Sales and Use Tax – TAA 14A-026 – Public Works Contract
QUESTION: WHETHER, BASED ON THE TERMS OF THE DRAFT AGREEMENT AND THE FACTS PROVIDED WITH THE TAXPAYER’S REQUEST, THE PROPOSED OWNER DIRECT PURCHASE PROCEDURES ALLOW FOR THE EXEMPT PURCHASE OF BUILDING MATERIALS PURSUANT TO S. 212.08(6), F.S.
ANSWER: BASED ON THE TERMS OF THE DRAFT AGREEMENT AND THE FACTS PROVIDED WITH THE TAXPAYER’S REQUEST, THE PROPOSED OWNER DIRECT PURCHASE PROCEDURES ALLOW FOR THE EXEMPT PURCHASE OF BUILDING MATERIALS PURSUANT TO S. 212.08(6), F.S. THE TAXPAYER WILL ISSUE ITS OWN PURCHASE ORDERS DIRECTLY TO THE SUPPLIERS, WHO WILL DIRECTLY INVOICE THE TAXPAYER. THE TAXPAYER WILL ISSUE A CHECK FOR THE MATERIALS DIRECTLY TO THE SUPPLIER, ACCOMPANIED BY A CERTIFICATE OF ENTITLEMENT. THE TAXPAYER ASSUMES LIABILITY FOR THE MATERIALS UPON DELIVERY TO THE JOBSITE AND WILL ACQUIRE TITLE TO THE MATERIALS. WHILE THE CONTRACTOR WILL ACT AS INTERMEDIARY, ENSURING THAT THE CORRECT MATERIALS HAVE BEEN DELIVERED TO THE JOB SITE AND INCORPORATED INTO THE PROJECT, THE ASSUMPTION OF RISK DOES NOT CHANGE AND CONTINUES TO REST WITH THE TAXPAYER. THE CONTRACTOR IS REQUIRED TO PURCHASE INSURANCE WHICH COVERS THE COST OF THE BUILDING MATERIALS. THE TAXPAYER “SHALL BE SOLELY ENTITLED TO THE PROCEEDS PAID AND ATTRIBUTABLE TO DAMAGE OR LOSS” UNDER THE TERMS OF THE INSURANCE POLICIES PURCHASED BY THE CONTRACTOR.
October 20, 2014
Re: Subject: Technical Assistance Advisement (TAA) 14A-026
Sales and Use Tax – Public Works Contract
Section 212.08, Florida Statutes (F.S.)
Rules 12A-1.038, 12A-1.051, and 12A-1.094, Florida Administrative Code
(F.A.C.) XXXX (“Taxpayer”)
FEI # XXXX Dear XXXX:
This is in response to your letter dated August 20, 2014, requesting this Department’s issuance of a Technical Assistance Advisement (“TAA”) pursuant to section 213.22, F.S., and Rule Chapter 12-11, F.A.C., concerning the above referenced party and matter. An examination of your letter has established you have complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for a TAA.
Facts
The request for a TAA provides the following in part:
[The Taxpayer] is an independent special district of the State of Florida operating under Chapter 2012-234, Laws of Florida . . . . The [Taxpayer], which owns and operates all publicly owned aviation facilities within XXXX County, is preparing to make necessary and substantial renovations and additions to the parking garage at XXXX (“Airport”), located in XXXX County, Florida. The parking garage is a feature of the Airport’s terminal and is wholly owned and operated by the [Taxpayer].
The precise nature and scope of the projects have been published in the Airport’s Master Plan. [Contractor has] been selected and Design contracts have commenced. . . . The [Contractor] will perform all obligations listed in their respective contracts, and the relationship between the [Taxpayer] and the [Contractor] will be governed by contractual agreements (“Agreements”), which are currently in draft form. The projects will increase the capacity and improve the safety of airport operations. As such, the project is in the nature of a public works contract.
***
The Taxpayer provides that it has drafted Agreements (“Draft Agreement”)
in accordance with Section 212.08, F.S., and Rule 12A-1.094, F.A.C., in
order to take advantage of its tax exempt status. The Taxpayer submits
the following language as provided in “Article XXXX” of the
Draft Agreement, entitled “Owner Direct Purchase”:
xx. The [Taxpayer] reserves the right, at the[Taxpayer’s] option, to direct purchase materials, equipment, supplies and furnishings involved in the Project, so as to save sales tax which would otherwise have been due with regard to the purchase of the materials, equipment, supplies and furnishings. Pursuant to Section 212.08 Fla. Stat. and Rules 12A-1.094 and 12A-1.038 Fla. Admin. Code, the [Taxpayer] and [Contractor] agree to the following procedure regarding the [Taxpayer’s] direct purchase from suppliers, vendors and materialmen of certain material, equipment, supplies and furnishings to be used in the Project:
xx. 1.1 The [Contractor] shall provide the [Taxpayer] a list of all materials, equipment, supplies and furnishings required for the project and the proposed suppliers, vendors and materialmen for those materials, equipment, supplies and furnishings as well as the date upon which those materials, equipment, supplies and furnishings are required to be delivered to the site, a description of the materials, estimated quantities and prices. . . .
xx. 1.2 The [Taxpayer] shall determine the materials, equipment, supplies and furnishings it will direct purchase and provide that information to the [Contactor] no later than __ .
xx. 1.3 In order to not delay the project, the [Contractor] shall submit to the [Taxpayer] . . . a Purchase Order Requisition Form indicating the proposed supplier, vendor or materialman for the materials, equipment, supplies and furnishings, the description of the materials, equipment, supplies and furnishings and the price, quantity, delivery terms, delivery location, warranties and guarantees. Prior to the delivery of the Purchase Order Requisition Forum, the Contractor must enter into a contractual relationship with the supplier, vendor or materialman that includes the materials, equipment, supplies and furnishings to be direct purchased and incorporates these terms. All purchase orders made by the [Taxpayer] that direct purchase materials, equipment supplies or furnishings shall be subject to the [Taxpayer’s] standard PO terms and conditions which are made a part hereof.
xx. 1.4 . . . [Taxpayer] shall prepare its Purchase Order for materials,
equipment, supplies and furnishings specified by the [Contractor] which
the [Taxpayer] chooses to purchase directly.
The [Taxpayer] will deliver the Purchase Order to the [Contractor] and
. . . [Contractor] shall verify the terms and conditions of the Purchase
Order . . . . After such verification by the [Contractor], the [Taxpayer]
shall issue the Purchase Order to the supplier, vendor or materialman.
. . . The Purchase Order shall also require that the supplier, vendor
or materialman invoice the [Taxpayer] directly for the purchase price
of the [Taxpayer] Direct Purchased materials, equipment, supplies and
furnishings. . . . The [Taxpayer’s] Purchase Orders shall contain
or be accompanied by the [Taxpayer’s] exemption certificate and
must include the [Taxpayer’s] name, address, and exemption number
with issue and expiration date shown. The [Taxpayer] shall issue each
supplier, vendor or materialman a Certificate of Entitlement on the Certificate
of Entitlement Form attached hereto with each Purchase Order.
xx. 1.5 [Contractor] shall be fully responsible for all matters relating
to the receipt of
materials, equipment, supplies and furnishings, including, but not limited
to, . . . providing and obtaining all warranties and guarantees in favor
of and for the benefit of the [Taxpayer] . . . . At the time of, and subsequent
to, the delivery of such materials, equipment, supplies and furnishings,
the [Taxpayer] shall be liable for all loss or damage to materials, equipment,
supplies and furnishings purchased pursuant to the Purchase Order. . .
. Notwithstanding the foregoing, the [Taxpayer] shall be responsible for
payment of the invoices issued by the supplier, vendor or materialman . . . .
xx. 1.6 Upon receipt of the materials, equipment, supplies and furnishings, the [Contractor] shall verify in writing to the [Taxpayer] that the materials, equipment, supplies and furnishings were received and agree to approve the invoice for payment. The invoice shall be thereupon furnished to the [Taxpayer] for processing and payment in the manner as all other [Taxpayer] invoices are processed. . . .
xx. 1.7 The [Contractor] shall be responsible for obtaining and managing all warranties and guarantees in favor of and for the benefit of the [Taxpayer] for all materials, equipment, supplies and furnishings as required by the Contract. . . .
xx. 1.8 The transfer of possession of [Taxpayer] Direct Purchased materials, equipment, supplies and furnishings from the [Taxpayer] to the [Contractor] shall constitute a bailment for mutual benefit of the [Taxpayer] and the [Contractor]. The [Taxpayer] shall be considered the bailor and the [Contractor] the bailee of the [Taxpayer] Direct Purchased materials, equipment, supplies and furnishings. [Taxpayer] Direct Purchased materials, equipment, supplies and furnishings shall be considered returned to the [Taxpayer] for purposes of its bailment at such time as they are incorporated into the Project or consumed in the process of completing the Project. Bailee shall have the duty to safeguard, store and protect all [Taxpayer] Direct Purchased materials, equipment, supplies and furnishings.
xx. 1.9 The [Contractor] shall maintain insurance in favor of and for the
benefit of the
[Taxpayer] pursuant to the Contract requirements which shall be sufficient
to protect against any loss of or damage to [Taxpayer] Direct Purchased
materials, equipment, supplies and furnishings. Such insurance shall cover
the full value of any [Taxpayer] Direct Purchased materials, equipment,
supplies and furnishings not yet incorporated into the Project from the
time the [Taxpayer] first takes title which shall be at the time of delivery
and acceptance of the materials, equipment, supplies and furnishings by
the [Contractor] as provided in above.
xx. 1.10 . . . [The Contractor] shall provide to the [Taxpayer], a list indicating the acceptance of the materials, equipment, supplies and furnishings in accordance with the established monthly Payment Request Schedule. The list shall include a copy of the applicable Purchase Order, invoices, delivery tickets, written acceptance of the delivered items, and such other documentation as may be reasonably required by the [Taxpayer]. Upon receipt and verification of the appropriate documentation, the [Taxpayer] shall prepare a payment to the supplier, vendor or materialman based upon the receipt of data provided. This payment will be released, delivered and remitted directly to the supplier, vendor or materialman by the [Taxpayer]. . . .
xx.1.11 From the time of delivery and acceptance, the [Taxpayer] shall have and retain title to any and all [Taxpayer] Direct Purchased materials, equipment, supplies and furnishings.
xx.1.12 Risk of Loss
xx.1.12.1 Notwithstanding any provision in this Agreement to the contrary, except with respect to tangible personal property purchased by the [Taxpayer] for the purpose of receiving a tax exemption under Section 212.08(6), Fla. Stat., if any, the risk of loss shall remain with the [Contractor] until Final Completion.
xx.1.12.2 The [Taxpayer] shall retain the risk of loss of and damage to [Taxpayer] furnished materials, equipment, supplies and furnishings for the purpose of receiving a tax exemption under Section 212.08(6), Fla. Stat., which meets the criteria in Rule 12A 1.094(4)(b)(l-4), Fla. Admin. Code, to determine if the [Taxpayer] is the purchaser for the purposes of the tax exemption under Section 212.08(6), Fla. Stat.
xx.1.12.3 The [Taxpayer] shall be solely entitled to the proceeds paid and attributable to damage or loss to [Taxpayer] furnished materials, equipment, supplies and furnishings under the
Property/Builders Risk policies.
***
It is important to note that the complete Draft Agreement was not provided with the Taxpayer’s request for a TAA. Further, the provided drafted language does not contain a statement to the effect that the “Owner Direct Purchase” provisions are controlling to the extent there is a conflict between the “Owner Direct Purchase” provisions and other parts of the Agreements.
Requested Advisement
The Taxpayer requests that the Department issue a TAA that confirms the following:
The direct purchase procedures listed in the [D]raft Agreement satisfy
the conditions of
Section 212.08(6), Florida Statutes, and Rule 12A-1.094, Florida Administrative
Code. Therefore, the [Taxpayer’s] compliance with the procedures
listed in the draft Agreement constitute compliance with the requirements
for the sales tax exemption authorized under Section 212.08(6)[, F.S.]
and Rule 12A-1.094[, F.A.C]. As such, any materials purchased by the [Taxpayer]
under the [D]raft Agreement qualify for tax-exempt status.
Applicable Authority and Discussion
Section 212.08(6), F.S., provides that sales to political subdivisions of Florida are exempt from sales tax. Rule 12A-1.038(4), F.A.C., contains guidelines for claiming and documenting the exemption. Rule 12A- 1.038(4)(b), F.A.C., states that in order for a sale to a political subdivision to be tax exempt, “[p]ayment for tax exempt purchases . . . must be made directly to the selling dealer by the . . . political subdivision of a state. . . .” Political subdivisions must obtain a Consumer’s Certificate of Exemption from the Department of Revenue. Vendors are required to obtain for their records proper documentation of the exempt status of the sale.
The cited exemption exempts only direct purchases by governmental entities. The exemption does not apply when a contractor, employed by a political subdivision, purchases tangible personal property that 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 this case, are contained in Rule 12A-1.094, F.A.C.
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 a political subdivision, however, the transaction is exempt. For there to be an exempt transaction, the political subdivision must directly purchase, hold title to, and assume the risk of loss of the tangible personal property from the time of delivery to the jobsite, and satisfy various factors provided in Rule 12A-1.094, F.A.C.
Rule 12A-1.094(4), F.A.C., which sets forth the criteria that govern the status of the tangible personal property prior to its affixation to real property, will be considered in determining whether a political subdivision rather than a contractor is the purchaser of materials. These criteria include direct purchase order, direct invoice, direct payment, passage of title, and assumption of risk of loss. However, the assumption of risk of damage or loss from the time that the building materials are physically delivered to the job site is a paramount consideration. The political subdivision must assume all risk of loss or damage for the tangible personal property from the moment of acceptance of title to the materials. To establish that it has assumed that risk, the political subdivision should purchase, or be the insured party under, insurance on the building materials.
To establish that the political subdivision is entitled to the exemption, it must issue a Certificate of Entitlement to the vendors with each purchase order, and to the contractor(s). A copy of the political subdivision’s Consumer’s Certificate of Exemption must be attached to the Certificate of Entitlement. The Certificate of Entitlement sets forth the requirements for making tax-exempt direct purchases and notes the political subdivision’s acknowledgement that it is responsible for tax, penalty, and interest on material purchases that do not meet the exemption criteria. By statute, the political subdivision is prohibited from assigning liability for the tax, penalty, and interest to another party by contract or agreement. A suggested format for the certificate is found in Rule 12A-1.094(4)(c), F.A.C.
To summarize, the conditions that must be met to satisfy the requirements of Rule 12A-1.094, F.A.C., and establish that the political subdivision rather than the contractor is the purchaser of materials, include:
1. The political subdivision must execute the purchase orders for the tangible personal property involved in the contract directly to the materials vendors. The contractor may present the political subdivision's purchase orders to the vendors of the tangible personal property;
2. The political subdivision 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;
3. Vendors must directly invoice the political subdivision for supplies;
4. The political subdivision must directly pay the vendors for the tangible personal property; and
5. The political subdivision must assume all risk of loss or damage for the tangible personal property involved in the contract, as indicated by the political subdivision’s acquisition of, or inclusion as the insured party under, insurance on the building materials.
6. The political subdivision must issue a Certificate of Entitlement with each purchase order, along with a copy of its Consumer’s Certificate of Exemption, to each vendor, as well as to the contractor. The political subdivision is responsible for payment of tax, penalty, and interest on any purchases that are not found to be in compliance with the procedures for tax-exempt direct purchase of materials.
Review of the Department’s data base confirms that the Taxpayer is registered with the Department for purposes of obtaining a Consumer’s Certificate of Exemption as a tax exempt political subdivision. Based on the terms of the Draft Agreement and the facts provided with the Taxpayer’s request, the proposed Owner Direct Purchase Procedures allow for the exempt purchase of building materials pursuant to s. 212.08(6), F.S. The Taxpayer will issue its own purchase orders directly to the suppliers, who will directly invoice the Taxpayer. The Taxpayer will issue a check for the materials directly to the supplier, accompanied by a Certificate of Entitlement. The Taxpayer assumes liability for the materials upon delivery to the jobsite and will acquire title to the materials. While the [Contractor] will act as intermediary, ensuring that the correct materials have been delivered to the job site and incorporated into the project, the assumption of risk does not change and continues to rest with the Taxpayer. The [Contractor] is required to purchase insurance which covers the cost of the building materials. The Taxpayer “shall be solely entitled to the proceeds paid and attributable to damage or loss” under the terms of the insurance policies purchased by the [Contractor].
Conclusion
The Draft Agreement’s Owner Direct Purchase Procedures meet the requirements of the Rule 12A-1.094, F.A.C. The direct purchase of materials by the Taxpayer under the Draft Agreement “qualify for tax exempt status.” The Draft Agreement provides that the Taxpayer will issue its own purchase orders directly to the suppliers, accompanied by the Taxpayer’s Consumer’s Certificate of Exemption. The suppliers will directly invoice the Taxpayer. The Taxpayer will issue payment for the materials directly to the supplier, accompanied by a Certificate of Entitlement. The Taxpayer will assume liability for the materials upon delivery and will acquire title to the materials upon delivery. The Taxpayer will be the insured party under the insurance on the building materials required by the terms of the Draft Agreement.
Since only draft language for future anticipated Agreements was provided for review, this conclusion is based on language and facts provided with the Taxpayer’s request for a TAA, and it presumes that no other sections of the of the Final Agreements will compromise the Owner Direct Purchase Procedures of the Draft Agreement. To the extent purchases are not made in accordance with the Owner Direct Purchase Procedures, those purchases will not qualify for exemption. Please note that if the Final Agreements contradict the terms set forth in the Owner Direct Purchase Procedures, and the terms of the Final Agreements are controlling, the Taxpayer may not take advantage of its tax-exempt status on the purchase of materials for use in the public work.
Further, this response does not apply to a contractor or subcontractor that manufactures, fabricates, or furnishes tangible personal property that it will incorporate into a public work as specified in Rule 12A- 1.094(5), F.A.C. Under the rule, the contractor and subcontractors, not the Taxpayer, are deemed to be the ultimate consumers of the articles of tangible personal property they manufacture, fabricate, or furnish to perform their contracts. As such, the contractor and subcontractors are liable for the sales tax on the full cost of the manufactured, fabricated or furnished articles of tangible personal property, as detailed in Rule 12A-1.051(10), F.A.C. Such contractors cannot accept a certificate of entitlement for such materials.
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 that 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,
Brinton Hevey
Tax Law Specialist
Technical Assistance and Dispute Resolution 850/717-6839
Record ID: 176168
