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Beware . . . All Tax Exempt Purchases are not the Same

The Southeast Glass Association (SEGA) recently contacted the Department of Revenue (DOR) concerning exemptions from Florida’s sales tax on the purchase of construction materials using an unconventional method on certain projects. We contacted DOR and have received advice from DOR in the form of a Letter of Technical Advice (LTA) (please click here to view DOR LTA).

The following information is being provided to you for your information and is based on the LTA, as well as applicable statutes and Florida Administrative Code (F.A.C.). The information is being provided to SEGA members to assist them with Florida’s complicated tax rules.

Let’s start with the basics. 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, wood, 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.

However, there are exceptions to the rule. Florida law allows the state or federal government to buy the goods and services sales tax–free on a public works project if the government purchases the taxable item directly from the vendor and certain procedures are followed. This direct purchase by the government is referred to in the industry as an owner–direct purchase (ODP). To be entitled to purchase materials tax exempt for a public works project, a government entity is required to issue a Certificate of Entitlement to each vendor and the government 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. Most SEGA members are probably familiar with this program.

Recently, a SEGA member discovered other entities which may be entitled to goods and services sales tax–free. The Navy Federal Credit Union, the world’s largest credit union, is building new facilities in Pensacola. The credit union is neither financed nor owned by the government; however, they were seeking to purchase goods and services sales tax–free. SEGA inquired of DOR if the Navy Federal Credit Union is not financed or owned by the government is there another exemption under Chapter 212 that would allow them to purchase materials directly and not pay sales tax?

We were surprised to learn that federally chartered credit unions are exempt from state and local tax under the statutes of the United States. Both state and federally chartered credit unions qualify for what is known as a Consumer’s Certificate of Exemption, which allows tax–exempt purchases of tangible personal property used in carrying on exempt entities’ nonprofit activities including construction material. The exemption cannot be used by any other entity and payment for the tangible personal property must be made with the exempt entity’s funds (direct payment between owner and Vendor). See Rule 12A–1.038, F.A.C., s. 213.12(2), F.S., and Form DR–5, Application for Consumer’s Certificate of Exemption. Since this is not an exempt governmental entity engaged in a public works contract, Rule 12A–1.094, F.A.C., and its various requirements is not applicable. Further examination of s. 213.12, F.S., finds that banks and trust companies also qualify for exemption from state and local tax.

To summarize, a credit union holding a Consumer Certificate’s of Exemption can purchase tangible personal property exempt from tax if the provisions of Rule 12A–1.038, F.A.C., are satisfied. Documentation should be maintained to show that the tangible personal property was purchased by (sold to) the exempt entity, such as:

Copies of purchase orders, invoices and receipts issued directly to the credit union vendor and proof that payment was made with credit union funds.

Documentation that the credit union took title and possession of all materials it purchased before they were incorporated into real property.

Documentation that the credit union assumes all risk of loss on all materials purchased, and the credit union bears the cost of all insurance on all materials purchased.

A contractor may be hired to install the materials purchased by the credit union from a third party without incurring a liability for the sales tax on such materials. However, the contractor would owe tax on any tangible personal property it fabricates (Fabrication Tax) or supplies (purchases) and installs.

This article is based on a Department of Revenue (DOR) Letter of Technical Advice received in the SEGA office in response to facts and circumstances provided to DOR of a specific situation, and it does not constitute the official position of the DOR. Rather, this letter represents the opinion of the writer only. The information is being provided to SEGA members to assist them with Florida’s complicated tax rules and should not be considered a legal opinion. SEGA encourages you to consult with your attorney and/or CPA.

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