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Sales Use and Tax TAA 19A-009 Real Property Improvements

Question: Is the Owner Direct Purchase Program sufficient to allow a tax-exempt organization to take advantage of its tax-exempt status on the purchase of materials for use in a real property construction contract?

Response: The Owner Direct Purchase Program, as described in the Taxpayer’s request and confirmed in the supporting documentation submitted with the Taxpayer’s request, is sufficient to allow the Taxpayer to take advantage of its tax-exempt status on the purchase of materials for use in real property construction contracts.

March 22, 2019, XX

Subject: Technical Assistance Advisement

STATUTE CITE(S): Section 212.08, Florida Statutes (F.S.)

RULE CITE: Rules 12A-1.038 and 12A-1.051, Florida Administrative Code (F.A.C.) XX ("Taxpayer") FEIN: XX

Exemption Certificate Number: XX XX ("Sole Member") FEIN: XX

Dear XX:

This is in response to your letter dated January 9, 2019, 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 Owner Direct Purchase Program that is the subject of your request. 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 and Requested Advisement

Your letter provides the following in part:

Taxpayer is a limited liability company incorporated in the State of XX. The sole member of Taxpayer . . . ("Sole Member"), [is] a nonprofit corporation incorporated in the State of XX. Sole Member is a nonprofit company created to enter into public-private partnerships with government and other tax-exempt groups to develop public and community facilities, including responsibilities for design and construction, related development funding, and structuring governmental leasehold and ownership interests. Sole Member is a 501(c)(3) nonprofit organization that is currently exempt from federal income tax. Taxpayer was formed by Sole Member to participate in the development of the Project, which is defined below, on behalf of Sole Member. Taxpayer holds a valid Consumer's Certificate of Exemption issued by the Florida Department of Revenue (the "Department") and is categorized as exempt under the exemption category of 501(c)(3) organization. . . .

Taxpayer and the City XX (the "City") have entered into a written agreement for a [PPP Agreement] to develop, design and construct certain significant improvements for the City's XX (the "Project"). Taxpayer will contract with XX, or other architect (the "Architect") to design, and with XX and/or the XX, or other licensed general contractors or design/builders (the "Contractor") to construct the Project. Those contracts with Contractors are to be known as the "Construction Contracts".

Under the PPP Agreement, Taxpayer and the City have agreed that Taxpayer is independently responsible for purchasing certain supplies, goods, equipment, and other materials ("Products") directly from vendors to be incorporated in or used in constructing the Project. The City will enter into a long-term (approximately 27-year) ground lease with Taxpayer under which the City and Taxpayer regard Taxpayer as the owner of the property and improvements that Taxpayer will design and construct.

When the improvements are designed and constructed by Taxpayer, Taxpayer will lease the completed Project improvements to the City under a long-term Facilities Lease Agreement for the City's public purposes. Under that Facilities Lease, the City will have exclusive use of the facilities. Upon expiration of the Facilities Lease to the City, the real property and improvements, which the City will have exclusively used for public purposes during the Facilities Lease, will remain with the City upon termination of the long-term ground lease under its terms. . . .

The Project is a customary nonprofit activity of Sole Member........ All purchases of

Products for which Taxpayer seeks an exemption are necessary for Taxpayer to achieve its customary nonprofit activities by facilitating the cost-effective execution and completion of the Project. Those nonprofit activities will achieve a clear public purpose. Sole Member is not subject to a final disqualification order issued by the Department of Agriculture and Consumer Services pursuant to Fla. Stat. § 496.430.

Taxpayer has created an Exhibit to the Construction Contracts which describes the owner direct purchase procedures (the "Addendum"). Taxpayer has also created a purchase order template (the "Purchase Order Template"). Taxpayer's Addendum to be incorporated in the Construction Contracts, and the Purchase Order Template to be utilized for Taxpayer's direct purchases, will specify that the owner direct purchase procedure will be exclusively used for those Products purchased by Taxpayer from third- party vendors for incorporation in this Project, and for which Taxpayer will bear the risk of loss from the point of purchase through installation at the job site. No contractors or subcontractors who provide construction services for the Project will sell or purchase any tax-exempt Products from a third-party vendor. . . .

Taxpayer will issue its Purchase Orders directly to all vendors of tax-exempt items. Taxpayer will attach its Consumer's Certificate of Exemption and Certificate of Entitlement to each purchase order sent to each vendor......................................... Taxpayer's Purchase

Orders shall provide that vendors of tax-exempt items shall invoice Taxpayer directly for the items purchased and not invoice the Contractor or any subcontractor. Taxpayer will provide the Contractor and the City with copies of the invoices Taxpayer receives for informational and coordination purposes. Taxpayer will make payment directly to the vendor and not to the Contractor or any subcontractor. Taxpayer will take title to the Products at the time of purchase or delivery by the vendor. Taxpayer will bear the risk of loss to Products purchased, from the time of purchase by Taxpayer until their installation at the jobsite.

* * *

Included with your request is a copy of a “statement of policy regarding the Owner Direct

Purchase Program (“ODPP”) and a copy of sample purchase order (“PO”).

The ODPP statement of policy provides the following in part:

[Taxpayer] is tax-exempt and may wish to exercise its right to directly purchase various construction materials, supplies and equipment ("Products") which are otherwise included in this contract................................ Products not directly purchased by the [Taxpayer] need not

comply with this Owner Direct Purchase Program.

In order to purchase Products tax-exempt, [Taxpayer] and those involved in such [Taxpayer] direct purchases must comply with the ODPP. The ODPP requires that the [Taxpayer]: prepare and issue its Purchase Orders and Certificate of Exemption directly to all vendors which sell Products directly to [Taxpayer]; receive vendors' invoices directly from the vendors; pay vendors directly; take title to Products at the time of purchase or delivery by the vendors; and at the point of purchase the [Taxpayer] must bear the risk of damage or loss to the directly purchased Products. The [Taxpayer] itself is responsible to obtain insurance covering such damage or loss to Products during the period of time that [Taxpayer] bears that risk of loss.

In compliance with the ODPP, the [Taxpayer] will purchase such Products via its Purchase Orders....................... [Taxpayer] shall issue its executed Purchase Orders directly to

vendors. [Taxpayer] shall attach a copy of its Florida Consumer's Certificate of Exemption to all Purchase Orders.

All vendors shall send invoices directly to the [Taxpayer]. Invoices will then be forwarded to the Design-Builder for coordination and verification. The [Taxpayer] shall take title to the Products at the point of purchase or delivery under the Purchase Orders.

. . . [Taxpayer] will bear the risk of loss to the goods purchased from the time of purchase and prior to their installation at the project. Owner shall also bear the economic burden of obtaining insurance covering damage or loss of the Products purchased pursuant to the ODPP and will directly enjoy the economic benefit of the proceeds of any such insurance. . . .

Listed below is the written procedure for the implementation of the ODP Policy:

. . . 5. Invoices are to be billed by the Vendor, directly to the [Taxpayer] at [Taxpayer’s]

mailing address........ The [Taxpayer] shall pay Vendor directly for the Products following this day time period.

The [Taxpayer] is responsible for preparing this ODPO program and ensuring that it complies with current law. Materials purchased within the ODPO program are the property of the [Taxpayer]. . . .

* * *

The PO provides the following “Terms and Conditions”:

  1. This is a Direct Purchase Order to Vendor from [Taxpayer]. [Taxpayer] is a tax-exempt entity under applicable Jaw and is utilizing its State of Florida sales tax exemption (Tax Exempt Number appears on first page of this Purchase Order).

  1. Vendor shall issue Direct Invoices to [Taxpayer] for purchases under this Purchase Order.
  1. [Taxpayer] shall issue direct payment from [Taxpayer’s] funds to Vendor for sums due Vendor under this Purchase Order.
  1. [Taxpayer] will take title to the items purchased under this Purchase Order ("Direct Purchase Items"), and [Taxpayer] bears the risk of loss to those items, as of the time of purchase, which will be the point of delivery by Vendor F.O.B. to the delivery location identified in this Purchase Order. "F.O.B." refers to delivery "Free on Board" as commonly used and as identified in the Uniform Commercial Code. Vendor is responsible for adequate property insurance for risk of loss prior to the time of purchase. Vendor shall establish [Taxpayer] as an additional insured under such property insurance, as [Taxpayer’s] interests may appear.
  1. Vendor's services exclude any aspect of installation of the Direct Purchase Items, and Vendor will have no role, function, or participation in any installation of the Direct Purchase Items.
  1. Warranties and any special or extended warranties as apply to the items purchased under this Purchase Order are identified below.

* * *

Issue

Whether the Taxpayer’s Owner Direct Purchase Program is sufficient to allow the Taxpayer to take advantage of its tax-exempt status on the purchase of materials for use in real property construction contracts.

Law and Discussion

Section 212.08(7)(p), F.S., provides an exemption from sales tax for purchases of tangible personal property by “501(c)(3) organizations” where payment is made directly to the vendor by the exempt organization and such purchases will be used to carry out the exempt organization's customary nonprofit activities. The exempt organization is required by Rule 12A- 1.038(1), F.A.C., to present the vendor with a properly completed exemption certificate at the time of purchase in order to establish tax exempt status of the transaction.

Rule 12A-1.051, F.A.C., governs the taxability of the purchase, sale, or use of tangible personal property by contractors and subcontractors who purchase, acquire, or manufacture materials and supplies for use in the performance of real property contracts. Rule 12A-1.051(4), F.A.C., provides that real property contractors are generally considered to be the ultimate consumers or users of the tangible personal property they purchase to perform a real property contract (i.e., they are not reselling the tangible personal property). The stated general rule for real property contractors is that they should not charge tax to their customers, regardless of whether or not they itemize charges for materials or labor, because they are not engaged in the activity of selling tangible personal property. Real property contractors are considered the ultimate consumers of the materials and supplies they use to perform real property contracts, so they must pay tax on the costs of those materials and supplies.

Nonprofit institutions that qualify under section 501(c)(3) of the Internal Revenue Code may structure construction contracts in order to take advantage of tax exemptions available to them. If the organization elects to take advantage of tax exemptions in a construction contract, certain criteria are required in order to legally effect the exemption. The criteria must be followed for the exempt organization to receive its exemption. The tax-exempt entity when making purchases of tangible personal property must do so in the tax-exempt entity's own name, using its own purchase orders, and making direct payment to the vendor of the materials from its own funds. The tax-exempt entity must be invoiced directly by the supplier for the purchases. Then s. 212.08(7)(p), F.S., may apply to the purchases.

In cases where a “501(c)(3)” tax exempt entity has structured a construction contract to take advantage of tax exemptions, the tax exempt entity must assume all risk of damage or loss for the building materials from the time of purchase and prior to their installation or incorporation into the project in order for the sale of building materials to be deemed a sale to the tax exempt entity, and thus be tax exempt. Further, 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.

The assumption of risk of damage or loss is the paramount consideration. The assumption of risk would include the period of time that the building materials are physically stored at the job site prior to their installation or incorporation into the project. The tax exempt entity will be deemed to have assumed the risk of damage or loss if the tax exempt entity 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. If the tax exempt entity does not assume the risk of damage or loss, the contractor will be construed to be the ultimate or final consumer of the building materials it uses and will be liable for the applicable tax.

Review of the “Addendum” and the “Terms and Conditions,” of the Purchase Order Template, reveal that Taxpayer’s Owner Direct Purchase Program contains the following provisions to ensure that the Taxpayer is the final consumer of the building materials prior to installation:

  1. The Taxpayer will issue purchase orders in its own name, along with a copy of its Florida Consumer's Certificate of Exemption.
  2. The materials will be delivered to the Taxpayer at the job site, and title of materials will transfer to the Taxpayer.
  3. The Taxpayer will be billed directly by the selling vendor.
  4. The Taxpayer will make direct payment for the purchase of the materials to the selling vendor.
  5. The Taxpayer will bear all risk of loss or damage to materials from the time of purchase and prior to installation into the project.
Determination

The Owner Direct Purchase Program, as described in your letter and confirmed in the supporting documentation submitted with your request, is sufficient to allow the Taxpayer to take advantage of its tax-exempt status on the purchase of materials for use in real property construction contracts.

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

Brinton Hevey Tax Law Specialist

Technical Assistance and Dispute Resolution Record ID: 150175

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