Did U.S. Department of Agriculture funding make a contractor's materials for lump-sum real-property improvements exempt federal purchases?

Plain-English summary

A contractor performed real-property improvements for a fixed amount per installed foot. California treated those arrangements as lump-sum construction contracts and measured the tax by the contractor's cost of the materials.

The contractor's estimate separately showed an amount labeled sales tax, but the memorandum viewed that amount as one cost element in the lump-sum price. It warned that the contractor should not describe more as tax than the actual tax due on its material purchase.

Some contract costs were paid with funds furnished by the U.S. Department of Agriculture. That did not change the tax analysis because the federal agency merely supplied money for part of the contractor's expenses and did not purchase the tangible personal property.

What this means for you

Construction contractors, federal grant programs, customers, and tax advisers

Separate funding from purchasing. In a lump-sum real-property contract, federal cost support did not turn the contractor's material acquisition into an exempt federal purchase.

Common questions

Q: Were these lump-sum contracts?

A: Yes.

Q: What was the tax measure?

A: The contractor's cost of materials.

Q: Did federal payment of some expenses create exemption?

A: No, because the United States did not buy the property.

Citations and references

• The memorandum cited no numbered statute, regulation, or case.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0640
• Original supporting opinion: 505.0640 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. L. H. Wilson

From:

E. H. Stetson

Subject:

[I]
P. O. Box XXX

505.0640

Date:

Sacramento
March 18, 1952

Account No. X-XXXXX

This is with reference to your memo of January 18 concerning the application of sales tax with respect to materials used by [I] in the performance of contracts for the improvement of real property on a “fixed per foot installed basis”. We agree with your understanding that these lump-sum contracts and the measure of the tax is, therefore, the cost of the materials to the vendor. You state, “The amount shown on the estimate as ‘Sales Tax’ is the amount of tax computed on the marked up price of the pipe alone. Other materials include provision for sales tax.” It appears, however, that the items of sales tax is merely one of the elements of cost considered in computing the lump-sum price. If we understand your memo, the contractor is actually showing a greater amount as tax than is actually due the State. The tax should not amount to more than the actual tax due with respect to the sale of the materials to the contractor. With respect to those contracts in which a portion of the amount is paid by the Government, we believe the application of the tax is the same. It appears that the United States Department of Agriculture, Production and Marketing Administration, furnishes funds with which the contractor pays a portion of his expenses. There does not appear from the information submitted with your memo to have been any purchase of tangible personal property by the United States.

EHS:ph