Could parties avoid federal construction-contract tax by splitting one real-property job into separate material-sale and installation contracts?

Plain-English summary

The memorandum said the essential nature of the transaction determines whether materials are sold to the United States or consumed by the supplier in performing a federal construction contract.

Parties could not avoid the normal tax result merely by dividing one planned real-property improvement into a material-sale contract and an installation contract. If they intended when ordering the materials that the supplier would also install them, section 6384 governed the overall construction undertaking.

The memorandum distinguished cases in which the government separately solicited materials and later installation, and the same bidder happened to win both awards. The Board had recognized those genuinely separate transactions as exempt government sales.

Common questions

Do separate contract documents always create separate tax transactions?

No. The essential overall undertaking controls.

What fact showed one construction contract?

The parties intended from the start that the material supplier would also install the property.

Could separately solicited government bids receive different treatment?

Yes. The memorandum said genuinely separate material and later installation bids had been recognized as exempt government sales when the same bidder won both.

Citations and references

• Cal. Rev. & Tax. Code section 6384 — federal real-property construction rule applied when the supplier was intended to install the materials

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/565-0180.pdf

Original ruling text

State of California

Board of Equalization

565.0180
Memorandum
To:

REDACTED TEXT

From:

E. H. Stetson

Subject:

REDACTED TEXT

Date:

October 15, 1951

In answer to your memo of August 20, we advise that whether material is to be regarded as sold to the United States or as consumed by the person furnishing the material in the performance of a construction contract with the United States depends upon the essential nature of the contract. We do not believe that tax can be legitimately avoided by the device of splitting up what is essentially a contract to improve real property into a contract for the sale of the materials and into a contract for the installation or application of those materials. There have been cases in which the Government called for bids for materials and subsequently called for bids for their installation or application. In such a case, where the successful bidder to furnish materials was also the successful bidder for their installation or application, we recognized that the transaction was an exempt sale to the Government. This may be the type of transaction to which you refer in the fourth paragraph of your memo. We do not know of any case in which we allowed the normal application of the tax to be avoided by the mere device of entering into two contracts instead of one where, to all intents and purposes, the overall transaction was a contract for the improvement of real property. We believe that if at the time of ordering the material it is the intention of the parties that the supplier shall also put it in place, that a contract for the improvement of real property is involved and the provisions of Section 6384 govern. EHS:ph