Did a federal service contractor owe Texas tax on equipment and supplies charged to a contract or titled to the U.S. government?

Plain-English summary

A private contractor asked about equipment and consumable supplies acquired for federal government contracts. The Comptroller assumed the contracts were for services and were not contracts to improve real property.

The contractor owed tax on all tangible personal property it bought, rented, or leased to perform those services. That result did not change when an item was required by the contract, charged directly to the government, or titled to the U.S. government immediately upon acquisition.

The same rule applied to equipment the government did not own and to consumable materials used up during the contract, whether or not the government took title and even when the consumed property had no salvage value at completion.

What this means for you

Federal contractors

Government ownership and cost reimbursement did not make the contractor's service inputs tax free. Under this letter, the contractor was the taxable user of equipment and supplies acquired to perform its services.

Accountants and tax professionals

Confirm the contract classification first. The letter expressly assumed that the work was a service and not an improvement-to-realty contract; it did not decide how a real-property construction contract would be treated.

Common questions

Did immediate federal title make equipment tax free? No. The letter called federal title irrelevant when the contractor used the equipment to provide services.

Did direct charging to the federal contract change the answer? No. The contractor still owed tax on acquisition.

Were consumable supplies taxable even if they had no salvage value? Yes.

Did the ruling cover real-property improvement contracts? No. Its answers were expressly based on the assumption that the contracts were not improvements to realty.

Citations and references

The letter cited no specific statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1174E10

Original ruling text

February 28, 1992

Dear **:

Thank you for your recent letter asking about Texas sales and use tax on
purchases for governmental contracts. The four situations you presented are
restated below with our responses.

SITUATION l: ** purchases a piece of equipment for use on a
government contract. This item is required in the performance of the contract,
is directly charged to the government, but is not a deliverable under the terms
and conditions set forth. The U. S. Government takes title to the property upon
acquisition, and upon contract completion, decides ultimate disposition.

All responses are based on the assumption that the governmental contracts of
which you inquire are not improvements to realty contracts.

Response: When ** provides a service to the government, all tangible
personal property purchased, rented, or leased to provide the service is
taxable to **** at the time the property is acquired. The fact that the
item is required in the performance of the contract, is directly charged to the
government and that the government takes title to the property upon acquisition
is irrelevant.

SITUATION 2: ** purchases a piece of equipment for use on a
government contract. This item is required in the performance of the contract,
is directly charged to the government, but is not a deliverable under the terms
and conditions set forth. The U. S. Government does not take title to the
property.

Response: ** owes tax on the purchase price of the equipment. See the
response to Situation 1.

SITUATION 3: ** purchases an item which is used up in the performance
of a government contract. This piece of material is required in the performance
of the contract and is directly charged to the government. The U. S. Government
takes title to the property upon acquisition, and upon contract completion, the
property has no salvage value.

Response: ** owes tax on the purchase price of the consumable
supplies. See the response to Situation 1.

SITUATION 4: ** purchases an item which is used up in the performance
of a government contract. This piece of material is required in the performance
of the contract and is directly charged to the government. The U. S. Government
does not take title to the property.

Response: ** owes tax on the purchase price of the item.

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

If you have any additional questions or need more information, you may call me
toll free at 1-800-252-5555, extension 3-4633. The regular number is
512/463-4633. You may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division