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Sales and Use Tax TAA 17A-005 Public Works; Real Property Improvements

QUESTION: WILL TAXPAYER’S CONTRACT QUALIFY FOR THE PUBLIC WORKS EXEMPTION PROVIDED FOR BY SECTION 212.08(6), F.S.?

ANSWER: YES, TAXPAYER WILL SATISFY ALL CRITERIA REQUIRED BY RULE 12A-1.094(4), F.A.C., IF IT EXECUTES THE CONTRACT AS AMENDED, AND MAINTAINS THE RISK OF LOSS THROUGH INSTALLATION INTO THE PUBLIC WORK.

March 9, 2017

Re: Technical Assistance Advisement 17A-005
Sales and Use Tax- Public Works; Real Property Improvements
Taxpayer: City of XXXX
Section(s) 212.08(6), Florida Statutes ("F.S.")
Rule(s) 12A-1.094, Florida Administrative Code ("F.A.C")

Dear XXXX:

This letter is in response to your request August 29, 2016, for issuance of a Technical Assistance Advisement (“TAA”) pursuant to Section 213.22, F.S., and Rule Chapter 12-11, F.A.C. An examination of your request has established you complied with the statutory and regulatory requirements for issuance of a TAA. Therefore, the Department is hereby granting your request for a TAA.

FACTS PROVIDED

City of XXXX (Taxpayer) is the owner and operator of the XXXX International Airport (Airport). Taxpayer has contracted to construct a building on airport property owned by Taxpayer. When the building is completed, Taxpayer will own the building and lease it to a third party. Taxpayer states it intends to buy certain materials for the project.

Taxpayer also provided a copy of the construction contract, the first amendment to the construction contract, and the lease agreement. The amendment includes the following relevant language from pages 2-4:

12. Owner Direct Purchases. The following subsections are hereby added to the Contract under Section 10.3.4 of the Contract:

10.3.4.1 City certifies and represents that it is properly certified as an entity exempt from the payment of sales and use taxes in the State of Florida. Prior to City's purchase of any materials pursuant to the provisions of Section 10.3.4, Cityshall provide Construction Manager, upon request, with documentation confirming such exemption, including City's Certificate of Entitlement. City acknowledges that Construction Manager may rely upon this certification and representation by City.

10.3.4.2 City may purchase materials to be incorporated into the Work directly pursuant to the terms and conditions of this Section 10.3.4.

10.3.4.3 In the event City elects to purchase materials directly, City and Construction Manager shall follow the following procedures:

(a) Prior to City's issuance of the Notice to Proceed, Construction Manager shall provide to City a list of the materials and equipment potentially available for direct purchase by City. Such list shall include (i) an estimate of the value of each such item, (ii) an estimate of the sales/use tax savings on each such item, and (iii) the deadline for ordering each such item, such that the materials can be timely ordered, fabricated and delivered so as not to delay the prosecution of the Work. Construction Manager shall not order any such items until not less than thirty (30) days after such list has been provided to City. City shall notify Construction Manager in writing of the materials and equipment to be used or incorporated into the Work that City has determined that it will purchase directly. This notice must be provided to Construction Manager before the Construction Manager has ordered the materials, and such materials shall be ordered by City on or before the ordering deadline specified in such list.

(b) Construction Manager shall prepare, on City's form, a purchase order directed to the vendor of the materials sufficient to describe and order the materials which City has elected to purchase directly, and shall provide such purchase order to City. Such purchase order shall provide that the purchased item shall be FOB job site. Construction Manager's submission of a completed purchase order form is a representation by Construction Manager to City that the materials described therein comply with the Contract Documents. City may not prepare or issue a purchase order not prepared by Construction Manager.

(c) City shall execute the purchase order and shall issue the purchase order directly to the vendor supplying the materials, including, as an attachment to such purchase order, a copy of the City's Certificate of Exemption in accordance with the provisions of Florida Administrative Code, Paragraph 12A-1.094, Public Works Contracts.

(d) The vendor shall then issue its invoice directly to City, and City shall pay the invoice according to its terms directly to vendor from public funds.

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(g) City shall take title to the materials at the time of delivery by the vendor to the job site, and all warranties with respect to such materials shall run directly from the vendor to City; however, Construction Manager shall be deemed a third-party beneficiary of such warranties. City's direct purchase of materials shall not, however, alter any of Construction Manager's obligations under the Contract Documents, including but not limited to Construction Manager's warranty obligations under the Contract Documents.
(h) As provided above, direct purchases by City shall be FOB the jobsite, so the vendor assumes the risk of loss or damage to the materials from the date of submission of the order until the materials are delivered to the job site and properly unloaded and stored at the job site, upon which City shall assume the risk of loss or damage to the materials until Construction Manager exercises control over such materials.
***
10.3.4.6 City shall indemnify and hold the Construction Manager harmless of and from any liability for sales and use taxes for direct purchases by City should it be determined that the purchases, in fact, are subject to the payment of sales and use taxes or that the methodology described herein is not sufficient to exempt such direct purchase materials from sales and use taxes.
On December 12, 2016, Taxpayer provided an unsigned copy1 of a second amendment to the contract (hereafter “Second Amendment”), which removes Section 10.3.4.3(h) and replaces it with the following:

(h) As provided above, direct purchases by City shall be FOB the jobsite, so the vendor assumes the risk of loss or damage to the materials from the date of submission of the order until the materials are delivered to the job site and properly unloaded and stored at the job site, upon which City shall assume the risk of loss or damage to the materials.

REQUESTED ADVISEMENT

Are Taxpayer’s purchases of materials for use in the completion of the project subject to tax?

APPLICABLE STATUTES

Section 212.08(6), F.S., provides, in part, the following:

(6) EXEMPTIONS; POLITICAL SUBDIVISIONS

(a) 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 shall not inure to any transaction otherwise taxable under this chapter when payment is made by a government employee by any means, including, but not limited to, cash, check, or credit card when that employee is subsequently reimbursed by the governmental entity....

(b) The exemption provided under this subsection does not include sales of tangible personal property made to contractors employed directly to or as agents of any such government or political subdivision when such tangible personal property goes into or becomes a part of public works owned by such government or political subdivision. 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 upon the substance of the transaction rather than the form in which the transaction is cast. However, for sales of tangible personal property that go into or become a part of public works owned by a governmental entity, other than the Federal Government, a governmental entity claiming the exemption provided under this subsection shall certify to the dealer and the contractor the entity's claim to the exemption by providing the dealer and the contractor a certificate of entitlement to the exemption for such sales. If the department later determines that such sales, in which the governmental entity provided the dealer and the contractor with a certificate of entitlement to the exemption, were not exempt sales to the governmental entity, the governmental entity shall be liable for any tax, penalty, and interest determined to be owed on such transactions. Possession by a dealer or contractor of a certificate of entitlement to the exemption from the governmental entity relieves the dealer from the responsibility of collecting tax on the sale and the contractor for any liability for tax, penalty, or interest related to the sale, and the department shall look solely to the governmental entity for recovery of tax, penalty, and interest if the department determines that the transaction was not an exempt sale to the governmental entity. The governmental entity may not transfer liability for such tax, penalty, and interest to another party by contract or agreement.

(c) The department shall adopt rules for determining whether a particular transaction is properly characterized as an exempt sale to a governmental entity or a taxable sale to a contractor which give special consideration to factors that govern the status of the tangible personal property before being affixed to real property. In developing such rules, assumption of the risk of damage or loss is of paramount consideration in the determination. The department shall also adopt, by rule, a certificate of entitlement to exemption for use as provided in paragraph (b). The certificate shall require the governmental entity to affirm that it will comply with the requirements of this subsection and the rules adopted under paragraph (b) in order to qualify for the exemption and that it acknowledges its liability for any tax, penalty, or interest later determined by the department to be owed on such transactions.

Rule 12A-1.094(4) and (5), F.A.C, provide, in part, the following:
(4)(a) The exemption in Section 212.08(6), F.S., is a general exemption for sales made directly to the government. A determination whether a particular transaction is properly characterized as an exempt sale to a governmental entity or a taxable sale to or use by a contractor shall be based on the substance of the transaction, rather than the form in which the transaction is cast. The Executive Director or the Executive Director's designee in the responsible program will determine whether the substance of a particular transaction is a taxable sale to or use by a contractor or an exempt direct sale to a governmental entity based on all of the facts and circumstances surrounding the transaction as a whole.
(b) The following criteria that govern the status of the tangible personal property prior to its affixation to real property will be considered in determining whether a governmental entity rather than a contractor is the purchaser of materials:
1. Direct Purchase Order. The governmental entity must issue its purchase order directly to the vendor supplying the materials the contractor will use and provide the vendor with a copy of the governmental entity's Florida Consumer's [Certificate] of Exemption.
2. Direct Invoice. The vendor's invoice must be issued to the governmental entity, rather than to the contractor.
3. Direct Payment. The governmental entity must make payment directly to the vendor from public funds.
4. Passage of Title. The governmental entity must take title to the tangible personal property from the vendor at the time of purchase or delivery by the vendor.
5. Assumption of the Risk of Loss. Assumption of the risk of damage or loss by the governmental entity at the time of purchase is a paramount consideration. A governmental entity will be deemed to have assumed the risk of loss if the governmental entity bears the economic burden of obtaining insurance covering damage or loss or directly enjoys the economic benefit of the proceeds of such insurance.
(c)1. To be entitled to purchase materials tax exempt for a public works project, a governmental entity is required to issue a Certificate of Entitlement to each vendor and to the governmental entity's contractor to affirm that the tangible personal property purchased from that vendor will go into or become a part of a public work....
2. The governmental entity's purchase order for tangible personal property to be incorporated into the public works project must be attached to the Certificate of Entitlement. The governmental entity must issue a separate Certificate of Entitlement for each purchase order. Copies of the Certificate may be issued.
3. The governmental entity will also affirm that if the Department determines that tangible personal property sold by a vendor tax-exempt pursuant to a Certificate of Entitlement does not qualify for the exemption under Section 212.08(6), F.S., and this rule, the governmental entity will be liable for any tax, penalty, and interest determined to be due.
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(d) Sales to contractors, including subcontractors, are subject to tax.
(e) The governmental entity may not transfer liability for such tax, penalty, and interest to another party by contract or agreement.
(f) In the case of contracts with any agency or branch of the United States government in which the federal governmental agency or branch is not required to produce a Certificate of Entitlement, the purchase must comply with the five criteria provided in paragraph (b), for the purchase of tangible personal property to be exempt from sales and use tax. If the criteria in paragraph (b) are not met, the contractor is the ultimate consumer of such tangible personal property and is liable for sales or use tax on such purchases and manufacturing costs.
(5) Contractors, including subcontractors, that manufacture, fabricate, or furnish tangible personal property that the contractor incorporates into public works are liable for tax in the manner provided in subsection (10) of Rule 12A-1.051, F.A.C. The contractor and subcontractors, not the governmental entity, are deemed to be the ultimate consumers of the articles of tangible personal property they manufacture, fabricate, or furnish to perform their contracts and may not accept a Certificate of Entitlement for these articles.

As provided by Rule 12A-1.094(4)(c)4., F.A.C, the following is the format of the Certificate of Entitlement to be issued by the governmental entity:

CERTIFICATE OF ENTITLEMENT

The undersigned authorized representative of ________________(hereinafter "Governmental Entity"), Florida Consumer's Certificate of Exemption Number ____________________, affirms that the tangible personal property purchased pursuant to Purchase Order Number____________ from ______________(Vendor) on or after_______________ (date) will be incorporated into or become a part of a public facility as part of a public works contract pursuant to contract # __________________________with ___________________________ (Name of Contractor) for the construction of __________________________.
Governmental Entity affirms that the purchase of the tangible personal property contained in the attached Purchase Order meets the following exemption requirements contained in Section 212.08(6), F.S., and Rule 12A-1.094, F.A.C.

You must initial each of the following requirements.
_____ 1. The attached Purchase Order is issued directly to the vendor supplying the tangible personal property the Contractor will use in the identified public works.
_____ 2. The vendor's invoice will be issued directly to Governmental Entity.
_____ 3. Payment of the vendor's invoice will be made directly by Governmental Entity to the vendor from public funds.
_____ 4. Governmental Entity will take title to the tangible personal property from the vendor at the time of purchase or of delivery by the vendor.
_____ 5. Governmental Entity assumes the risk of damage or loss at the time of purchase or delivery by the vendor.
Governmental Entity affirms that if the tangible personal property identified in the attached Purchase Order does not qualify for the exemption provided in Section 212.08(6), F.S., and Rule 12A-1.094, F.A.C., Governmental Entity will be subject to the tax, interest, and penalties due on the tangible personal property purchased.

If the Florida Department of Revenue determines that the tangible personal property purchased tax-exempt by issuing this Certificate does not qualify for the exemption, Governmental Entity will be liable for any tax, penalty, and interest determined to be due.
I understand that if I fraudulently issue this certificate to evade the payment of sales tax I will be liable for payment of the sales tax plus a penalty of 200% of the tax and may be subject to conviction of a third degree felony.
Under the penalties of perjury, I declare that I have read the foregoing Certificate of Entitlement and the facts stated in it are true.
Signature of Authorized Representative __________________Title ______________
Purchaser's Name (Print or Type)______ ______________ Date ________________
Federal Employer Identification Number: ___________________________________
Telephone Number: _________________________________________
You must attach a copy of the Purchase Order to this Certificate of Entitlement. Do not send to the Florida Department of Revenue. This Certificate of Entitlement must be retained in the vendor's and the contractor's books and records.

DISCUSSION ANALYSIS AND CONCLUSION

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 general exemption on sales to governmental entities. Rule 12A-1.038(4)(b), F.A.C, provides, in part, that in order for a sale to a political subdivision to be tax-exempt, payment for tax exempt purchases must be made directly to the selling dealer by the political subdivision of Florida. 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(TPP) 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 addressed by 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 TPP 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.

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.
The terms of section 10.3.4 (of the Second Amendment) state Taxpayer will make direct purchases of the TPP after receiving requisition forms from the contractors. The provisions go on to state that Taxpayer will pay the vendors directly, and retain legal, and equitable, title to all materials it purchases. Additionally, the terms of section 10.3.4 (of the Second Amendment) state Taxpayer shall assume the risk of loss of the TPP at the time of delivery. Therefore, by assuming risk of loss.

So long as, Taxpayer executes the Second Amendment (quoted in relevant part in the facts) provided to the Department, and Taxpayer ensures that all measures that the request provides that Taxpayer will be obligated to take, then the criteria provided by Rule 12A-1.094, F.A.C, will be satisfied. Taxpayer will be required to complete all measures provided herein, including, but not limited to, direct issuance of purchase orders, direct payment to vendors by Taxpayer, direct invoicing from vendors to Taxpayer, passage of title of tangible personal property directly from the vendors to Taxpayer, assumption of risk of loss of the materials used in project from the moment that vendor delivers the material to the jobsite until it is permanently affixed as a real property improvement. If all measures that are provided in the request are completed by Taxpayer, then Taxpayer may purchase the materials used in project without paying the vendor for sales tax.

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(10), 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,
Timothy Surface
Tax Conferee
Technical Assistance & Dispute Resolution
Record ID: 211763

End Notes:

1 Taxpayer notes it intends to have this amendment signed as soon as possible.

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