SUMMARY. Jan 08, 2001

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1 SUMMARY QUESTION: Do purchases of furnishings, fixtures, and equipment by a public sports authority for a sports team facility qualify for exemption from sales tax under s (6), F.S.? ANSWER - Based on Facts Below: Furnishings, fixtures, and equipment purchased by a public sports authority for use in a facility to be leased to a professional sports team can be purchased tax exempt where the purchases are made with public funds and under the terms of the controlling documents: (1) the authority issues its purchase orders directly to the vendors; (2) the purchase orders include the authority's consumer's certificate of exemption number and the authority will provide the vendor with a certificate of exemption; (3) the vendors invoice the authority directly; (4) the authority issues its checks directly to the vendors in payment of the invoices; (5) the authority takes title to the materials from the vendor and assumes liability for the materials upon their delivery to the facility; (6) the authority assumes the risk of loss of the materials upon delivery, which is clearly established by the authority bearing the economic burden of the purchase of insurance against loss or damage; and (7) the remaining terms of the documents do not prevent concluding that the authority rather than the contractor or the sports team is in substance as well as form the purchaser of the materials. ********************************************************** Jan 08, 2001 Re: Technical Assistance Advisement 01A-004 Sales and Use Tax -- Exemption for Purchases by Public Entities Section (6), F.S. Dear :

2 This is in response to your letter to the Florida Department of Revenue dated November 29, 2000, in which you request a technical assistance advisement ("TAA") indicating that certain purchases described in your letter will be exempt from Florida sales and use tax. Facts XXX ("Authority") was created by Chapter , Laws of Florida (1965), as amended by Chapter , Laws of Florida (1996)(the "Act"), to plan, develop, promote, and maintain sports and recreation facilities for "the use and enjoyment of the citizens of XXX and XXX County." Authority is empowered to purchase, construct, reconstruct, equip, maintain, and operate any stadium or other sports facility. Authority may lease, license, or contract out the operation of its facilities. Authority holds both a consumer's certificate of exemption as a governmental entity and a dealer's certificate of registration. XXX ("LP") is a limited partnership formed to enter into agreements with Authority concerning the construction and operation of a football stadium and related facilities. LP is owned and controlled by the same persons as the XXX ("Team"), a limited partnership that owns the XXX franchise. On August 28, 1996, Authority and LP entered into a Stadium Agreement pursuant to which Authority undertook the construction of XXX (the "Stadium") and licensed the Stadium to Team for exhibition of its games and related events. Construction of the Stadium was funded with proceeds of bonds issued by Authority and backed by local option sales surtaxes, tourist development taxes, and an allocation of state sales taxes. Team agreed to exhibit its games and other events at the Stadium. Team pays $3,500,000 annually under the Stadium Agreement, plus a surcharge on sales of tickets to Team games and 50 percent of the revenue from non-team events in excess of $2,000,000. The $3,500,000 fixed payment is allocated $2,000,000 to rental of the Stadium, $1,000,000 to rental of a Practice Area to be used for certain Team activities, and $500,000 as compensation for certain Development Rights. LP

3 agreed to unconditionally guarantee Team's obligations as described in the Stadium Agreement. The initial term of the Stadium Agreement ends in Team has the right to extend the Agreement for a total of 20 additional years. Other than an increase in the fixed amount to be paid annually to the Authority, all extensions will be on the same terms and conditions as in the original Stadium Agreement. Several other agreements were executed contemporaneously with the Stadium Agreement. One of these, the Stadium Parcel Development Agreement, granted LP the right to develop certain Stadium-related facilities on a parcel of land adjacent to the Stadium and owned by Authority. The Practice Area Development and Lease Agreement (the "1996 Agreement") provided that Authority would provide $12,000,000 that was reserved from the bond proceeds (the "Project Fund") to acquire and develop a Practice Area facility to be leased to Team for the same duration as Team leased the Stadium. The only rent to be paid for the Practice Area was the $1,000,000 annually provided for in the Stadium Agreement. The Practice Area facility was to be used for practice and training areas, administrative offices, retail merchandise sales, preparation and sale of food and beverages, sales of tickets to practices held at the Practice Area, and hosting public functions and meetings. Any costs in excess of $12,000,000 must be paid by Team. Team would hold title and have the right to remove personal property and trade fixtures purchased with Team funds. All real property improvements and any personal property, fixtures, furniture, and equipment paid for with Authority funds would be and remain the property of Authority. The 1996 Agreement provided that a Disbursement Agreement would be entered into to provide procedures for making expenditures from the Project Fund. The Disbursement Agreement was required to "include such provisions for direct payment by the Authority to the contractor, subcontractors or suppliers providing goods or services to the construction of the Improvements, together with such provisions regarding risk of loss and theft, acceptance of title and such other matters as may be reasonably necessary to allow the Team to take advantage of the tax exempt status of the Authority in connection with the purchasing of

4 goods and services to be incorporated into the Improvements." On September 20, 1999, LP and the Authority entered into a Project Development Agreement (the "1999 Agreement") concerning the Stadium Parcel and the Practice Area. The 1999 Agreement states that it replaces the Disbursement Agreement otherwise required by the 1996 Agreement. Pursuant to the 1999 Agreement, the parties agreed that the Practice Area would be constructed on the Stadium Parcel. Authority was required to engage and pay an architect to develop a design criteria package for approval by Authority and LP. Authority would then prepare and distribute requests for proposals for a prime contractor to design and construct the Practice Area. Selection of the prime contractor and negotiation of contract terms would be by a committee composed of both Authority and LP representatives, with Authority's Board to have final review and approval authority. LP would serve as Project Manager. The design/build contract was to be on a cost plus fixed fee basis and could contain a guaranteed maximum price provision. In addition, the contract must require the general contractor to "segregate building materials and equipment for direct purchase by the Authority to ensure that the Authority's sales tax exempt status is utilized for the Project to the greatest extent legally permissible,..." Section 12 of the 1999 Agreement provides as follows: Section 12. Purchase of FF&E. After the design build contract is executed, [LP] shall provide the Design Builder with a list of all furniture, fixtures and equipment to be acquired for the Project and funded from the Authority's Project Fund and the Design Builder shall submit to the Authority drafts of purchase orders to be issued by the Authority for their acquisition. All such purchase orders shall be in increments of not less than One Thousand Dollars ($1,000). The Authority shall be reimbursed from the Authority's Project Fund for all reasonable administrative costs incurred by the Authority to issue such purchase orders. Taxpayer's letter explains that this section refers to items

5 such as lockers, benches, furniture, and exercise equipment. That letter also states that the purchase orders will include Authority's consumer's certificate of exemption number. In addition, the letter states that vendors will be instructed to directly invoice Authority. (The 1999 Agreement does not explicitly state that such instructions will be given, but it would be customary for vendors to address invoices to the purchaser identified on the purchase orders.) Payment will be made by Authority from the Project Fund. Section 24 of the 1999 Agreement addresses insurance during the construction period. It provides that "Authority shall purchase and continuously maintain (or shall require the Design Builder to purchase and continuously maintain) builder's risk insurance on a completed value basis." If Authority purchases the insurance, LP must be named as an additional insured. If Authority causes the Design Builder to purchase the insurance, Authority, LP, and LP's general partner must all be named as additional insured parties. (Section 31 of the 1999 Agreement requires LP to indemnify Authority against any loss, including injury to or destruction of the Stadium and tangible personal property. That requirement does not apply, however, to work on the Practice Area project that is otherwise adequately insured.) Authority's letter also states that Authority's existing property insurance on the Stadium, on which Authority pays the premiums with its own funds, would apply to tangible personal property purchased pursuant to Section 12 of the 1999 Agreement at the point in time when it is delivered. Requested Advisement You have requested an advisement on whether purchases of furniture, fixtures, and equipment (the "Furnishings") pursuant to Section 12 of the 1999 Agreement will be exempt from Florida sales and use taxes. Taxpayer Position Taxpayer believes the purchases of the Furnishings are exempt under section (6), F.S., and Rule 12A-1.094, F.A.C., as direct purchases of tangible personal property by a governmental

6 entity. In addition, Taxpayer asserts the purchases should be exempt as purchases for resale on the basis that Authority will lease the Furnishings to Team. Law and Analysis Sales to governmental units are exempt from sales tax pursuant to section (6), F.S., which provides: 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... This exemption does not include sales of tangible personal property made to contractors employed either directly or as agents of any such government or political subdivision thereof when such tangible personal property goes into or becomes a part of public works owned by such government or political subdivision. A determination 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 on the substance of the transaction rather than the form in which the transaction is cast. The department shall adopt rules that give special consideration to factors that govern the status of the tangible personal property before its affixation to real property. In developing these rules, assumption of the risk of damage or loss is of paramount consideration in the determination... By its terms, section (6), F.S., exempts only direct purchases by governmental entities. The exemption does not apply when a contractor, employed by the governmental entity, purchases tangible personal property which is to be incorporated into public works owned by the entity. Administrative guidelines governing the taxability of materials purchased for public works contracts, are contained in Rule 12A-1.094, F.A.C., which provides: (1) This rule shall govern the taxability of transactions

7 in which contractors manufacture or purchase supplies and materials for use in public works,... (2) The purchase or manufacture of supplies or materials by the contractor for incorporation into a public works project is taxable to the contractor since he is the ultimate consumer... (3)(a)... (b) With regard to contracts with government entities, the exemption in subsection (3)(a) is appropriate only where the levy would otherwise fall on the government itself, or on an agency or instrumentality so closely connected with that government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned... (4) The exemption in subsection (3)(a) is a general exemption for sales made to the government... 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 on the substance of the transaction, rather than the form in which the transaction is cast. The Executive Director... will determine whether the substance of a particular transaction is governed by subsection (2)(a) or is a sale to a governmental body as provided by subsection (3) of this rule based on all of the facts and circumstances surrounding the transaction as a whole. The Executive Director... will give special consideration to factors which govern the status of the tangible personal property prior to its affixation to real property. Such factors include provisions which govern bidding, indemnification, inspection, acceptance, delivery, payment, storage, and assumption of the risk of damage or loss for the tangible personal property prior to its affixation to real property. Assumption of the risk of damage or loss is a paramount consideration. A party may be deemed to have assumed the risk of loss if the party either: bears the economic burden of posting a bond or obtaining insurance covering damage or

8 loss; or enjoys the economic benefit of the proceeds of such bond or insurance. Other factors that may be considered by the Executive Director... include whether: the contractor is authorized to make purchases in its own name; the contractor is jointly or severally liable to the vendor for payment: purchases are not subject to prior approval by the government; vendors are not informed that the government is the only party with an independent interest in the purchase; and whether the contractors are formally denominated as purchasing agents for the government... Rule 12A-1.001(9), F.A.C., states that in order for a sale to a state or local governmental entity to be tax exempt, "payment must be made directly to the dealer by... the political subdivision of a state." Subsections (2) and (3) of Rule 12A-1.094, F.A.C., state that the purchase of materials for public works contracts is taxable to the contractor as the ultimate consumer where the contractor is deemed to be the purchaser. If the purchaser of the materials is the governmental entity, however, the transaction is exempt. For there to be an exempt transaction, the governmental entity must directly purchase, hold title to and assume the risk of loss of the tangible personal property prior to its incorporation into a public facility, and satisfy various factors contained in Rule 12A-1.094, F.A.C. Under Rule 12A-1.094, F.A.C., 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. However, the assumption of risk of damage or loss during the time that the building materials are physically stored at the job site prior to their installation or incorporation into the project is a paramount consideration. The governmental entity must assume all risk of loss or damage for the tangible personal property during that period. To establish that it has assumed that risk, the governmental entity should purchase, or be the insured party under, insurance on the tangible personal

9 property. To summarize, the conditions that must be met to satisfy the requirements of Rule 12A-1.094, F.A.C., and establish that the governmental entity rather than the contractor is the purchaser of materials, include: 1. The governmental entity must execute the purchase orders for the tangible personal property involved in the contract, which must include the governmental entity's consumer's certificate of exemption number. The contractor may present the governmental entity's purchase orders to the vendors of the tangible personal property; 2. The governmental entity must acquire title to and assume liability for the tangible personal property at the point in time when it is delivered to the job site up until the time it is incorporated into the public facility; 3. Vendors must directly invoice the governmental entity for the tangible personal property; 4. The governmental entity must directly pay the vendors for the tangible personal property; and 5. The governmental entity must assume all risk of loss or damage for the tangible personal property involved in the contract, as indicated by the entity's acquisition of, or inclusion as the insured party under, insurance on those materials. The provisions of the 1996 and 1999 Agreements appear to satisfy the foregoing requirements for exemption of transactions as sales to a governmental entity. Authority will make direct purchases of the Furnishings. After receiving drafts from the contractor, Authority will prepare its own purchase orders for the Furnishings. After receiving the invoices from the vendors, Authority will pay the vendors directly from the Project Fund. Authority will take title to the Furnishings upon delivery and retain title to them while they are used by Team under its lease of the Practice Area facility. Authority will be responsible

10 for obtaining or having the contractor obtain builder's risk insurance to cover any Furnishings during the construction phase and will be a named insured party on such insurance. (If the contractor purchases the insurance under a cost reimbursement plus fee contract, the cost of the insurance will be borne by Authority if that cost is paid from the $12,000,000 in the Project Fund but could be reimbursed by LP if the Project Fund is exhausted before all insurance premiums are paid.) In addition, the Furnishings will be covered by Authority's property insurance on the Stadium, which Authority pays for with public funds. Authority would receive any insurance proceeds related to the loss or destruction of the Furnishings. Based upon the conclusion that Authority is the purchaser, all purchases of Furnishings which are made in accordance with the provisions of the 1996 and 1999 Agreements discussed above will be exempt from sales tax. It is necessary, however, that a properly completed exemption certificate be extended at the time of purchase to each of the vendors. Please see Rule 12A-1.039, F.A.C., for a suggested format for an exemption certificate. Please note that this response does not apply to a contractor that both manufactures or fabricates its own materials and also installs those materials so that they become a part of the Practice Area facility in terms of being attached or affixed to the facility. As specified in Rule 12A-1.094(5), F.A.C., contractors and subcontractors who perform such contracts, not the government entity, are deemed to be the ultimate consumers of the articles of tangible personal property they manufacture or fabricate to perform their contracts. As such, the contractor and subcontractors are subject to use tax on the full cost of the manufactured or fabricated articles as detailed in Rule 12A-1.051(10), F.A.C. (This subsection of the rule is not applicable to items that are not attached in any way, such as free-standing furniture and equipment.) The request for advisement also argues that Authority's purchases of the Furnishings are tax exempt because Authority is purchasing those items for the exclusive purpose of leasing them to Team. This is not the case. Authority is renting real property, the Practice Area facility, to Team for the $1,000,000

11 annual rental provided in the Stadium Agreement. That rental will not be increased because of any improvements or tangible personal property, including the Furnishings, added to the Practice Area facility. No part of the annual rental payment is allocated to the Furnishings. They are tangible personal property that Taxpayer is using in the activity of leasing real property to Team and that is provided to Team as an incidental part of the real property rental. Review of similar cases where a taxpayer acquires tangible personal property that taxpayer will permit another to use in the course of taxpayer carrying on its own business activity supports denying resale treatment to Authority for the furnishings. For example, a landlord must pay sales or use tax on the furniture purchased to be provided with a furnished apartment where there is no separate consideration for the furniture. A hotel operator must pay tax on purchases of furniture, bedding, and towels furnished to guests as part of the amenities included in the rental of the room. See Florida Hotel and Motel Association, Inc. v. Department of Revenue, 635 So.2d 1044 (Fla. 1st DCA 1994)("We conclude... that tangible personal property purchased by hotels and motels for use in guest rooms incident to their business is not purchased for `resale' and, therefore, that there is no entitlement to a sales tax exemption on that ground; and that imposition of a sales or use tax upon the purchase of such property and upon rental of guest rooms does not constitute duplicate taxation."). In American Video Corp. v. Lewis, 389 So.2d 1059 (Fla. 1st DCA 1980), the court held converter boxes, cable, and similar items used in providing taxable cable television services were not purchased for resale by the taxpayer where they were provided to customers at no itemized charge to enable customers to receive cable signals. In Air Jamaica, Ltd. v. State, Department of Revenue, 374 So.2d 575 (Fla. 3rd DCA 1979), cert. den., 392 So.2d 1371 (Fla. 1980), the taxpayer airline was denied resale treatment on meals provided to taxpayers as part of the price of a ticket. Advisements Except as otherwise provided above, the purchase of the

12 Furnishings pursuant to the 1996 and 1999 Agreements will be exempt from taxes under s (6), F.S., as direct purchases by Authority. This advisement applies only to those items purchased with Authority funds and not to any item purchased with funds provided by LP or Team. Authority's purchases of the Furnishings are not purchases for resale within the meaning of Chapter 212, F.S., and Authority should not provide a resale certificate when making those purchases. Closing Statement This response constitutes a Technical Assistance Advisement under s , F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice, as specified in s , 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 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 s , 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, Linda W. Bridges Senior Attorney Technical Assistance and Dispute Resolution (850)

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