A common question and a problematic situation that often arises in our practice involves public works contracts, i.e. federal, state, or local government projects, such as a school. Whether the issue surfaces during an initial consultation, a sales and use tax audit, or a Florida sales tax planning project, the so-called "public works" contract is a real and often an expensive inquiry for contractors. We have helped dozens of manufacturing companies, contractors, and state and local governments deal with this rather this rather tedious exercise. The numerous inquiries we get and rather popular topic on message boards and speaking engagements prompted the creation of this article.

Starting from the top, the general rule is that under Florida law, real property contractors and subcontractors are the ultimate consumers of materials they use in the performance of a real property construction contract and owe sales or use tax on their purchases of those items. Taking even a further step back, most real property improvement property begins as tangible personal property. All of the items such as the cement, the wood, the nails, etc are tangible. It is not until the cement is poured and the wood/bricks are erected does the tangible property become real property. Therefore, whether it is the contractor, subcontractor, or end-consumer the last person to touch or own the property in its tangible state owes the sales or use tax.

But what if the state or federal government is the entity receiving the real property improvement? What if the government is having a school, courthouse, or airport built? These governmental entities are tax exempt, right? Does the contractor still have to pay the sales or use tax on tangible personal property used in a tax exempt project? Generally, the answer is yes unless all the parties to the contract plan ahead, but it has always been a very tedious process with expensive consequences for mistakes. Florida law has thought of this situation and allows the state or federal government to buy the goods and services sales tax-free if the government purchases the taxable item directly from the vendor if certain procedures are followed. This direct purchase by the government is referred to in the industry as an owner-direct purchase ("ODP"). However, Florida does not allow the government to buy the materials from the same contractor that is installing the materials. The materials MUST be bought directly from a non-installing vendor, which is catching a lot of contractors off guard.

To clarify the situation, consider the following examples:

Example 1. XYZ County needs a school built. XYZ County purchases materials for the construction of the school from ABC Construction Supply, Inc., its vendor. Simultaneously XYZ County hires BuildCo to install and build the school using the materials now owned by XYZ County. The purchases of the materials by XYZ County are tax free because the governmental entity purchased the materials directly.

Example 2. XYZ County needs a school built. XYZ hires BuildCo to construct the school. BuildCo purchases materials for the construction of the school from ABC Construction Supply, Inc., its vendor. The purchases of the materials by XYZ County are taxable because someone other than governmental entity purchased the materials directly from the vendor.

For all practical purposes other than sales and use tax, the end result is still the same. XYZ County has its school constructed by BuildCo using materials purchased from ABC Construction Supply Inc. However, the tax implications are very different based on the Florida Department of Revenue's draconian1 interpretation of the law. Despite the fact that the state clearly intends these types of projects to be sales and use tax free, if the procedures are not followed to a T, the Florida Department of Revenue now collects sales or use tax on the materials used, which can be quite substantial in a large project. Even worse, the contractor, who may have believed the whole project was tax-exempt now owes use tax on its purchases, which can be enough to wipe out any profit the contract hoped to make.

In an effort to encourage business and promote growth in the state, the Florida Legislature passed a sales tax exemption for the above described scenario. Specifically, section 212.08(6), Florida Statutes ("F.S.") succinctly states the exemption as follows:

(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 . . . .

(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.

Even in its abridged version, one can easily see that the statute is quite a mouth full. In order to clarify the statute, the Florida Department of Revenue enacted rules 12A-1.038 and 12A-1.094, Florida Administrative Code ("F.A.C.") which outlines how a company can go about claiming the exemption. At its core, the Department takes the position that the government, rather than the contractor is the one purchasing the materials directly if 1) the government issues a direct purchase order to the vendor along with its Exemption Certificate, 2) the vendor's invoice must be issued to the government, 3) the government must pay for the materials directly from public funds, 4) the government must take title at the time of purchase or delivery, 5) the government bears the risk of loss, and 6) if the government is any government other than the United States government, a certificate of entitlement must be issued. For convenience, I have included a certificate of entitlement at the end of this article.

From a logical perspective, if the contractor gets the government to sign the certificate of entitlement, the contract theoretically should be off the hook. One would expect the Department of Revenue's recourse at that point would likely be against the government according to the statute. While it is unlikely that the Florida Department of Revenue would assess tax against a state or local government, I wouldn't put anything past them. This was made apparent in 2012 when the Florida Department of Revenue ("DOR") issued a tax warrant against the Florida Supreme Court. [an article on this debacle can be found at the bottom of this article] We have heard that if any mistakes in the process occur, such as the contractor accidentally took title to the materials via a mislabeled invoice or somehow can be considered an agent for the governmental entity, then the Florida Department of Revenue is going to come after the contractor.

Echoing what our firm has seen over the past year, the Florida DOR has also seen this as ongoing problem. In 2012, the Florida DOR issued two Technical Assistance Advisements ("TAA"), which is the equivalent to an IRS private letter ruling. TAA 12A-002 and TAA 12A-024, were based on essentially the same facts. Each scenario, a county asked whether its contracts with a contractor met the requirements of the public works exemption. Both contracts provided that the County will prepare its own orders of materials, the County will pay the suppliers, the vendor will invoice the County directly, the County will take title upon delivery, and payment will be made directly by the County. The main differences are that in one TAA no certificate of entitlement will be issued and the county will not assume the risk of loss. Conversely, the other TAA stated that the County will issue a certificate of entitled with each purchase order and it will County will be liable for risk of loss and purchase insurance to cover such loss. Based on these seemingly small discrepancies, the Florida Department of Revenue gave its blessing in TAA 12A-024 and did not in TAA 12A-002.

As evidenced by a recent issuance of a Taxpayer Information Publication, the Florida DOR believes this is still an ongoing problem for taxpayers. On March 11, 2013, the Florida DOR issued TIP 13A01-01 to reiterate its position regarding public works contracts. Further, the Florida DOR reiterated its position that if the contractor doing the install is the same entity selling the property, then even the Certificate of Entitlement will not work. In its typical draconian fashion, the Florida Department of Revenue's TIP took the opportunity to expand beyond the law to claim that governmental entities are all of a sudden not allowed to purchase construction materials tax free from apparently anyone without a Certificate of Entitlement. The Florida Department of Revenue is going to get a rude awakening when they try to enforce this concept.

What is really frustrating is the legislature tried to clarify and simply how public works contracts could be completed without sales or use tax implications. However, in our experience, contractors seldom meet the technical nit-picky requirements set for by the Florida Department of Revenue to qualify for a public works exemption. Even worse, the contractors often believe they have met the rule and do not discover their lack of documentation until slapped with a hefty Florida tax assessment, plus penalties and interest as a result of a Florida sales and use tax audit. If a company does several of these big, public works projects in the 3 years before an audit, then the resulting tax assessment could easily wipe out the financial viability of most contractors. If your company or your client's company is in or considering to be in this industry, then it is strongly advisable to get a review of your transactions from an experienced Florida sales and use tax attorney to minimize the chance of disaster down the road. There are also some other creative planning opportunities that may be taken to avoid the extremely burdensome record keeping requirements of the public works exemption. If you have any questions about these topics, then our firm offers free initial consultations.

florida sales tax help, florida sales tax attorney, florida sales and use tax attorney, jerry donniniAbout the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in Fort Lauderdale, Florida. Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.


§ 212.08(6), F.S.

Rule 12A-1.038, F.A.C.

Rule 12A-1.094, F.A.C.

TAA 12A-024

TAA 12A-002

TIP 13A01-01 - Owner-Direct Purchase Programs (March 11, 2013)



FL controversy ALERT - MST CONSTRUCTION - THE DOR TOLD ME TO DO IT THIS WAY, by Jerry Donnini, Esq., January, 17, 2013.


1 "Draconian" relates to Draco, a 7th-century B.C. Athenian statesman and lawmaker who implemented laws that prescribed extremely harsh punishment for almost every offense, quite often the death for even minor offenses.

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