVIC+%23%5B%7D&filename=SUT%5F.., 3/24/2006
"fax Law Library - Search Output Page 6 of 10
public works owned by such government or political
subdivision....
Rule 12A-1.001(2), 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 the City of Cape Coral, purchases
tangible personal property that is to be incorporated into
public works owned by the City. 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 Owner 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
http://taxlaw.state.fl.us/search out.asp?r=01A062+%7BVIC+%23%5B%7D&filename =SUT%SF... 3/24/2006
Tax Law Library - Search Output Page 7 of 10
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 sa.:]es are, in substance, Lax 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, F.A.C....
Discussion, Analysis and Conclusion
Rule 12A-1.001(2), F.A.C., states that in order for a sale to a
state or local government entity to be tax exempt, "[p]ayment
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 City, however, the transaction is exempt.
For there to be an exempt transaction, the City 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,
http://taxlaw.state.fl.us/search_out.asp?r=01 A062+%7BVIC+%23%5B%7D&filename=SUT%5F... 3/24/2006
Tax Law Library - Search Output Page 8 of 10
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 City 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
City 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
City rather than the contractor is the purchaser of materials,
include:
1. The City must execute the purchase orders for the
tangible personal property involved in the contract, which
must include the City's consumer's certificate of exemption
number, issue date, and expiration date. The contractor
may present the City's purchase orders to the vendors of
the tangible personal property;
2. The City 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 City for supplies;
4. The City must directly pay the vendors for the tangible
personal property; and
5. The City 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.
With the exception of the tax on off site fabrication discussed
below, the Direct Purchase Procedures satisfy the foregoing
requirements for exemption of transactions as sales to the City.
The City will make direct purchases of various construction
materials. The Subcontractor will prepare requisitions for
direct purchases for the City's approval. The City will prepare
detailed Purchase Orders, including their exemption
documentation, and forward them to the vendor. After receiving
the approved invoices from the CM, the City will pay the vendors
directly. The City will retain legal, and equitable, title to
all materials it purchases, and it will be responsible for the
cost of insurance and will be the named insured on those
materials.
Based upon the conclusion that the City is the purchaser, with
the exception of off site fabrication, all purchases of
materials that are made in accordance with the Direct Purchase
Procedures will be exempt from sales tax. 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
http ://taxlaw. state. fLus/searchout.asp?r=01 A062+%7BVIC+%23%5B%7D&filename=SUT%5F... 3/24/2006
Tax Law Library - Search Output Page 9 of 10
exemption certificate is provided in Rule 12A-1.039, F.A.C., a
copy of which is enclosed.
With respect to the tax on off site fabrication, the Direct
Purchase Procedures do not secure a tax exemption. Rule 12A-
1.094(5), F.A.C., specifically provides that the rule's
guidelines for determining that the City is the purchaser,
rather than the contractor, do not apply where there is off -site
fabrication by the contractor.
Any contractor or subcontractor that manufactures or fabricates
materials as specified in Rule 12A-1.094(5), F.A.C., is deemed
to be the ultimate consumer 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(10), F.A.C.
Advisement
The City's Direct Purchase Procedures, with representations set
out above, qualify for tax exempt purchases, as provided in
Section 212.08(6), F.S., and Rule 12A-1.094, 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 Owner. Your response should be received by
the Department within 15 days of the date of this letter.
Sincerely,
Karen Kugell
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4834
KK/
Enclosure.: Rule 12A-1.039, F.A.C.
Control #: 45494
****************************************
FOOTNOTE 1. The order form enclosed with the Direct Purchase
Agreement shows the City as the purchaser, has a place for the
City's Procurement Manager's authorization signature, and sets
http://taxlaw.state.fl.us/search out.asp?r=01A062+%7BVIC+%23%5B%7D&filename=SUT%5F... 3/24/2006
Tax Law Library - Search Output Page 10 of 10
out the City's saes tax exemption number, but not issue date or
expiration date.
Return to: JTLL Main Menu]. [Sales and Use TaJ'Technical Assistance Advisements (2000 - 2002)j
FAQs I Comments/Suggestions? j Technical Problems? 1 Contact Us
Maintained by Florida Department of Revenue
Disclaimer, Privacy Statement, and Conditions of Use
http://taxlaw.state.fl.us/search out.asp?r=01 A062+%7BVIC+%23%5B%7D&filename=SUT%5F... 3/24/2006