(813) 251-3013

Under long standing laws and regulations a contractor or subcontractor has been considered the final user of construction materials for purposes of assessing sales tax on the materials. Consequently the material supplier would collect the sales tax from the contractor purchasing the material and remit it to the State. While there are exemptions from the sales tax for public bodies, these exemptions do not extend to materials purchased by the contractor.

In order to obtain the sales tax exemption, a number of public bodies have utilized what has come to be called Owner Direct Purchase programs during a construction project. In these programs, the owner and contractor agree that the owner will purchase and supply a substantial portion of the materials for use in the project thus reducing the project costs by the amount that would have been paid for sales taxes.

While this practice has been going on for some time there was concern about its use because if it was not done properly, the contractor would be assessed the unpaid sales tax. To deal with these concerns, a law was enacted (Fla. Stat. Sec 212.08(6)) dealing with sales tax exemption in the construction of public works.  The new law (effective January 2, 2011) shifts the potential liability for an improper sales tax exemption from the contractor to the owner. The statute also directed the Department of Revenue to adopt rules for determining whether a particular transaction is properly characterized as an exempt sale and to adopt a Certificate of Entitlement to Exemption for use in this circumstance.

The rule, or more correctly the modification of an existing rule (12A-1.094 F.A.C.), has now been issued. Effective January 2, 2011 a governmental entity must issue a Certificate of Entitlement to purchase tax exempt tangible personal property for a public works project.  This certificate must be issued to the contractor and must certify that the property being purchased will become part of a public facility and that the government entity will be liable for any tax, penalty, or interest should the Department of Revenue later determine that the items purchased do not qualify for the exemption. The statute and the rule provide that liability for an improper exemption may not be shifted back to the contractor.

The modified rule also requires that the governmental entity take title to the property from the vendor at the time of purchase or delivery by the vendor.  In what is perhaps the most significant change, the rule makes it clear that the risk of damage or loss to the personal property is assumed by the governmental entity at the time of purchase or delivery by the vendor. Many of the Owner Direct Purchase programs placed the risk of damage or loss on the contractor even if it was purchased by the governmental entity.

A copy of the purchase order must be attached to the Certificate of Entitlement, and the Certificate of Entitlement must be retained in the vendor’s and the contractor’s books and records.  If it is an agency or branch of the United States Government, the agency or branch is not required to produce the Certificate of Entitlement, but the purchase must still comply with the five criteria set out in the Certificate of Entitlement.

The rule provided that any contractor who manufactures tangible personal property that is incorporated in the work cannot obtain a tax exemption. That section has been expanded to add subcontractors to the group and to add fabrication and furnishing to the definition. Effectively this means that material, to be eligible for the Certificate of Entitlement, must come from a third party material supplier. To be a contractor or subcontractor on a project one has to provide labor as at least one component of the work, otherwise one would be a material supplier. A party supplying some labor component to the project cannot separate out the materials it purchases to obtain a tax exemption even if the materials are incorporated into a public project.