How should a government contractor allocate and report tax on one overhead item used for qualifying federal contracts and commercial contracts?

Plain-English summary

A contractor used one overhead item, such as a reference book, in both commercial work and government contracts containing appropriate title-passage clauses.

California concluded that Aerospace allowed an allocation of the purchase price. The contractor could treat the qualifying government-contract portion as property bought for resale to the United States.

The contractor could buy the entire item ex-tax with a resale certificate, then report and pay use tax on the amount of the sales price allocated to private and commercial contracts.

This corrected an earlier opinion while acknowledging that the issue was not free from doubt.

Common questions

Did the item have to be used only on federal work?

No. Mixed use could be allocated.

What happened to the commercial portion?

The contractor reported and paid use tax on that share of the purchase price.

What made the federal portion qualify?

Appropriate title-passage clauses in the government contracts.

Does another annotation use the same source?

Yes. Annotation 565.1600 uses the identical opinion for the certificate-acceptance issue.

Citations and references

• Aerospace Corp. v. State Board of Equalization, 218 Cal.App.3d 1300 (1990) — mixed-use overhead allocation under qualifying federal title clauses
• December 17, 1991 prior opinion — conclusion revised after senior legal and audit review

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/565-1585.pdf

Original ruling text

565.1585

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 920-6563

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

February 26, 1992

GRAY DAVIS
Controller, Sacramento
BURTON W. OLIVER
Executive Director

Dear Mr. REDACTED TEXT,
Several purchasers of REDACTED TEXT’s products which have contracts with the United States have telephoned me to say that you are sending them copies of my letter to you dated December 17, 1991, on the above subject, and that your company is refusing to accept their resale certificates. The subject of the interpretation of the Aerospace decision when the issue is a contractor's purchase of overhead items which it may use in the accomplishment of both its government and commercial contracts has been the object of much discussion. After I wrote you, this matter was reviewed by several senior members of the legal and auditing staffs. This matter is certainly not free from doubt, as you are aware. However, it has been determined that, while the legal reasoning expressed in my letter is correct, the sense, if not the actual letter, of the Aerospace ruling requires a different conclusion. We have concluded that, in the situation where a contractor is buying an overhead item (such as one of REDACTED TEXT’s books) which it will use in the performance of both its commercial and governmental contracts and those governmental contracts contain the appropriate title-passage clauses, the Aerospace decision permits the contractor to allocate part of the purchase price to its government contracts. The contractor may thus purchase the item ex-tax by issuing a resale certificate to the seller. He must then report and pay use tax on the amount of the sales price which he allocates to his private and commercial contracts. This rule will be followed in the future barring legislative or court action. Please notify your clients of our conclusion. I apologize for any inconvenience our previous opinion may have caused you. Sincerely, John L. Waid Tax Counsel JLW:es