Could a federal contractor buy tangible property tax-free when the contract charged it directly and vested title in the government?

Plain-English summary

Florida explained that contractors ordinarily pay sales tax even when buying for a tax-exempt government. A special rule, however, treated qualifying property used under a Department of Defense or NASA contract as a sale for resale.

The contractor could purchase tangible personal property other than electricity without tax when three conditions were met: the property was used or consumed in performing the qualifying contract, its cost was charged as a direct cost to that contract, and title vested in or passed to the federal government under the contract.

The ruling also addressed overhead materials. Indirect-cost property could qualify when used under a qualifying contract and titled to the government, but only the portion allocated to qualifying contracts was exempt. On the taxpayer's representation that all purchases were directly identified and charged to the contract and title passed to the agency, the purchases were not subject to Florida sales tax.

What this means for you

Federal-customer status alone does not create a contractor exemption. The contract type, cost-accounting treatment, actual use, and title-passage clauses must all support it.

Common questions

Was direct payment by the government required under the special contractor rule? No. Direct payment was the ordinary governmental-unit exemption rule; the qualifying-contract exemption used different conditions.

Did the rule cover any federal contract? No. The ruling described qualifying DOD or NASA contracts and excluded real-property contracts except where purchases were otherwise exempt.

Could overhead materials qualify? Yes, to the extent allocated to qualifying contracts and titled to the government.

Citations and references

• Fla. Stat. §§ 212.02(14)(a), (20) and 212.08(6), (17), and 48 C.F.R. § 9904.418-30, as discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-034

Original ruling text

SUMMARY
QUESTION(S): Is Taxpayer’s contract with the U.S. Government a “qualifying contract”
where Taxpayer’s purchases of tangible personal property are exempt from sales tax?
ANSWER: Florida law provides that the purchase of materials or supplies by a
contractor is subject to Florida sales tax at the time of the sale, even if the purchase is
for or on behalf of a tax-exempt private or governmental entity. The exemption
available in Section 212.08(6), F.S., requires a direct payment to the vendor by the
governmental unit.
However, an exemption is available for a “qualifying contract” where title to the tangible
personal property passes to the federal government. For contracts with the United States
Department of Defense (“DOD”) or National Aeronautics and Space Administration
(“NASA”) contractors, there are two categories of tangible personal property purchases that
are not subject to tax: “qualifying property”; and, “overhead materials.”
A government contractor (both prime contractors and subcontractors) may purchase tangible
personal property, other than electricity, without paying tax if:

1. The tangible personal property is used or consumed in performing a
   contract with NASA or the DOD;
2. The cost of the property was charged as a “direct cost” to that contract; and
3. Under the terms of the contract, title to the item vests in NASA or the
   DOD.
   July 1, 2009
   XXX
   Re:

Technical Assistance Advisement 09A-034
XXX (“Taxpayer”)
FEIN: XXX
Sales and Use Tax- Qualifying Contracts
Statutes: Sections 212.02, 212.08, F.S
.
Dear XXX:
This response is in reply to your letter dated April 3, 2009, requesting the Department's
issuance of a Technical Assistance Advisement ("TAA") pursuant to § 213.22, F.S., and
Chapter 12-11, F.A.C., regarding the referenced matter and party. An examination of your
petition has established that you have complied with the statutory and regulatory

requirements for issuance of a TAA. Therefore, the Department is hereby granting your
request for issuance of a TAA.
INFORMATION SUPPLIED
Your letter states in pertinent part:
[Taxpayer] is a company that provides professional services to the federal
government. In addition to providing professional services, one of our
contracts with a XXX XXX XXX (“XXX”) agency calls for us to purchase
tangible property that will be used in Florida. Because the items being
purchased are allocated or charged as a direct item of cost to such contract
and title to the property vests in or passes to the federal government under the
terms of the contract, our customer believes the purchases should be tax
exempt, and wants us to use its government tax exemption number when we
buy the items.
Relevant facts under the Contract and Performance Work Statement with
XXX:
A.

Contract:

Under [Taxpayer’s] contract with the XXX, the government has incorporated
XXX provisions which specify that any purchases we make for the
government are owned by the government and would be a direct charge to
the XXX contract so the government retains 100% ownership. For instance,
the government incorporated XXX 52.245-1 which pertains to “government
property” and in Section (e) (3) (i) it provides that:
“(i) Title to all property purchased by the Contractor for which the
Contractor is entitled to be reimbursed as a direct item of cost under this
contract shall pass to and vest in the Government upon the vendor’s delivery
of such property. (ii) Title to all other property, the cost of which is
reimbursable to the Contractor, shall pass to and vest in the Government
upon— (A) Issuance of the property for use in contract performance; (B)
Commencement of processing of the property for use in contract
performance; or (C) Reimbursement of the cost of the property by the
Government, whichever occurs first…”.
If we make any purchases under this contract for the government this
provision would apply.
Other relevant XXX provisions incorporated into the contract by XXX which
indicate that the purchases we make for XXX are government owned and

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would be a direct charge are: 1) XXX 52.216-7 which outlines what are
allowable costs under this contract. Specifically, items purchased for the
government are allowable direct costs. 2) XXX 52.244-6, XXX 252.244-700
which states that if we purchase commercial items on XXX’s behalf the
guidelines are the same and they are to be components of times to be
supplied under the contract; 3) XXX 52.246-3 which states that under the
contract XXX has a right to inspect any supplies we buy on their behalf. We
have attached true and correct copies of pages from our contract with XXX
which show that these provisions govern our contract with XXX.
B.

Performance Work Statement

1. In Section 3.0 Scope it provides that “The contractor shall furnish all
   labor, materials, equipment, and supplies necessary…”. This means if we
   provide the foregoing on behalf of the government, this will result in a
   direct charge.
2. In Section 4.7.1 Requirements Planning and Analysis it provides: (The
   contractor shall) “Select and use appropriate Commercial Off-the-Shelf
   (COTS) or Government Off-the-Shelf (GOTS) software…” This means if
   we select and use the foregoing on behalf of the government, this will
   result in a direct charge.
3. In Section 4.7.2 IT Systems Operations and Maintenance: “With
   government approval, provide necessary equipment, supplies and
   outside services to ensure continuity of operations for mission essential
   IT systems.” This means if we are required to purchase the foregoing on
   behalf of the government, this will result in a direct charge.
4. In Section 4.10.2 Quick Reaction Development and Fielding: (The
   contractor shall) “establish and manage …other technical services
   and
   materials to provide technical collection capabilities…” This means if
   we
   purchase technical services or materials for the government, this will
   result in
   a direct charge
5. In Section 4.10.2.2 Quick Reaction Development and Fielding: (The
   contractor shall) “…secure work space and other required supplies
   and
   services.”
   This means if we purchase the foregoing for the
   government,
   this will result in a direct charge.
6. In Section 9.9 Government Ownership Rights: Even “Any new data,
   products, techniques, applications, activities, concepts, plans, programs,
   and

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publications developed under this effort shall be 100% wholly
Government
owned…”
APPLICABLE AUTHORITY
Section 212.02, F.S., provides in pertinent part:
(14)(a) "Retail sale" or a "sale at retail" means a sale to a consumer or to any
person for any purpose other than for resale in the form of tangible personal
property or services taxable under this chapter, and includes all such
transactions that may be made in lieu of retail sales or sales at retail. A sale
for resale includes a sale of qualifying property. As used in this paragraph,
the term "qualifying property" means tangible personal property, other than
electricity, which is used or consumed by a government contractor in the
performance of a qualifying contract as defined in s. 212.08(17)(c), to the
extent that the cost of the property is allocated or charged as a direct item of
cost to such contract, title to which property vests in or passes to the
government under the contract. The term "government contractor" includes
prime contractors and subcontractors. As used in this paragraph, a cost is a
"direct item of cost" if it is a "direct cost" as defined in 48 C.F.R. s.
9904.418-30(a)(2), or similar successor provisions, including costs identified
specifically with a particular contract.
Section 212.08, F.S., provides in pertinent part:
(17) EXEMPTIONS; CERTAIN GOVERNMENT CONTRACTORS.-(a) Subject to paragraph (d), the tax imposed by this chapter does not apply
to the sale to or use by a government contractor of overhead materials. The
term "government contractor" includes prime contractors and subcontractors.
(b) As used in this subsection, the term "overhead materials" means all
tangible personal property, other than qualifying property as defined in s.
212.02(14)(a) and electricity, which is used or consumed in the performance
of a qualifying contract, title to which property vests in or passes to the
government under the contract.
(c) As used in this subsection and in s. 212.02(14)(a), the term "qualifying
contract" means a contract with the United States XXX XXX XXX or the
XXX XXX XXX XXX XXX, or a subcontract thereunder, but does not
include a contract or subcontract for the repair, alteration, improvement, or
construction of real property, except to the extent that purchases under such a
contract would otherwise be exempt from the tax imposed by this chapter.

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DISCUSSION AND RESPONSE
Florida law provides that the purchase of materials or supplies by a contractor is subject to
Florida sales tax at the time of the sale, even if the purchase is for or on behalf of a taxexempt private or governmental entity.
The exemption available for exempt governmental entities in Section 212.08(6), F.S.,
requires a direct payment to the vendor by the governmental unit. However, for contracts
with the United States XXX XXX XXX (“XXX”) or XXX XXX XXX XXX XXX
(“XXX”) contractors, there are two categories of tangible personal property purchases that
are not subject to tax: “qualifying property”; and, “overhead materials.”
Qualifying Property
Section 212.02(14)(a), F.S., provides that a taxable retail sale includes “a sale to a consumer
or to any person for any purpose other than for resale in the form of tangible personal
property ….” Section 212.02(14)(a), F.S., continues by providing:
(a) . . . A sale for resale includes a sale of qualifying property. As used in this
paragraph, the term “qualifying property” means tangible personal property,
other than electricity, which is used or consumed by a government contractor
in the performance of a qualifying contract as defined in s. 212.08(17)(c), to
the extent that the cost of the property is allocated or charged as a direct item
of cost to such contract, title to which property vests in or passes to the
government under the contract. The term “government contractor” includes
prime contractors and subcontractors. As used in this paragraph, a cost is a
“direct item of cost” if it is a “direct cost” as defined in 48 C.F.R. s.
9904.418-30(a)(2), or similar successor provisions, including costs identified
specifically with a particular contract.
Section 212.02(20), F.S., correspondingly provides that “use” does not include a
contractor’s use of “qualifying property.” A “qualifying contract” is defined in Section
212.08(17)(c), F.S., as a contract or subcontract with the XXX or XXX, excluding purchases
under a contract or subcontract for the repair, alteration, improvement, or construction of
real property.
As defined in 48 C.F.R. § 9904.418-30, an item is treated as a “direct cost” of a contract if
its cost is identified specifically with that contract. Direct cost items are “not limited to
items which are incorporated in the end product as material or labor.” In other words, direct
materials, consumable materials, or capital items could all be direct cost items if their cost is
specifically identified with and charged to a particular contract.
Thus, a government contractor (both prime contractors and subcontractors) may purchase
tangible personal property, other than electricity, without paying tax if:

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1. The tangible personal property is used or consumed in performing a
contract
with XXX or the XXX;

2. The cost of the property was charged as a “direct cost” to that contract; and
3. Under the terms of the contract, title to the item vests in XXX or the XXX.
   Overhead Materials
   Section 212.08(17)(a), F.S., provides that Florida sales tax does not apply to the sale to or
   use by a government contractor of “overhead materials.” “Overhead materials” is defined as
   tangible personal property, other than qualifying property or electricity, that is used or
   consumed in performing a XXX or XXX contract “title to which property vests in or passes
   to the government under the contract.” Section 212.08(17)(b), F.S.
   Items charged as “indirect costs” under the federal cost accounting standard regulations
   would qualify as overhead materials if title vested in the government. Under the federal cost
   accounting regulations, an “indirect cost” is “any cost not directly identified with a single
   final cost objective, but identified with two or more final cost objectives or with at least one
   intermediate cost objective.” 48 C.F.R. § 9904.418-30. Examples would be the cost of
   consumable supplies or a capital item, if those supplies or that item would be used for more
   than one contract. Indirect costs of tangible personal property are allocated and
   charged to the various contracts involved as the property is used. Thus, only the portion of
   the cost of overhead items that is allocated to a qualifying contract or contracts qualifies for
   the exemption. The contractor must pay tax on the balance of the cost.
   If, as indicated by your letter, all items are directly identified and charged to the contract,
   and title to such items passes to the XXX under the contract, [Taxpayers'] purchases of
   tangible personal property under the contract are not subject to Florida sales tax.
   CLOSING STATEMENT
   This response constitutes a Technical Assistance Advisement under § 213.22, F.S., which is
   binding on the Department only under the facts and circumstances described in the request
   for this advice as specified in § 213.22, F.S. Our response is predicated on those facts and
   the specific situation summarized above. You are advised that subsequent statutory and
   administrative rule changes or those 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., which are subject to disclosure to the public under
   the conditions of § 213.22, F.S. Confidential information must be deleted before public
   disclosure. In an effort to protect confidentiality, we request that you provide the
   undersigned with an edited copy of your request for Technical Assistance Advisement,

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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,

Michael T. Cavanaugh
Tax Law Specialist
Technical Assistance and Dispute Resolution
850-922-9411
Control # 62681

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