Can a subcontractor use a Form 149 exemption certificate to buy materials tax-free because the work is ultimately for the U.S. Government?

Subject

Taxability of Purchases by Government Contractors

Plain-English summary

The Missouri Department of Revenue ruled that a subcontractor's purchases of materials used to do work for a Government Contractor are not exempt from Missouri sales tax -- even though the work ultimately supported a U.S. government contract, and even though Applicant had a Form 149 exemption certificate listing "Other: purchases on behalf of the U.S. Government" as the reason for exemption.

Applicant obtained that Form 149 from a Government Contractor (the entity holding the actual government contract) and tried to present it to its own vendors when buying materials used in its work for that contractor. Some vendors refused to accept the form and suggested alternative ways to complete it -- prompting Applicant to ask the Department for clarity.

The Department explained that Missouri only exempts sales the state is constitutionally or legally barred from taxing, which includes sales made directly to the U.S. Government under Section 144.030.1, RSMo. Applicant, however, was a subcontractor -- it was not selling directly to the federal government, and it was not buying the materials for resale. Because Applicant was simply buying materials to use in its own work for the Government Contractor, no exemption applied, and the purchases were fully taxable.

What this means for you

Subcontractors and vendors working on government contracts

If you are a subcontractor supplying labor or materials to a company that holds a direct contract with the U.S. Government, you generally cannot claim the government's own sales tax exemption on your own purchases -- even if a prime or general contractor gives you a Form 149 that says "purchases on behalf of the U.S. Government." That exemption under Section 144.030.1, RSMo, is reserved for sales made directly to the government itself. Buying materials to use in your own work (rather than to resell) does not qualify, no matter how the paperwork is labeled. If a vendor pushes back on accepting that kind of Form 149, this ruling explains why -- the vendor may be right to be cautious.

Government contractors issuing exemption certificates to subcontractors

If your business holds a government contract and subcontracts out portions of the work, be careful about handing subcontractors a Form 149 based on your own tax-exempt status. This ruling confirms Missouri's general rule that a contractor's (or subcontractor's) purchases don't inherit the government's exemption just because the end product or service flows to a government customer. Passing along that exemption certificate to a subcontractor who is not itself selling directly to the government, and not buying for resale, does not make the subcontractor's purchases exempt.

Accountants and tax professionals

When evaluating whether a client's purchases qualify for the government-sale exemption under Section 144.030.1, RSMo, confirm whether the client is making a sale directly to the U.S. Government or a state/local government entity, or whether the client is a subcontractor one or more steps removed from that direct relationship. Also check whether the purchase is for resale -- a distinct basis for exemption that did not apply here either. Absent one of those two things, materials purchased for use in performing a government contract remain taxable, regardless of any exemption certificate language referencing the government.

Common questions

Q: Does buying materials for a project that ultimately serves the U.S. Government make those purchases tax-exempt?
A: No. The exemption in Section 144.030.1, RSMo, applies to retail sales the state is prohibited from taxing under the U.S. Constitution or federal law -- in practice, sales made directly to the U.S. Government. A subcontractor buying materials to use in its own work for a government contractor is not making a sale to the government at all, so the exemption does not apply.

Q: Applicant had a Form 149 saying "purchases on behalf of the U.S. Government." Why wasn't that enough?
A: The form's stated reason didn't match the legal requirement for the exemption. Applicant was a subcontractor, not a direct seller to the U.S. Government, and it was not purchasing the materials for resale. Simply labeling a purchase as being "on behalf of" the government does not create an exemption where none exists under Section 144.030.1, RSMo.

Q: Why did some vendors refuse to accept the Form 149?
A: The ruling doesn't say exactly what the vendors told Applicant, but it confirms the vendors' skepticism was well-founded: the purchases described were not actually exempt, so a vendor accepting that certificate could be exposed to tax liability for not collecting sales tax that was actually due.

Q: Would the answer be different if Applicant were selling directly to the U.S. Government, or buying the materials for resale?
A: Potentially, yes. The ruling notes the exemption applies to sales the state cannot tax under federal law (direct government sales) and separately recognizes resale as a distinct basis for not owing tax on a purchase. Applicant's facts fit neither: it was a subcontractor buying materials to consume in its own work, not to resell and not as a direct seller to the government.

Q: Can other Missouri government subcontractors rely on this ruling for their own purchases?
A: Not directly. This letter ruling binds the Department only with respect to the Applicant who requested it, only for three years from its date, and only so long as the facts described don't change and the underlying law isn't changed by the legislature or courts. Other subcontractors facing similar facts should expect the same reasoning to apply, but should confirm their own situation with a licensed Missouri tax professional rather than relying on this ruling directly.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8225

Original ruling text

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated November 7, 2022.

The facts as presented in your letter ruling request and subsequent phone call are summarized as follows:

Applicant has a Form 149, Sales and Use Tax Exemption Certificate, completed by a Government Contractor for work done under a government contract, listing the reason for exemption as "Other: purchases on behalf of the U.S. Government." Applicant then presents this exemption form to vendors for purchases of materials that are then used in their work for the Government Contractor. Some of Applicant's vendors have refused to accept this form, and have suggested alternative ways to complete the form.

ISSUE :

Are Applicant's purchases of materials that are used in their work with the Government Contractor exempt from taxation?

RESPONSE :

No. Applicant's purchases of materials that are used in their work with the Government Contractor are not exempt from taxation.

Section 144.020, RSMo, imposes a sales tax on the privilege of making retail sales of tangible personal property or providing certain taxable services in this state.

Sales to the U.S. Government are exempt from sales tax under section 144.030.1, RSMo, because they are "retail sale[s] which the State of Missouri is prohibited from taxing pursuant to the Constitution or laws of the United States of America."

Here, Applicant is a subcontractor and is not making sales directly to the United States government, and Applicant does not purchase their items from vendors for the purpose of resale. Therefore, there is no provision of law that exempts Applicant's purchases of materials that are used to provide a service for a government contractor.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford

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