Could a defense contractor buy employee safety shoes ex-tax when part of their overhead was allocated to federal progress-payment contracts?

Plain-English summary

A defense contractor let a shoe vendor sell safety footwear at its premises. The vendor billed the contractor for the full price, the contractor gave required employees an allowance, and any excess was withheld from employee pay.

The contractor—not the employees—was treated as the purchaser and consumer. Employee reimbursement of part of the cost did not by itself create a resale to the worker.

Under Aerospace, however, shoes allocated to federal contracts with qualifying progress-payment title clauses could be bought for resale to the United States. Because some shoe cost also went to commercial contracts and government fixed-price contracts without those clauses, the contractor could buy all shoes ex-tax and then report use tax on the nonqualifying allocations.

The use-tax measure was the contractor's entire shoe cost. The portion recovered from employees did not reduce it.

Common questions

Did payroll withholding make the employee the buyer?

No. The contractor remained the consumer under the described arrangement.

Could any shoes qualify for federal resale treatment?

Yes, to the extent allocated to government contracts with qualifying progress-payment title clauses.

How were commercial-contract allocations treated?

The contractor owed use tax.

Could the employee-paid share reduce the taxable measure?

No. Tax was measured by the contractor's full cost.

Citations and references

• Cal. Rev. & Tax. Code §§ 6051, 6007, and 6091 — retail sale and tax-presumption framework
• Cal. Civ. Code § 1656.1 — retailer tax reimbursement by agreement
• Aerospace Corp. v. State Board of Equalization, 218 Cal.App.3d 1300 (1990) — qualifying progress-payment clauses can convert allocated overhead purchases into federal resales

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/565-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/565-0175.pdf

Original ruling text

565.0175

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 920 - 7445

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR
Third District, San Diego

August 20, 1993

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

Mr. REDACTED TEXT

BURTON W. OLIVER
Executive Director

Re: FR GH REDACTED TEXT
Sales to Defense Contractors

Dear Mr. REDACTED TEXT:
I am responding to the letter you wrote to the Legal Division on May 25, 1993. I apologize for the delay. You ask for an opinion regarding sales of shoes to your company (REDACTED TEXT) for its employees. You indicate that, REDACTED TEXT accrues and pays use tax on the portion of materials and supplies charged to overhead that is allocated to commercial contracts and government fixedprice contracts without progress payments clauses. From this phrase, I assume that REDACTED TEXT purchases these materials and supplies ex-tax for resale and accrues use tax on the materials and supplies it consumes in performing these contracts. You describe the purchase of the shoes as follows: "A defense contractor (presumably REDACTED TEXT) allows a vendor, that sells safety shoes, to sell its product on the contractor's premises on a periodic basis. Defense contractor employees obtain shoes and wear them in performing their duties while working the defense contractor. That safety shoe vendor bills the defense contractor for the entire cost of the shoes. The defense contractor pays the safety shoe vendor. Employee's that are required to have safety shoes and obtain the shoes are given an allowance. The defense contractor withholds the employee's portion of the cost of the shoes from their pay. The contractor's portion of the cost of the shoes is charged to an overhead account that is allocated to all contracts." OPINION A. Sales and Use Tax Generally. In California, except where specifically exempted by statute, Revenue and Taxation Code Section 6051 imposes an excise tax, computed as a percentage of gross receipts, upon all retailers for the privilege of selling tangible personal property at retail in this state. (Unless otherwise noted, all statutory references are to the Revenue and Taxation Code.) A "retail sale" means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property. (§ 6007.)

Mr. REDACTED TEXT

-2-

August 20, 1993
565.0175

"It shall be presumed that all gross receipts are subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale ...." (§ 6091.) The retailer owes the sales tax, but may collect sales tax reimbursement from the purchaser pursuant to agreement. (Civ. Code § 1656.1.) B. Tax Consequences to REDACTED TEXT. As you describe it, these sales appear to be to REDACTED TEXT for its own consumption. The fact that the workers who ultimately receive these shoes reimburse REDACTED TEXT for a part of its cost does not, by itself, create resales of the shoes to the workers. REDACTED TEXT is, then, the consumer of the shoes. As a result, the supplier owes sales tax on these sales and may collect sales tax reimbursement from REDACTED TEXT. The facts indicate that some of REDACTED TEXT's contracts have progress payments clauses while some do not. Under the Aerospace rule, those clauses transform sales of overhead materials to a government contractor from taxable retail sales to ex-tax sales for resale to the United States. REDACTED TEXT may purchase for resale only the shoes which are allocated to government contracts containing progress payments clauses. Assuming that some of these purchases are for resale to the United States and some are not, REDACTED TEXT may buy all of the shoes free of tax for resale and report and pay use tax on those purchases which were allocated either to private commercial contracts or government contracts which do not contain progress payments clauses. The measure of tax is the entire cost of the shoes to REDACTED TEXT. Since REDACTED TEXT is the consumer, no deduction for the portion paid by the employees is available. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again. Sincerely, John L. Waid Tax Counsel JLW:es bc: San Jose District Administrator