Were equipment sales, rentals, and leases to federal service contractors exempt when title passed immediately to the government?

Plain-English summary

A business performing services for the federal government had to pay sales tax on equipment and supplies it bought and used to fulfill its own contract obligations. Immediate passage of title to the government did not by itself turn the purchase into an exempt federal purchase when the contractor ordered in its own name and was the buyer.

Items actually sold and transferred to the federal government could be purchased tax-free with a resale certificate. But if the contractor used the goods on the government's behalf, the goods were taxable. The seller was told to treat sales as taxable until it received a resale certificate that it could accept in good faith.

The same distinction applied to rentals and leases. They were taxable unless the items were transferred to the federal government, rather than merely used for it.

Common questions

Did immediate passage of title to the government automatically create an exempt sale? No.

When could the seller accept a resale certificate? For items actually sold and transferred to the federal government, if the certificate could be accepted in good faith.

Were rentals or leases exempt because the contractor served the government? No. The items had to be transferred to the government, not merely used on its behalf.

Citations and references

• United States v. New Mexico, 455 U.S. 720, 102 S. Ct. 1373 (1982) — cited for the principle that title passage alone does not make an independent contractor's purchase a purchase by the United States.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8601L0693G03

Original ruling text

January 16, 1986

Dear ***:

Thank you for your recent letter which is restated with response below.

Over the past few years, we have requested and received from your sales
tax division rulings on the taxability of federal contractors. Many of
these rulings related to contractors who improving realty belonging to the
government.

However, most of the contractors that we do business with are not improving
realty, but are under contract with the government to perform other types
of work for them. These contractors purchase our equipment on behalf of
the government agency involved, and title to the equipment purchased vests
immediately with that agency. The contractor in these cases has supplied us
with a copy of the letter of authorization from the agency involved and the
contract itself clearly indicates that the title to what the contractor is
purchasing is to vest immediately with the government agency.

I would appreciate your advice as to whether or not we could consider these
transactions exempt from Texas Sales/Use taxes. If the answer is yes, is
the above referenced documentation sufficient to produce at the time of audit?
In addition, is there any exemption for this type of contractor on the rental
or lease of equipment used in the performance of a non-realty government
contract?

Response: I apologize for any confusion brought about by the Term Contractor.
We have traditionally limited that term to a person improving real property.

When a person is performing services for the Federal Government and purchases
equipment and supplies to use in fulfilling his obligation, he must pay sales
tax on those items.

Any items which are actually sold and transferred to the Federal Government
may be purchased tax free on a resale certificate. However, if the goods are
used by the contractor, on behalf of the government, they are taxable.

Support for this position is found in United States v. New Mexico et al,
455 U.S. 720, 102 S. Ct. 1373 (1982). In this case contractors managed an
atomic facility for the U.S. Government, and the contract provided that title
to all tangible personal property purchased by the contractors passed directly
from the vendor to the government. On the other hand, the contractors placed
orders in their own names and were identified as the buyers. New Mexico
imposes a gross receipt tax and a compensating use tax on business in the
State. The government argued that taxing the contractors for the receipts used
to pay for tangible personal property purchased pursuant to the management
contract was constitutionally immune from state taxation. The court held that
"tax immunity is appropriate in only one circumstance: when the levy 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, at least in so far as the activity being taxed is
concerned." The contractors were found to be independent entities, and the
court stated, "It is true that title passes directly from the vendor to the
Federal Government, but that factor alone cannot make the transaction a
purchase by the United States..."

You should consider your sales to these individuals as taxable until they
provide you with a resale certificate and you are able to take it in good
faith. The same would apply to rentals or leases of equipment. They would be
taxable unless the items were transferred to the Federal Government, not just
used on their behalf.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Administration Division