Can a federal cost-plus-fixed-fee contractor buy materials tax-free by invoking the government's immunity, when title passes to the U.S.?

Plain-English summary

Hydroacoustics, Inc. performs work for the U.S. Government under cost-plus-fixed-fee (CPFF) contracts. Under the Armed Services Procurement Regulations, title to reimbursed property passes to the Government on delivery by the vendor. But the contractor buys in its own name (noting the contract number and ASPR), vendors bill it in its own name, it pays with its own funds and is later reimbursed, and it needs no advance approval for specific purchases. It asked whether these purchases are exempt under § 1116(a)(2) because the buyer is effectively the United States.

The Department held the purchases are taxable — the contractor isn't cloaked in federal immunity.

• The exemption tracks federal immunity. Section § 1116(a)(2) exempts the United States "insofar as it is immune from taxation where it is the purchaser," so the exemption is co-extensive with the Supremacy Clause immunity.
• U.S. v. New Mexico sets the test. Immunity applies only when the tax "falls on the United States itself, or on [an] agency or instrumentality so closely connected to the government that the two cannot realistically be viewed as separate entities." Traditional agency notions aren't enough.
• The four significant factors all point to taxability. The Court flagged: (1) purchases made in the contractor's own name; (2) vendors not told the government was the only interested party; (3) the contractor presumably liable on the sales; and (4) no advance approval required. All four are present here — and the contractor is even less identified with the government than in New Mexico, because it pays from its own funds and is only later reimbursed.
• Result: not immune, so taxable. The contractor's purchases are not exempt under § 1116(a)(2). The cases the petitioner cited (du Pont; Bethlehem Steel) turned on different facts or on resale.
• Resale exception preserved. Property to which title passes to the government and which is delivered to the government before any use by the contractor may be bought for resale with a completed Form ST-120.

What this means for you

A "title passes to the government" clause doesn't buy you the government's tax immunity. Federal contractors routinely have title vest in the U.S., yet that alone doesn't make the contractor's purchases exempt. New York applies the Supreme Court's closely-connected test, not simple agency labels.

The four New Mexico factors are the checklist. Buying in your own name, not disclosing the government's sole interest to vendors, being liable on the sales, and not needing advance approval each push you toward "independent buyer," and therefore taxable. To be treated as the government, the transaction has to look like the government's own purchase.

Resale is the realistic path to no tax. Where property's title passes to and is delivered to the government before you use it, treat it as a purchase for resale and give the vendor an ST-120. That's a different theory from immunity — and it depends on the property really going to the government untouched.

Common questions

Q: We're a federal cost-plus contractor and title passes to the U.S. Are our purchases exempt?
A: Generally no. Under § 1116(a)(2) and U.S. v. New Mexico, immunity requires that you be so closely connected to the government that you can't be seen as separate. Buying in your own name, being liable, and needing no approval make you an independent buyer — so your purchases are taxable.

Q: What are the key factors that make a contractor taxable?
A: Purchases in the contractor's own name; vendors not told the government is the only interested party; the contractor presumably liable on the sales; and no required advance government approval.

Q: Is there any way to avoid tax on these purchases?
A: Yes, via resale: property whose title passes to and is delivered to the government before you use it can be bought for resale using Form ST-120.

Citations and references

Statutes:

• Tax Law § 1116(a)(2) — exemption for the United States as purchaser, co-extensive with federal constitutional immunity

Authorities cited:

• U.S. v. New Mexico, 50 L.W. 4326 (1982) — closely-connected test; four significant factors
• U.S. and du Pont v. Livingston; Bethlehem Steel Co. v. Joseph — distinguished (different facts; resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(15)S
Sales Tax
March 24, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820209B

On February 9, 1982 a Petition for Advisory Opinion was received from Hydroacoustics, Inc.,
P.O. Box 23447, Rochester, New York 14692.
The issue raised herein is whether purchases made by Petitioner pursuant to contracts with
the United States Government or its agencies under a cost plus fixed fee arrangement are subject to
sales tax.
Petitioner enters into contracts with the United States Government to supply products and/or
to perform research. Some of the work is performed by the Petitioner pursuant to contracts known
as "cost plus fixed fee" contracts. These contracts are subject to the Armed Services Procurement
Regulations (ASPR) section 7-203.21(c) of which states that "title to all property purchased by the
Contractor, for the cost of 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 delivery of such property by the
vendor."
Purchase orders prepared by Petitioner in connection with purchases made pursuant to these
contracts are made out in Petitioner's own name. The purchase orders indicate, however, the
particular Government contract number involved, and state that the purchases are being made in
accordance with the ASPR. Vendors bill Petitioner in its own name. Petitioner pays the bills with
its own funds and is entitled to reimbursement from the Government for all payments made to
vendors. Petitioner is not required to obtain advance approval from the Government for specific
purchases made in connection with the contracts.
Section 1116(a)(2) of the Tax Law exempts from sales and compensating use taxes:
"The United States of America, and any of its agencies and
instrumentalities, insofar as it is immune from taxation where it is the
purchaser, user or consumer .... " (Emphasis added).
As indicated by the language emphasized in the above-quoted statute, the exemption
applicable to sales purportedly made to the United State and its agencies or instrumentalities is co­
extensive with the Federal government's immunity deriving from the Supremacy Clause of the
United States Constitution (U.S. Const., Art VI, cl.2). Such provision has been recently and
authoritatively construed, insofar as it bears on the issue presented herein, in United States v. New
Mexico, _ U.S. _ ,50 LW 4326(1982).

ROBERT W. BOUCHARD, ACTING COMMISSIONER
GABRIEL B. DiCERBO , DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

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Sales Tax
March 24, 1983

United States v. New Mexico involved federal contractors operating under cost plus fixed
fee contracts with the Department of Energy. The Court there stated that the applicability of
"constitutional tax immunity" to federal contractors "requires something more than the invocation
of traditional agency notions." Rather, the test was stated as follows: ". . . tax immunity is
appropriate in only one circumstance: when the levy falls on the United States itself, or on the agency
or instrumentality so closely connected to the government that the two cannot realistically be viewed
as separate entities, at least insofar as the activity being taxed is concerned." Id at 4330. The Court
found the following characteristics of the transactions there under scrutiny to be of significance:
1.

The contractors made the purchases in their own names.

2.
The vendors were not informed that the government was the only party with an
independent interest in the purchases.
3.

The contractors were presumably liable on the sales.

4.
The contractors were not required to obtain advance governmental approval of its
purchases.
As the Court put it, "these factors demonstrate that the contractors have a substantial independent
role in making purchases, and that the identity of interests between the government and the
contractors is far from complete. "Id at 4332. The Court concluded, accordingly, that the test
enunciated supra had not been satisfied, and that the purchases by the contractors were subject to tax.
It is significant not only that the circumstances in the present matter wholly accord with the
four factors cited as significant by the Supreme Court, but that the present case bears other
similarities to the particulars laid out in United States v. New Mexico. Thus, in both instances title
to the purchased property passed directly from the vendor to the government, and the risk of loss
with respect to the property being borne (with certain exceptions, in the present matter) by the
government. It is to be noted, in addition, that the contractors in United States v. New Mexico had
an even closer identification with the government than that presented by Petitioner herein, in that
Petitioner pays for its purchases from its own funds and is only subsequently reimbursed by the
Department of Energy, whereas the payments in the New Mexico case were made with Federal
funds.
It is concluded, accordingly, that Petitioner's purchases under its described contracts with the
United States government are not exempt from sales and use taxes under section 1116(a)(2) of the
Tax Law. It is to be noted that the judicial decisions cited by Petitioner do not compel a contrary
conclusion. U.S. and E.I. du Pont de Nemours & Co. v. Livingston, 179 F. Supp. 9, aff'd _ U.S.,
_ involved a different set of facts than that presented by Petitioner herein. In du Pont, thus, the
bulk (75%) of the purchases by the contractor required prior approval by the government; Du Pont
entered into the contract "without hope of gain, except the nominal one dollar, payable upon final

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March 24, 1983

completion of the contract, but upon whom was imposed no risk of loss; "and, in addition, the fact
that DuPont was required to include in its subcontracts certain provisions typical of public contracts
was held by the Court to suggest that "the parties regarded the subcontracts as ones entered into by
or on behalf of the United States." Id. at 18. The other case cited by Petitioner, Bethelehem Steel Co.
v. Joseph, 284 AD 5, dealt not with the extension of Federal constitutional immunity to contractors,
but with the question of resale. Naturally, property to which title passes to the government and which
is delivered to the government (prior to any use by Petitioner) in performance of the contract with
Petitioner may be purchased by Petitioner without the payment of tax. In such cases, Petitioner
should furnish its vendor with a properly completed resale certificate (Form ST-120). Letter of
Counsel, June 9, 1966.

DATED: March 8, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau