Did a federal contractor owe South Carolina sales or use tax on supplies bought for Army watercraft kits when title vested in the government upon vendor delivery?

Plain-English summary

South Carolina Private Letter Ruling 90-12 concluded that a contractor did not owe sales or use tax when it bought specified supplies for U.S. Army watercraft kits under a contract that transferred title to the federal government upon vendor delivery.

The contractor bought “end-item hardware,” such as flares, fire extinguishers, life jackets, oars, rations, and first-aid supplies, and assembled the items into kits for small Army watercraft. Because the federal contract made title vest in the government as soon as a vendor delivered reimbursable property, the contractor bought the items for resale rather than for its own consumption.

The contractor's transfer of the hardware to the Army was then an exempt retail sale to the federal government. The ruling reached similar no-tax results for hardware sold onward to other retailers for resale or used by other federal contractors under qualifying arrangements.

The contract clause drove the result

XYZ Associates operated, maintained, and supported an Army facility under a cost-plus-fixed-fee contract. The facility repaired Army amphibians, watercraft, causeway systems, parts, and components.

The contract incorporated Federal Acquisition Regulation 52.245-5. For property that XYZ bought and could charge to the government as a direct contract cost, title passed to and vested in the government upon vendor delivery.

That immediate passage of title was central. Under the ruling's statutory analysis, a sale included a transfer of title or possession for consideration, and a wholesale sale included tangible personal property sold to a retailer or wholesaler for resale.

How the three transaction paths were treated

Hardware assembled or installed for the Army

XYZ's purchases were wholesale sales for resale to the Army and were not subject to sales or use tax. Its later transfers to the federal government were exempt retail sales, or exempt retail sales with installation, under section 12-36-2120(2).

Hardware sold to other retailers

Purchases by XYZ of hardware that it then sold to other retailers for resale were wholesale sales and were not subject to sales tax.

Hardware sold to other federal contractors

The ruling also treated XYZ's sales to retailers working under federal contracts as nontaxable when those retailers used the hardware to repair Army watercraft or sold it to the federal government under contracts similar to XYZ's. Depending on the transaction, the sale qualified as a wholesale sale or an exempt retail sale.

What this means for you

Federal contractors

The ruling did not create a general exemption for every contractor purchase. It depended on the contract's title-passage language and applied only to end-item hardware covered by FAR 52.245-5.

Vendors to government contractors

A contractor's resale documentation and federal contract terms can determine whether a vendor's sale is a wholesale sale. The government customer alone did not replace the need to analyze when title passed and what the contractor did with the property.

Accountants and tax professionals

The ruling separated the contractor's acquisition from its transfer to the government: the first was a wholesale purchase for resale, and the second was an exempt retail sale to the federal government.

Common questions

Q: Did XYZ owe tax when it bought end-item hardware?

A: No under the described contract. The ruling treated the purchases as wholesale sales for resale to the Army.

Q: Why was XYZ considered a reseller if it assembled or installed the kits?

A: The incorporated FAR clause passed title to reimbursable property to the government upon vendor delivery. The ruling therefore treated the property as being resold to the Army.

Q: Was the transfer to the Army taxable?

A: No. It was an exempt retail sale, or retail sale with installation, to the federal government.

Q: Did the ruling cover all property used under the Army contract?

A: No. Its note limited the result to end-item hardware subject to FAR 52.245-5.

Q: Can another federal contractor rely on PLR 90-12?

A: No. The document says it applied only to the requesting taxpayer's specific facts and had no precedential value.

Citations and references

• S.C. Code sections 12-36-910(A), 12-36-1310(A), and 12-36-1330(A) — 1990 sales and use tax imposition and liability
• S.C. Code sections 12-36-110 and 12-36-120(1) — retail and wholesale sale definitions
• S.C. Code section 12-36-100 — sale and purchase definition
• S.C. Code section 12-36-2120(2) — federal-government exemption
• S.C. Code section 12-36-2130(1) — use-tax exemption for property already subject to paid sales tax
• Federal Acquisition Regulation 52.245-5 — government-property title clause incorporated into the contract
• Lockheed Aircraft Corp. v. State Board of Equalization, 146 Cal. Rptr. 283 (Cal. Ct. App. 1987) — analogous title-passage and resale analysis cited by the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR90-12.pdf

Original ruling text

SC PRIVATE LETTER RULING #90-12

TO:

XYZ Associates

TAX MANAGER:

John P. McCormack

SUBJECT:

U.S. Army Watercraft Program
(Sales and Use)

REFERENCE:

S.C. Code Ann. Section 12-36-910(A) (As Amended June, 1990)
S.C. Code Ann. Section 12-36-1310(A) (As Amended June, 1990)
S.C. Code Ann. Section 12-36-1330(A) (As Amended June, 1990)
S.C. Code Ann. Section 12-36-2130(1) (As Amended June, 1990)
S.C. Code Ann. Section 12-36-110 (As Amended June, 1990)
S.C. Code Ann. Section 12-36-120(1) (As Amended June, 1990)
S.C. Code Ann. Section 12-36-100 (As Amended June, 1990)
S.C. Code Ann. Section 12-36-2120(2) (As Amended June, 1990)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Questions:
1.

Are sales to, or purchases by, XYZ Associates of "end-item hardware" subject to the
sales and use tax?

2.

Are transfers by XYZ Associates to the federal government of "end-item hardware"
exempt from the tax pursuant to Code Section 12-36-2120(2)?

3.

Are sales to XYZ Associates of "end-item hardware", which they then sell to other
retailers, subject to the sales tax?

Facts:
XYZ Associates ("XYZ") has a "cost-plus-fixed-fee" contract with the U.S. Army to operate,
maintain and support a facility known as the ABC Storage Activity ("Activity"). The purpose of

1

the Activity is to repair U.S. Army amphibians, watercraft, causeway systems and parts and
components thereof. The program is known as the U.S. Army Watercraft Program.
The question at hand concerns one aspect of XYZ's contract with the Army. Specifically, we
have been asked to address the taxing of trans- actions concerning "end-item hardware". "Enditem hardware" are the supplies necessary to maintain small Army watercraft such as rafts or
landing crafts, and may include such items as flares, fire extinguishers, life jackets, and various
other supplies. These items are purchased by XYZ and assembled into kits. An example of a kit
may be all the supplies of a raft (i.e.: oars, rations, first aid supplies, and life jackets).
XYZ submits that some "kits" are installed by them; some are shipped to other retailers under
contract with the federal government, for subsequent installation; and, others are installed by the
Army. XYZ is presently paying the sales or use tax on purchases of all items in question.
In addition, an examination of XYZ's contract with the federal government reveals the following
pertinent information:
c. Section I, page 16, incorporates, by reference, Federal Acquisition Regulation
("FAR") 52.245-5, "Government Property (Cost-reimbursement, Time-and-Material, or
Labor-Hour Contracts)". Section (c)(3) of the FAR reads, in part, "[t]itle 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 and...is to vest in the Government, shall pass to and
vest in the Government upon the vendor's delivery of such property".
Discussion:
Code Section 12-36-910(A) imposes the sales tax, and reads:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible personal
property at retail.
Code Section 12-36-1310(A) imposes the use tax, and reads:
An use tax is imposed on the storage, use or other consumption in this State of tangible
personal property purchased at retail for storage, use or consumption in this State, at the
rate of five percent of the sales price of the property, ....
Further, Code Section 12-36-1330(A) reads, in part:
Every person storing, using or otherwise consuming in this State tangible personal
property purchased at retail is liable for the use tax....
Code Section 12-36-2130(1) exempts from the use tax:
property the gross proceeds of sales of which are required to be included in the measure
of the tax imposed by the provisions of Article 9 of this chapter [sales tax] and on which
the [sales] tax has been paid by its seller or retailer.
2

In summary, the sales tax is imposed upon retail sales made in the State and the use tax is
imposed on property used, stored, or consumed upon which the sales tax has not been paid.
Furthermore, the term "sale at retail" is defined at Code Section 12-36-110, in part, as, "...all
sales of tangible personal property except those defined in this article as wholesale sales". A
wholesale sale is defined in Code Section 12-36-120(1) as a sale of "tangible personal property
to licensed retail merchants, jobbers, dealers or other wholesalers for resale, and do not include
sales to users or consumers;..."
Code Section 12-36-100 defines the terms "sale" and "purchase", and reads:
'Sale' and 'purchase' mean any transfer, exchange, or barter, conditional or otherwise, of
tangible personal property for a consideration including:
(1) a transaction in which possession of tangible personal property is transferred
but the seller retains title as security for payment, including installment and credit
sales;
(2) a rental, lease or other form of agreement;
(3) a license to use or consume; and
(4) a transfer of title or possession, or both.
In summary a sale occurs with the transfer of 1) title, 2) possession, or 3) title and possession of
tangible personal property for a consideration.
A California Second District Court of Appeals case, Lockheed Aircraft v. State Board of
Equalization, 146 Cal. Rptr. 283 (1987), dealt with an analogous situation to the facts in question
in determining when a sale occurs.
In Lockheed, Lockheed Aircraft Corporation and Aerojet-General Corporation acquired or
manufactured special test equipment used for conducting functional tests of certain aircraft,
torpedoes, related components and subsystems. The items being tested were manufactured by
Lockheed and Aerojet for the federal government; and, the State of California sought to impose
the sales or use tax on the purchase/use of the test equipment.
As with the contract between XYZ and the U.S. Army, the contracts in Lockheed provided title
to the test equipment vested with the federal government upon being acquired or produced by
Lockheed and Aerojet.
The California sales tax statutes are very similar to South Carolina's. More specifically, the sales
tax is imposed upon retailers selling tangible personal property at retail; "sale" is defined as
"[a]ny transfer of title or possession...for a consideration"; "retail sale" does not include sales for
resale (wholesale); and, sales to the federal government are exempt.

3

The Court, in Lockheed, concluded that the transactions between Lockheed and Aerojet and their
suppliers were sales for resale, thereby excluded from being taxed. Furthermore, subsequent
transfers of the test equipment to the federal government constituted exempt retail sales.
Furthermore, Code Section 12-36-2120(2) exempts from the sales and use tax the gross proceeds
of the sales, or sales price of :tangible personal property sold to the federal government; ...
As stated in the "Facts", XYZ's contract with the federal government reveals that "[t]itle to all
property purchased by [XYZ] for which [XYZ] is entitled to be reimbursed as a direct item of
cost under this contract and...is to vest in the Government, shall pass to and vest in the
Government upon the vendor's delivery of such property".
Conclusions:
1.

Sales to, or purchases by, XYZ Associates of "end-item hardware" are not subject to the
sales and use tax, as such constitute wholesale sales of tangible personal property
pursuant to Code Section 12-36-120. Such "end-item hardware" are being resold to the
U.S. Army.

2.

Transfers by XYZ Associates to the federal government of "end-item hardware" qualify
as retail sales or retail sales and installation, and are exempt from the tax pursuant to
Code Section 12-36-2120(2).

3.

Sales to XYZ Associates of "end-item" hardware, which they then sell to other retailers
for resale, qualify as wholesale sales and are not subject to the sales tax. Sales by XYZ
Associates of "end-item" hardware to other retailers under contract with the federal
government, which they use to repair U.S. Army watercraft or sell to the federal
government under contracts similar to XYZ's, are also not subject to sales and use tax, as
such sales qualify as wholesale sales or exempt retail sales.
Note: This ruling applies only to the sale or purchase of "end-item hardware" subject to
the provisions of Federal Acquisition Regulation ("FAR") 52.245-5.
SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner
s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
, 1990
August 14

4