Florida Addresses Whether Lump-Sum Contractors May Utilize Customer-Specific Sales Tax Exemptions

If a contractor is used to construct a building which will be used by a sales tax-exempt entity, can the exemption be assigned to the contractor and applied to the contractor’s purchases?

By Tina Chunn, SALT senior manager

Many states provide blanket sales tax exemptions to specific classes of taxpayers, such as governmental entities, utilities, schools, hospitals, etc. These exemptions apply to all purchases made by these entities as specifically defined in the state guidance. However, if a contractor is used to construct a building to be used by such exempt entities, could the exemption be assigned to the contractor and applied to the contractor’s purchases since the building is still used by the exempt entity? This specific question was recently raised by such a contractor in Florida Technical Advisement – TAA 15A-013.

Florida provides an exemption from sales/use tax to governmental entities when the payment is made directly by the governmental entity. [1] The statute provides further that “the exemption does not apply to sales of tangible 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.” [2] Whether or not a transaction is considered an exempt sale to the government or a taxable sale to the contractor is based on the substance of the transaction rather than its form.

Florida regulations provide guidance on the criteria to be used for purposes of determining whether or not a transaction is considered an exempt sale to the government or a taxable sale to the contractor. [3] The criteria are as follows: (1) the purchase order is issued to the vendor from the governmental entity; (2) the vendor should invoice the governmental entity and not the contractor; (3) payment must be made directly from the governmental entity using government funds; (4) the governmental entity should pay the vendor directly at the time of purchase or delivery; and (5) the risk of loss remains with the governmental entity. Risk of loss is a paramount consideration, and the 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.

In this case, the governmental entity had included an assignment of its tax-exempt status in its bid award to the contractor.The contractor had paid Florida sales tax on its purchases and requested a refund of these taxes paid. The transactions did not meet the requirements above to be considered an exempt purchase by a governmental entity because the entity did not make direct purchases or pay the vendors directly. In addition, there was no evidence that the governmental entity assumed risk of loss. Therefore, the contractor was subject to Florida sales tax for the purchases of tangible personal property incorporated into the lump-sum contract for the governmental entity.

Construction contractors should pay particular attention to the use of exemptions. Similar to the case above, many states will not allow exemptions clearly statutorily provided to be passed to contractors. This limitation can be based on the premise that the exemption is limited to purchases by a specifically exempted entity or simply because the contractor is purchasing tangible personal and converting it into real property, thereby becoming the user of the property.

The SALT team at HA&W is experienced with sales tax treatment determinations for construction contractors and is available to assist you in reviewing your transactions to identify proper sales tax treatment. We constantly strive to keep our clients advised of important issues and developments in SALT in order to help them address their specific tax situations and will continue to monitor these and other significant SALT developments, including any updates in future issues of the HA&W SALT Newsletter.

Contact Tina Chunn, SALT senior manager, at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Section 212.08(6)(a), F.S

[2] Section 212.08(6)(b), F.S

[3] Rule 12A-1.094(4), F.A.C.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.