Did a federal contract amendment calling a contractor the United States' agent make otherwise taxable purchases exempt?

Plain-English summary

An earlier analysis considered a contractor's claim that it acted as agent for a United States instrumentality. This follow-up asked the threshold question: could the contractor actually qualify as a federal agent for tax-immunity purposes?

Federal law controlled that status. United States v. New Mexico upheld tax on contractors even after federal contracts were amended to call them government agents for purposes including spending government funds to acquire property. The critical question was whether the contractors remained realistically independent from the United States.

Contract wording and government funding therefore did not by themselves convert otherwise taxable purchases into exempt federal purchases. The memorandum expressed doubt that a person which was not itself a federal instrumentality could act as the United States' tax-immune agent, while stopping short of declaring that impossible in every case.

What this means for you

Federal contractors, vendors, procurement teams, and tax advisers

Do not rely solely on an agency clause or federal funding source. Determine whether federal law treats the purchaser as genuinely inseparable from the United States for the taxed activity.

Common questions

Q: Did calling the contractor an agent create exemption?

A: No, not by itself.

Q: Did spending government funds settle the issue?

A: No. The Supreme Court still treated the contractors as independent entities.

Q: What was the controlling question?

A: Whether the contractor could realistically be considered independent from the United States.

Citations and references

• United States v. New Mexico, 455 U.S. 720 (1982)
• The memorandum cited no numbered California statute or regulation.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0608
• Original supporting opinion: 505.0608 PDF

Original ruling text

State of California

Board of Equalization

505.0608
Memorandum
To:

From:

Subject:

Mr. Dario J. Romano
Business Taxed Representative
Return Review Section
David H. Levine
Supervising Staff Counsel

Date:

April 1, 1994

Telephone:

(916) 445-5550

REDACTED TEXT
This is a follow up to the memorandum to you dated December 7, 1993 from Staff Counsel Gerald Morrow. Prior to getting to the main reason for this follow up, I wish to confirm your memorandum dated January 28, 1994. In Mr. Morrow's memorandum, he referred to the belief of REDACTED TEXT that it need not collect sales tax reimbursement from REDACTED TEXT. You correctly point out that this was reversed and should have referred to REDACTED TEXT’s belief that it need not pay sales tax reimbursement to REDACTED TEXT. Thank you for calling this to our attention. The primary reason for this memorandum relates to whether a person can, in fact, act as the agent of the United States or its instrumentalities. Mr. Morrow considered the claim that REDACTED TEXT acted as the agent of a United States instrumentality. He discussed the tax ramifications of REDACTED TEXT acting, or not acting, as the agent of the instrumentality. Mr. Morrow did not discuss whether REDACTED TEXT could, in fact, act as an agent of a United States instrumentality. For us to accept that a person acts as an agent of the United States or its instrumentalities, that person must be regarded as an agent of the United States or its instrumentalities under federal law. In United States v. New Mexico (1982) 455 U.S. 720, 71 L.Ed.2d 580, the United States Supreme Court considered whether sales tax could be properly imposed on sales to contractors whose contracts with the United States had been amended to provide that the contractors acted as agents of the United States for certain purposes, including the disbursement of government funds for the acquisition of property. The Court identified the critical question as "whether the contractors can realistically be considered entities independent of the United States. If so, a tax on them cannot be viewed as a tax on the United States itself.” (71 L.Ed~2d at 594.) The Court upheld the tax. Thus, although Mr. Morrow discussed the implications of REDACTED TEXT acting as the agent of the United States instrumentality, there is some doubt as to whether a person such as REDACTED TEXT who is not itself an instrumentality of the United States can act as the agent of the United States or its instrumentalities. DHL:cl cc:

San Francisco District Administrator