Taxing government to pay for government: Florida's nonsensical approach to taxation.

A difficult taxation issue has plagued Florida's material suppliers, contractors and subcontractors for several decades. Florida's NACM Improved Construction Practices Committee (ICPC) began looking for solutions many years ago, and together with the Florida Department of Revenue, crafted a proposed

Florida's NACM Improved Construction Practices Committee has taken the lead on this issue, and has been unrelenting in its efforts to seek a solution and lobby for legislative change. We remain both steadfast and optimistic in these efforts. Bills have been filed in the Florida House and Senate for the 2006 Legislative Session, which begins on March 7, 2006, and runs for 60 days. Copies of the Bills can be viewed on the Florida Legislature's website at www.leg.state.fl.us. The Bills are identified as House Bill 689 by Representative Rich Glorioso (R-Plant City) and Senate Bill 434 by Senator Mike Bennett (R-Bradenton).

Let's begin by explaining that Florida is heavily reliant on sales tax for its revenue. We do not have an individual state income tax, and in recent years, led by a business-friendly Republican Governor and Legislature, have substantially reduced the intangibles tax on investments, with a goal toward complete elimination of that tax. When the economy is good and tourism is thriving, our state revenues are in excellent shape--we are almost solely dependent upon it.

So, it may come as no surprise to you that if the state, local, or federal government (or for that matter a church or private school) builds a building here in Florida, we would just as soon tax every square yard of concrete, 2 x 4 or shingle that goes into that building. As a matter of fact, that has been the case with every state building--including our modern capitol. With close to 1,000 new residents coming into this state daily, we have huge infrastructure needs for road, schools, utilities; and the state would just as soon collect tax on the materials that go into those projects and then allow the legislature to redistribute that revenue as it sees fit. Forget that there is a cost to collecting and redistributing the tax--and that taxing government to pay for government doesn't sound very Republican. Nevertheless, if it was just that simple--tax everything, the industry could live with that.

The problem began in the mid-1980s when, at the urging of local governments, the Florida Legislature passed an exemption that allows tax-exempt entities (both public and private) to purchase construction materials direct and thus avoid the tax. If the contractor purchases the materials, the contractor is considered the end-user, and tax is due. But if the tax exempt entity purchases direct, then they save 7 percent or more on the cost of the materials: a substantial savings on a project of any size. This sounds pretty simple, right? No! It's not simple at all. The litmus test for direct purchase is a complex trap; not only for the unwary, but even for the most astute supplier or subcontractor who makes every attempt to comply with the rules for direct purchase.

Some of the problems:

1) The most serious problem occurs at the front end. The supplier must have a purchase order from the tax exempt entity and the sales tax exemption certificate for that entity BEFORE they ship or deliver materials. Obtaining these documents after the fact is not good enough. The taxability of a transaction is determined at the time the transaction occurs. Getting these direct purchase orders in a timely fashion so that you can ship or deliver materials and keep contractors and subs on schedule is an incredibly difficult task, particularly from entities such as school boards.

2) What if someone forgets to tell you that the project is a direct purchase and they just order materials, and you ship? When the owner gets the bill, they refuse to pay the tax--and you are asked to reverse the transaction. Watch out! You can get hit not only with the taxes, but substantial penalties and interest as well.

3) Here's a great one! The tax exempt entity must take possession of the materials, insure them against damage and loss, and be responsible for them from the minute they are delivered. Not only do most contracts attempt to shift this responsibility to the contractor and subs, I've seen formal government policies and procedures for direct purchase that fly directly in the face of this requirement.

4) Perhaps not the biggest problem, but certainly a frustrating one: the tax exempt entity must be billed directly and pay directly for the materials. As if payment from governmental entities isn't slow enough, now we have a situation where the owner is looking to the contractor and subs to verify that the materials were delivered and to sign-off on the documentation. There may also be a project architect or engineer involved in the process. How long do you think this will delay the payment of your invoice?

5) Typically large projects and especially government projects, like schools and courthouses, are bonded jobs. If things go wrong, there is always the contractor's bond to insure payment to the subs and suppliers. Not if you are selling direct to the owner: then you have no protection under the contractor's bond. Your only source of payment is the owner.

6) Say you are a large construction material supplier and you are being audited by the Florida Department of Revenue: you have done your best to comply with this complex direct purchase system the state has created, and you've got 95 percent of the documentation for these sales. That 5 percent can be huge--not only are you going to be responsible for paying the tax plus penalties and interest, FDOR can take a sampling of one period of time and multiply it to cover the audit for a specific period. Using this multiplier method, the sub or supplier's tax liability can be huge, and there is little or no chance that you can go back and collect any part of this money from the customer.

The agreed-upon solution is simple. Allow the tax-exempt entity to issue a certificate on a project-specific basis, giving the prime contractor and designated major subcontractors the ability to purchase materials for the project tax-exempt. The system is relatively easy to administer, requires no administration directly by the FDOR, and each contractor who is authorized to use the certificate must attest to proper use of the exemption. Now, if fraud is found, the FDOR has a sworn statement by an individual that they can use to prosecute, and the civil and criminal penalties for fraudulent use of the exemption are stiff. FDOR likes this solution too.

So you ask, "What's the problem?" Well, money is the problem ... loss of potential tax revenue is the problem. The first year this legislation was proposed, the Revenue Estimating Conference attached a $92 million fiscal tag on this legislation. They claim that if we make it easier to purchase materials tax-exempt, more people will do it and the state will lose revenue. This is the challenge for the ICPC and the industry--how do you find that kind of money in the budget, and convince the right people that doing away with the current system is the right thing to do?

We have decided to chip away at this issue one piece at a time. Representative Glorioso's Bill implements the new procedures for pre-K and elementary school construction. Senator Bennett's Bill would go further, and address purchase of materials for all public schools. Every year we get a new budget calculation, which has not occurred as of the writing of this article; but we are hopeful this year that we can get the number low enough, and convince leadership to give us a piece of the budget monies. The good news is that with all the repairs occurring as a result of two years of damaging hurricanes, we've got excess sales tax revenue. Wouldn't it be nice to get our fair share!

If your state has complex issues affecting construction practices, NACM members would like to read about them. Please submit an article or summary of the issues, pending legislation and/or commentary on them to bcm@nacm.org.

Did You Know ...?

The National Chamber Litigation Center (NCLC)--the public-policy law firm of the Chamber of Commerce of the United States of America--plays a major role in shaping public policy on important legal questions of national concern to American business while achieving long-range improvements in the legal system.

NCLC serves its membership by:

* Challenging--as party plaintiff or amicus curiae (friend-of-the court)--anti-business statutes, regulations, and common law rulings

* Providing litigation support to companies involved in landmark cases

* Explaining to the media the business community's position on key business cases

Since its inception in 1977, the Litigation Center has participated in nearly 1,000 cases as the voice of business in the courts and regulatory agencies. For more than 25 years, NCLC has represented the interests of the business community and championed the principles of private enterprise.

Deborah Lawson is a government affairs consultant who lives and works in Tallahassee, FL. She has been a part of the Florida NACM-ICPC's legislative team since 192, and represents construction material suppliers and subcontractors.

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Shielding Your Receivables from Bankruptcy and Secured Creditors Through Trust Funds, Including Construction Industry Trust Fund Statutes, PACA and Trust Fund agreements 14099