Could a Navy contractor buy nonconstruction materials for resale whenever the Navy reimbursed it, or did the individual title clauses control?

Plain-English summary

A joint venture bought nonconstruction materials while performing two Navy pollution-control contracts. It said the Navy reimbursed the purchases and took title when the venture received the materials.

The letter explained that Regulation 1618 generally allowed resale treatment when the contract passed title to the United States before the contractor used the property for its designed function. But it did not accept a blanket exemption without reviewing the specific title clauses.

The brief contract review found at least two possible exceptions. The Navy could decline to purchase supplies below a stated amount, making the contractor's purchase taxable if it used them. A restricted-rights provision also left software and documentation ownership with the contractor, making those software purchases taxable if no sale to the Navy occurred.

The joint venture was a separate entity and therefore also needed its own seller's permit.

Common questions

Did reimbursement alone establish a nontaxable resale?

No. The applicable title clause and passage before contractor use controlled.

What if the Navy elected not to buy an item?

The contractor's purchase for contract use was taxable.

Could the joint venture use its members' seller permits?

No. The letter required a permit for the separate joint venture.

Citations and references

• Cal. Code Regs., tit. 18, reg. 1618 — historical United States government supply-contract rule
• Contract N00024-89-D-4013, paragraph 8(a) — Navy election not to buy supplies under the stated amount
• Restricted Rights Legend — contractor ownership of software and documentation
• Cal. Rev. & Tax. Code sections 6005 and 6066; Cal. Code Regs., tit. 18, reg. 1695 — seller's-permit requirement

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/565-0184.pdf

Original ruling text

565.0184

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

May 12, 1989

Mr. J--- J. M--Senior Vice President
G--- A--XXXX --- ---, Suite XXX
--- ---, CA XXXXX
Dear Mr. M---:
This is in reply to your March 13, 1989 letter regarding the application of sales tax to sales of tangible personal property to GPC, a Joint Venture of G--- A--- of --- ---, California and P--- C--& Co., Inc., which GPC will use in fulfilling a contract with the Department of the Navy (Navy). You note that GPC was recently awarded two contracts by the Navy to provide certain offshore pollution control operations. One of the bases at which GPC will operate is in ---, California. One of the functions of the --- base will be to purchase non-construction materials which are required by GPC to comply with the terms and conditions of the contracts. You note that, under the contract, GPC will issue purchase orders to its vendors to purchase the materials. GPC will pay the vendors for the property, and the Navy will reimburse GPC. You note that, all materials purchased in such manner are the property of the Navy upon receipt. We assume that you mean that the contract provides that title to the property passes to the Navy upon receipt by GPC and, consequently, prior to any use of the property by GPC. Given this information, you asked: “1.

As the purchases made by GPC are directly in support of the U.S. Navy contracts and none of the acquired materials become GPC property, can GPC be exempted from Sales and Use Tax in California?”

We are enclosing a copy of Sales and Use Tax Regulation 1618, United States Government Supply Contracts, which provides generally that, a person who has a contract with the United States to furnish equipment to the United States may purchase tangible personal property for resale if the United States takes title to the property prior to any use of the property by the contractor to perform the function or act for which for which the property was designed for manufactured. You have not directed us to any specific provision or provisions of the contracts which GPC believes transfers title to the property to the Navy prior to use. Rather than our poring over the entire two contracts and the Federal Acquisition Regulation clauses which have been incorporated

Mr. J--- J. M---

-2-

May 12, 1989
565.0184

into the contracts by reference, please review the contracts and advise us of the specific provisions and the questions you have regarding the application of tax. I did briefly review the contracts and noticed some areas of concern. For instance, on page 30 of the contract N00024-89-D-4013, paragraph 8(a) provides that, when the government requires supplies in an amount of less than $1,000.00, the government is not obligated to purchase those supplies. If the government exercises its election not to purchase the supplies, then the sale to GPC of such property for use in fulfilling the contracts is subject to tax. Also, on page 38 of the same contract, there is a provision relating to a Restricted Rights Legend that states “Title to and ownership of the software and documentation shall remain with the Contractor.” If, pursuant to that provision, GPC does not transfer ownership of software to the Navy, tax applies to the sale to GPC of such software, because GPC does not sell the software to the government. We reiterate that we have not closely examined the contracts; therefore, there may be other provisions in the contracts which may cause GPC to be the consumer of tangible personal property it purchases to fulfill the contracts with the Navy. “2.

Does GPC require any licenses, permits or certificates to provide the purchasing services defined in the contracts?”

We are unable to locate a record of a seller’s permit issued in the name of GPC. Since GPC is a separate entity from either G--- A--- or P--- C--- & Co., GPC is required to hold a seller’s permit. See Revenue and Taxation Code sections 6005, 6066; Sales and Use Tax Regulation 1695. Very truly yours,

Ronald L. Dick
Tax Counsel

RLD:sr
Enc.