Which purchases and leases by a federal management contractor were exempt as direct government sales or purchases for resale?

Plain-English summary

Florida concluded that the federal management contractor's purchases and leases were not direct sales to the United States. The contractor placed the orders and paid vendors from its accounts-payable system, even though federal funds reimbursed the costs and contract language passed title to the government. The Department found that the contractor was not a constituent part, agent, or servant of the federal government and that the government did not pay the vendors directly.

Most contractor purchases therefore remained taxable. The contractor was the final consumer of office, maintenance, and other consumable supplies; materials used to improve government real property; leased vehicles and equipment used in performing the contract; and research-and-development property consumed without becoming part of a delivered product.

Florida allowed narrower resale treatment for tangible property bought solely for a discrete sale to the government or incorporated into or attached to a finished product delivered to the government. That treatment required an actual billed or charged sale of the property and a valid resale certificate given to the supplier.

This 1996 reissue withdrew the earlier view that equipment could qualify for resale treatment merely because it was individually marked or otherwise identified as “Property of the United States Government.” Government title, reimbursement, or identification markings did not convert the contractor's own equipment and supplies into resale purchases.

The Department also rejected the contractor's claim that 1961 Comptroller letters broadly protected the later contract. Those letters were limited to a particular agreement and said each contract and its facts controlled. The ruling stated an alternative historical liability date if the transactions were under that same repeatedly modified contract and the contractor first received notice in October 1988.

What this means for you

Federal contractors

Government reimbursement and immediate federal title do not automatically make a purchase tax-exempt. Determine who orders, pays, possesses, uses, and consumes each item, and whether the government is actually buying it in a separate sale.

Procurement and contract teams

Separate qualifying product components and discrete resale items from consumables, construction materials, contractor-used equipment, leases, and R&D inputs. Do not rely solely on federal-property tags or contract title clauses.

Accountants and tax professionals

Resale documentation is essential. Even a qualifying component or discrete sale was taxable if the contractor failed to give the supplier the required resale certificate.

Common questions

Q: Were the contractor's vendor purchases direct sales to the federal government? A: No. The contractor paid the vendors, and the Department said section 212.08(6) required a direct government transaction and payment.

Q: Were office, cleaning, maintenance, and other consumable supplies exempt for resale? A: No. The contractor was their final consumer.

Q: Were materials used to improve government real property exempt? A: No. The contractor was the ultimate consumer of those construction materials.

Q: Were leased vehicles, computers, cranes, or similar equipment exempt? A: Not when the contractor used them to perform the contract. Lease payments qualified only if the property was leased solely for re-lease to the government or another entity.

Q: Were research-and-development purchases exempt? A: No when the contractor consumed the property in R&D and it was not incorporated into or attached to a product delivered to the government.

Q: What purchases could qualify for resale treatment? A: Property bought solely for a discrete sale to the government, or incorporated into or attached to a finished product delivered to the government, could qualify if the transaction involved a real charge and the contractor issued a valid resale certificate.

Q: Did labeling equipment as U.S. government property make it exempt? A: No. This reissue expressly ended that treatment.

Q: Can another government contractor rely on this TAA? A: Not automatically. The advisement binds the Department only on the contract and facts described, and its own reissue history shows that the Department changed part of the earlier treatment.

Citations and references

• Fla. Stat. § 212.08(6) and Fla. Admin. Code r. 12A-1.001(9)(a) — sales made directly to government
• Fla. Stat. § 212.02(15)(a) and Fla. Admin. Code r. 12A-1.038(1), (3), (5) — resale treatment and certificates
• Fla. Stat. §§ 212.03, 212.031, 212.05(1)(d), and 212.06 — taxable sales, rentals, and use
• Fla. Admin. Code r. 12A-1.051(2)(e) — contractor as consumer of real-property materials
• Fla. Admin. Code r. 12A-1.071(7) — leases for re-lease
• United States v. New Mexico, 455 U.S. 720 (1982) — contractor immunity analysis cited by the Department
• United States v. Forst, 569 F.2d 811 (4th Cir. 1978), affirming 442 F. Supp. 920 (W.D. Va. 1977) — contractor as final consumer
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96A-056

Original ruling text

Title:

Government Contracts

Status: This is a supplementation of TAA 89A-051 and revision of TAA 92A-006

Nov 26, 1996

RE: Technical Assistance Advisement 96A-056 Supplementation of TAA 89A-051 and revision of TAA 92A-006 Section 212.02(15)(a), 212.03, 212.031, 212.05(1)(d), 212.06, 212.08(6), F.S. Rule 12A-1.001(9)(a), 12A-1.038(1), (3), (5), 12A-1.051(2)(e), 12A-1.071(7), F.A.C.

Dear :

Note: This Technical Assistance Advisement is reissued replicating the text when issued as TAA 92A-006 except as to the deletion of the last paragraph on page sixteen which continues on page seventeen, and the alteration of four paragraphs on pages seventeen, eighteen and nineteen. These paragraphs described, or contained reference to, certain equipment as not subject to sales or use tax on the basis that the equipment purchased by the government contractor was resold to the United States Government when, among other requirements, the equipment was individually marked or otherwise identified by decal, tag, paint, or other identification method as "Property of the United States Government."

The Department, after the date of this Technical Assistance Advisement, will not recognize such equipment as purchased by the contractor for resale to the United States Government, conforming the Department's view of this issue with the treatment of other issues discussed in this Technical Assistance Advisement and similarly situated taxpayers.

TAA 92A-006, except for the deletion and the alteration of the paragraphs described above, is reissued, unchanged, as follows:

This is a response entitled a Technical Assistance Advisement (TAA) which supplements TAA 89A-051 dated October 4, 1989, both of which represent a reply to your initial letter dated August 7, 1989, and to your supplemental letters dated December 7, 1989, and May 24, 1991, in which you contend that purchases of tangible personal property made by the XXXX (herein Contractor), located in XXX (herein Site), in performance of a certain contract with the XXX (herein Government), are exempt from Florida sales tax as sales made directly to the federal government, or, in the alternative, that such purchases are not taxable by operation of statutory sale-for-resale provisions. Contractor is paid a fee by the Government for the work performed under the terms of the agreement which is known as a "management and operating contract" (herein Contract).

You also state that Mr. J. E. Straughn then Director, Sales Tax Division, Comptroller's office, issued an opinion in a letter dated August 22, 1961, that such purchases were exempt as purchases made directly by the federal government. You further note that in a letter dated November 28, 1961, Mr. Straughn authorized the use of a self-accrual permit under then Rule 91.6, F.A.C., rather than an exemption certificate. You request that, if the use of a resale certificate is now applicable, no tax liability attach to those purchases made pursuant to the self-accrual procedure established by Mr. Straughn in 1961.

Your letter dated August 7, 1989, reads, in pertinent part as follows:

"Background"

"[Contractor] has been under a contract with the
[Government] or its predecessors since the late 1950's. The contract provides for [Contractor] to manage and operate [Government's] XXXX in XXX, where electronic and mechanical components of nuclear weapons are assembled, and to perform reimbursable work as determined by

[Government's] schedules and work orders. Included among its management duties under the contract is the purchase by
[Contractor] on behalf of [Government) of tangible personal property, which purchases are reimbursed by [Government] as described below. This type of arrangement is referred to as a 'Management and Operating Contract' (M & 0 contract) as identified in the Federal Acquisition Regulations at Chapter 1, Subpart 17.6 of Title 48 of the Code of Federal Regulations (CFR) and as supplemented by the [Government] Acquisition Regulations at Chapter 9, Subpart 970 of Title 48 CFR.

"Pursuant to the terms of the contract, [Contractor] has purchased over the years supplies, equipment and services using [Contractor] purchase orders. The purchase orders note that [Contractor] is placing the order pursuant to its contact with [Government]. Payments to vendors are made by the XXXX Accounts Payable system which is reimbursed by
[Contractor] with funds from a [Government]-owned bank account operating under a letter of credit arrangement. The M & 0 contract provides that title to all property purchased by [Contractor] vests in the United States.

"In 1961, the Florida Comptroller provided XXXX with a letter advising that sales and use tax did not apply to purchases made by [Contractor] pursuant to the [Government] contract. A copy of that letter is attached. Following the issuance of this letter, XXX requested an exemption certificate but was instead advised by the Comptroller's office by letter dated November 28, 1961, that the Comptroller's Rule 91.6 would be extended, as had initially been done in March 1961, to allow the contractor to use a self-accrual permit as a means of effectuating the exemption acknowledged by the Comptroller. A copy of this letter is also attached. Because [Contractor] has been operating under renewals/extensions of the same contract ruled upon in the 1961 letter, it has continued to use the same accrual process as was directed by the Comptroller.

"In October 1988, [Contractor] was advised by the Department's Registration Section that it is not entitled

to continue using the self-accrual process and, additionally that the Department would not issue an exemption permit to [Contractor] for purchases under the contract.

"Issue"

"Should [Contractor] be permitted to continue exercising the exemption granted to it by the Comptroller in 1961 or should [Contractor] be permitted to issue resale certificates to its vendors?

"Taxpayer's Position"

"[Contractor's] purchases under its contract with
[Government] are exempt from sales and use tax either as purchases made on behalf of the federal government (section 212.08(6), F.S.) or as purchases for resale by [Contractor] to the federal government (section 212.02(15), F.S.). If the Department does not believe that an exemption permit or self-accrual procedure is proper under the circumstances then [Contractor] should be allowed to extend resale certificates to vendors. In any event, the 1961 Comptroller letters insulate [Contractor] from any prior liability should the Department now decide that a different procedure should be used.

"Discussion"

"The circumstances are such that the [Contractor] purchases are, in substance, purchases by [Government]. Title to all items purchased vests in [Government] and payments are ultimately made with [Government] funds. [Contractor] acts as the purchasing agent for [Government] and all purchase orders state that the purchase is being made pursuant to
[Contractor's] contract with [Government]. The decision reached by the Comptroller in 1961 concerning the same contract under which [Contractor] and [Government] continue to operate was that these were exempt purchases. Neither the contract nor the relationship between the contracting parties has materially changed.

"If these purchases are not considered to be direct purchases by [Government] then they must be purchases for resale by [Contractor] which are exempt under section 212.02(15), F.S. Pursuant to its contract with
[Government], [Contractor] purchases and receives all personal property, title to which ultimately vests in
[Government]. [Contractor] and XXX are reimbursed by
[Government] for all such purchases, which are utilized only in accordance with [Government] direction under the provisions of the M & 0 contract. Under the contract,
[Contractor] manages and operates the facility, for which it receives an annual fee. [Contractor] retains no interest in [Government] property after resale.

"Requested Ruling"

"[Contractor] purchases under the contract with
[Government] are exempt from sales and use tax either as purchases by the federal government or as purchases by
[Contractor] for resale. [Contractor] is entitled to either continue using the exemption granted by the Comptroller in 1961 or to extend resale certificates to vendors. If the latter, [Contractor] is not liable for any sales or use tax on any purchases made utilizing the self-accrual procedure because of the Comptroller's prior advisements in 1961."

In your supplemental letter (herein Supplemental), dated December 7, 1989, you observe that in the matter of United States v. New Mexico, 455 U.S. 720, 102 S.Ct. 1373, 71 L.Ed 2d 580 (1982), a case on which the Department relied in its letter dated October 4, 1989, to support the taxability of the Contractor's purchase of the subject tangible personal property, the sole issue raised was whether federal tax immunity protected the contractors in that case from state taxation. In the Supplemental, in pages 1 to 3, you distinguish that decision and express arguments against taxability in the following manner:

"In this case, however, [Contractor] contends that,

irrespective of any argument based on federal immunity,
[Contractor] is protected from state taxation in these circumstances because of Section 212.08(6), Florida Statutes. You note in your October 4 letter, that this section exempts from the imposition of Florida sales tax those sales made directly to the United States Government and to other government units.' It should be emphasized that, pursuant to the express terms of the [Government] contract, title to the materials purchased under the contract vest in the federal government, items purchased are deemed 'government property,' and the risk of loss for the goods falls on the government even while the goods are in [Contractor] possession. [Government] pays for the purchases by reimbursing [Contractor] under an arrangement specified in our prior letter. Accordingly, sales made pursuant to the [Government] contract are made directly to
[Government], paid for by [Government], and, therefore, should be exempt from Florida sales tax. ss. 212.08(6), Fla. Stat. (1988 Supp.).

"Alternatively, purchases made pursuant to the [Government] contract are exempt from Florida sales and use tax as purchases for resale by [Contractor] to the federal government. A sale is defined under the Florida Revenue Act of 1949 as l(a)ny transfer of title or possession, or both.... I ss. 212.02(18), Fla. Stat. (1988 Supp.). Section 212.02(15)(a), Florida Statutes (1988 Supp.), states that a sale at retail 'means a sale to a consumer or to any person for any purpose other than for resale in the form of tangible personal property...' (emphasis added)

"The purchases by [Contractor] from vendors constitute a 'sale for resale, to the federal government. Under the
[Government] contract, [Contractor] makes the purchases in its own name from the various vendors. Upon the placement of the purchase orders vendors provide the materials, equipment or services to [Contractor] at the plant. Accordingly, [Contractor] acquires possession in return for its promise to pay. Since a taxable sale includes a transfer of possession, it would appear at first glance that a taxable sale has occurred at this point. However,

since [Contractor] in turn sells the property to the government, a sale for resale has occurred and
[Contractor]'s purchase from the vendor is not a taxable retail sale. s. 212.012(15)(a)[sic], Fla. Stat. (1988 Supp.).

"The transfer of title from the vendor to the government pursuant to the terms of the [Government] contract triggers a second sale (or in this case, a resale), since a taxable sale includes a transfer of title as well as transfer of possession. ss. 212.02(16), Fla. Stat. (1988 Supp.). The
[Government] contract constitutes the agreement between
[Contractor] and the government that, although [Contractor] purchases from vendors, title to the property vests in the government. Thus, the transfer of title to the government pursuant to the parties' agreement constitutes a resale of the property by [Contractor]. Of course, the consideration for the transfer occurs when the government reimburses
[Contractor] for the property.

"There appear to be no Florida decisions involving a sale for resale of property under situations which are similar to the present case. However, courts in other jurisdictions which have decided this issue agree that a 'sale for resale' occurs in similar factual settings, thereby resulting in no tax to the contractor."

You cite and discuss, in support of this assertion, the following cases:

Controller of the Treasury v. Glenn L. Martin Co.., 140 A.2d 288 (Maryland Ct. App. 1958); Goodyear Aircraft Corporation v. Arizona State Tax Commission, 402 P.2d 423, (Arizona Ct. App. 1965); Lockheed Aircraft Corporation v. State Board of Equalization, 146 Cal. Rep.283 (California Ct. App. 1978); Bay & Zimmerman, Inc. v. Calvert, 519 S.W.2d 106 (Texas 1975); and, Martin Marietta Corporation v. Regional Transportation District, 772 P.2d 668 (Colorado Ct. App. 1989).

Department Response

First, the Department notes that it has gained information about the operations of Contractor from three sources: the three letters you have sent the Department; two meetings with you and representatives of Contractor on December 14, 1989, and on August 28, 1991; and a copy of the current contract between Government and Contractor, styled, Supplemental Agreement. This agreement, identified as supplemental to Contract XXXX, became effective October 1, 1988, and was forwarded to the Department attached to a cover letter dated February 26, 1990. Portions of the document may be cited in this letter by use of the term Contract Clause, and the agreement itself may be referred to as the Contract. This agreement will be discussed in greater detail in a later part of this letter. In addition to the Contract, you provided the Department with other documents identified as Appendixes A, B, C, D, E, F, G, H, and I.

The Constitution of the State of Florida speaks of taxation in Article VII but in neither this Article nor in any other part or provision can be found any declaration relevant to the instant issue. The Constitution of the United States likewise provides no declaration that specifically prohibits the imposition of a state tax on transactions with the federal government. Notwithstanding the absence of a stated prohibition it has long been established that there exists an implied immunity of the federal and state governments from taxation of one by the other. See, McCulloch v. Maryland, 4 Wheat 316, 4 L. Ed 579 (1819), and Collector v. Day, 11 Wall 113 (1870).

"[The] great principle is, that the constitution and the laws made in pursuance thereof are supreme; that they control the constitution and laws of the respective States and cannot be controlled by them." McCulloch v. Maryland, id. at 426.

This doctrine of implied immunity of the federal government from taxation by a state is expressed in Metcalf & Eddy v.

Mitchell, 269 US 514, 523 (1926) as resting "... on the conviction... that it may administer its affairs within its own sphere... free from undue interference [by a state]."

With respect to Florida law, s. 212.08(6), F.S., provides:

"There are also exempt from the tax imposed by this chapter sales made to the United States Government... when payment is made directly to the dealer by the governmental entity"

The statute prohibits sales tax on a sale made directly to the United State Government. Rule 12A-1.001(9)(a), F.A.C., interpreting the statute states:

"All sales made direct to the United States Government... are exempt... when payment is made directly to the dealer by the governmental entity."

Your priority argument against the tax in the instant matter, as expressed on pages 1 and 2 of the Supplemental, seems to be bottomed not on the above described doctrine of implied immunity as most recently expressed in United States v. New Mexico, supra, but on the state statute, s. 212.08(6), F.S., and its operative word "directly".

You state on page 2 of the Supplemental, that the sales at issue are made "... directly to [Government], paid for by
[Government], and, therefore, should be exempt from Florida sales tax s. 212.08(6), Fla. Stat. (1988 Supp.)." Thus, your primary argument rests on the conclusion that Florida law prohibits the tax because of these "direct" sales.

Your alternative position is that if the sales are not made directly to the Government the sales are nevertheless not subject to sales tax because Contractor purchased the tangible personal property for resale to Government. You cite s. 212.02(16), F.S., which defines the word "sale", and s. 212.02(15)(a), F.S., which provides that a sale at retail "... means a sale to a consumer or to any person for any purpose other than for resale..."

The Department notes that Rule 12A-1.038, F.A.C., describes, in general, the exemption from tax of a sale for resale and specifically provides in subsections (1) and (3) that unless a resale certificate is given by the vendee the tax will be applied to the sale.

In sum, what must be resolved here is whether the sales (or some of the sales) are made directly to Government and if not, whether Contractor purchased the property (or some of the property) solely for resale.

However, while agreeing that the two arguments raised by you must be answered, the Department finds additional issues which are central to the overall question of whether Florida may impose a sale or use tax on the purchases made by Contractor pursuant to the Contract with Government. Therefore, the Department frames the dispute in the following manner.

(1) Whether sales or use tax may be levied, pursuant to Part 1, Chapter 212, F.S., on transactions between vendors of tangible personal property and Contractor, or, on payments made pursuant to any lease of tangible personal property between lessor of such property and Contractor considering the following classes of transactions or leases:

(a) Sales of tangible personal property between vendors and Contractor when the property is not incorporated in or attached to the finished product, nor used in the production process, such as, consumable materials and supplies purchased for office use (paper, books, and other similar property), cleaning and maintenance materials or supplies used either within or without the premises occupied by Contractor, printing, lodging, and all other tangible personal property not included in any of the following four classes of taxable purchases.

(b) Sales of tangible personal property between vendors and Contractor when the property is for the purpose of altering or improving the real property occupied by

Contractor. Such sales, when sales of equipment, may not be subject to sales tax under certain conditions, as discussed in (e) below.

(c) Leases of tangible personal property by Contractor in the form of leased vehicles, or other equipment such as computers, word processors, communication equipment, cranes, fork lifts or other similar equipment.

(d) Sales of tangible personal property between vendors and Contractor when the property, while not incorporated in or attached to the finished product, is nevertheless consumed for the purposes of research and development in connection with the production of the finished product, or pursuant to any agreement with Government for such research and development.

(e) Sales of tangible personal property between vendors and Contractor when the property is purchased solely for resale in a discrete sale to Government, or when such property is incorporated in or attached to the finished product delivered to Government pursuant to the terms of the Contract. Such sales, in the former instance, may include equipment purchased by Contractor under certain conditions.

(2) While not a sale or lease issue, there also exists in this matter the question of the extent to which the letter dated November 28, 1961, from the Florida Comptroller's Office to Contractor, signed by Mr. J. E. Straughn, then, Director, Sales Tax Division, limits the tax liability of Contractor, wherein it was stated on page 2 that:

"It appears from what the writer was told that all purchases by [Contractor] under the Pinellas plant contract for governmental performance are equivalent to direct government purchases, and that no sales or use tax is likely to accrue specifically as to Contract XXX."

Within the context of the two issues you raise in the Supplemental, that is, the denial that sales were made to

Contractor but were instead made directly to Government, and your alternative argument that if sales were made to Contractor such sales were, from Contractor's view, sales for resale, the Department shall now state its position with respect to each of the above noted six issues it apprehends are relevant.

The Department first takes the position that in no instance of any sale or lease, described above, is such sale or lease made directly to the Government as required by s. 212.08(6), Florida Statutes. The Department has taken a position for a considerable time that the word "directly" requires a transaction solely between a vendor and Government whereby Government issues a payment warrant directly to the vendor. See, Rule 12A-1.001(9)(a), Florida Administrative Code.

Acknowledging that your primary argument is based on the provisions of s. 212.08(6), F.S., the holdings of the many Cases which have answered the question of federal immunity have commonly concluded that no sale or lease was made directly to the government. In its earlier letter the Department maintained that the decision in United States v. New Mexico, id., is controlling on this issue. The Department holds to that view. The court at 733 said, "... a State may not, consistent with the Supremacy Clause... lay a tax 'directly upon the United States'." Thus, in federal contractor instances, the contractor, if it is to avoid the tax, must be considered to be a constituent part of the federal government, New Mexico, id. at 741; or have the status of an agent, State v. King & Boozer, 314 U.S. 1, (1941) at 13; or be a servant of the United States, United States v. Township of Muskegon, 355 U.S. 484, (1958) at 486.

The Department has received no information that Contractor is either a constituent part, an agent, or a servant of the United States. Neither, is it the understanding of the Department that Government is billed directly for the subject purchases or leases, if any, or issues payment for such purchases or leases directly to the vendor or lessor.

To the contrary, your letter dated August 7, 1989, page 2, states that, "[p]ayments to vendors are made by the XXXX Accounts Payable system which is reimbursed by [Contractor] with funds from a [Government]-owned bank account..." Since it is Contractor which issues payment to vendors the sales may not be said to be made directly to Government as required by s. 212.08(6), F.S., or as described in Rule 12A-1.001(9)(a), Florida Administrative Code.

Having asserted a denial that any transaction, whether a sale or lease, is made directly to Government, the Department now turns to your alternative argument that if Contractor is considered the purchaser, such Contractor is a purchaser for resale and may not, for that reason, be liable for the tax.

This question, whether Contractor purchased or leased property for a subsequent sale or lease to Government, will be answered with respect to each issue the Department has previously listed as arising from the facts in this matter. Each of the issues shall be replicated in abbreviated form.

(1)(a) Sales of consumable materials and supplies to Contractor.

In United States v. Forst, 569 F.2d 811, 812 (1978), the court stated that, "[w]e agree with the district court and affirm upon its well reasoned opinion.", referring to the trial court's decision, 442 F. Supp. 920 (W. D. Virginia 1977), which found that office equipment, office supplies, and other purchases of tangible personal property paid for by a federal contractor, but reimbursed by the government and for which title to such property rested in the government upon delivery were not sales for resale since, "[t]his exemption is designed only to prevent multiple sales tax incidence for the same tangible personal property. The sales tax is designed to be legally incident only on the final consumer-purchaser. This exemption prevents the multiple imposition of the sales tax as goods are distributed by middlemen before they are finally sold at retail. We find that [federal contractor] was the final

consumer-purchaser of these items of tangible personal property." Id., at 925.

The Department in the instant matter can find no sales for resale when Contractor purchases such consumables which remain in Contractor's possession and are intended for use solely by Contractor notwithstanding that, ostensibly, title to such property is in Government after the purchase by Contractor. The Contract, as in virtually all similar agreements, requires the transfer of legal title to the government after property is purchased by the federal contractor, but this routine provision may not be reasonably understood to mean Contractor is reselling the consumables to Government. Within s. 212.02(15)(a), F.S., a retail sale is found from Contractor's purchase, but the element of exemption, that is, "... other than for resale..." is not applicable. The taxable sales extend to those transactions included in, but not limited to, those enumerated in ss. 212.03, 212.031, 212.05, and 212.06, Florida Statutes.

(1)(b) Sales to Contractor for purposes of improvement to realty.

A review of the Contract reveals that Contract Clause 2(b)(2) allows Contractor to perform certain small construction projects with its own personnel. Since such improvements to realty constitute consumption by Contractor of tangible personal property as described in Rule 12A-1.051, F.A.C., such property purchases by Contractor are taxable. Again, the Department finds no sale for resale exemption with respect to tangible personal property which may be purchased by Contractor for the improvement to the realty of Government. In Maecon, Inc. v. State Department of Taxation, 761 P.2d 411 (Nevada 1988), the sales tax was held to apply to the total sales price of materials delivered to the job site at which time the property became titled in the United States Navy. Although this case was not argued on the basis of the resale exemption, Rule 12A-1.051, F.A.C., describes the purchasing contractor as the ultimate consumer from whom the tax is to be collected

by the vendor. If materials are purchased by Contractor for the sole purpose of improving Government's realty then such materials may not be said to be bought for resale to Government. See also, United States v. Boyd, 378 U.S. 39 (1964); Washington v. United States, 460 U.S. 536 (1983); Bill Roberts, Inc. v. McNamara, 527 So.2d 459 (Louisiana Ct. App. 1988), reversed on other grounds; and Housing by Vogue v. State, 403 So.2d 478 (Fla. 1 DCA 1981), where class rooms were designated as public works and the statement is made that an exemption is strictly construed against the taxpayer.

Thus, as described in Rule 12A-1.051(2)(e), F.A.C., the contractor is the ultimate consumer of materials used in improving realty and the tax may not be avoided by resort to the resale exemption since Contractor is not in the business of selling construction materials to Government.

(1)(c) Leases of tangible personal property by Contractor.

Rule 12A-1.071(7), F.A.C., describes an exemption from tax on payments made pursuant to a lease of tangible personal property when the lessee has executed the contract solely for the purpose of leasing the property to another. The lease of tangible personal property by Contractor, including the lease of vehicles, irrespective whether such lease payments are allowable costs under Contract Clause 64(d), or unallowable costs as enumerated in Contract Clause 64(e), are taxable to Contractor as such tax is imposed by s. 212.05(1)(d), F.S., and described in Rule 12A-1.071, Florida Administrative Code. Thus, unless Contractor can provide evidence that such property is leased for the sole purpose of leasing the property to Government or another entity, such lease payments are taxable.

(1)(d) Tangible personal property purchased by Contractor for purposes of research and development.

Purchases made by Contractor pursuant to contract terms describing research and development work are taxable. The

Department views Hamm v. The Boeing Company, 216 So.2d 288 (Alabama 1968), opinion modified on denial of rehearing, as relevant to such purchases. In that case the supreme court held that the federal contractor was an independent contractor, not an agent of the government, and purchases intended for certain research and development work were not exempt as sales for resale since the property was purchased for the use of the contractor in accomplishing the research and development work. As decided in Hamm, id. and maintained now by the Department, purchases made pursuant to research and development work are not purchases made for later resale.

(1)(e) Sales to Contractor when the tangible personal property is sold, in a discrete sale, to Government, or when the property is incorporated in, or attached to, the finished product delivered to Government. Such sales may include equipment purchased by Contractor under certain conditions.

The Department first reasserts that Contractor is not a constituent part of Government. In United States v. New Mexico, supra, the court discussed in the following manner the view of the Court of Appeals which considered this relationship:

"'It concluded that the Government - contractor relationship, viewed as a whole, did not 'so incorporat[e]
[the contractors) into the government structure as to [make them) instrumentalities of the United States.... '" United States v. New Mexico, id. at 730.

The Department next notes that the Congress, in manifesting its aversion to exempting private companies from state or local taxation, repealed former 42 USC s. 1809(b) which prohibited the imposition of sales and use tax on purchases made by contractors pursuant to contracts with the then, XXXX Commission.

Of paramount importance are the terms of the agreements

between Contractor and Government. As previously indicated, you forwarded to the Department a document which you describe in your February 26, 1990, letter as "... a copy of the last published complete contract," and which is styled, Supplemental Agreement, Contract XXXX Modification No. XXXX, effective October 1, 1988, the parties to which are Government and Contractor. Briefly, the agreement, representing the one hundred and forty sixth modification of the original contract, requires Contractor under the heading, STATEMENT OF WORK, in Contract Clause 2., "... to manage, operate and maintain the XXXX and to perform the work and services described in this contract including Appendix B, 'Scope of Work,, and including the utilization of information, material, funds, and other property of
[Government], the collection of revenues, and the acquisition, sale or other disposal of property for
[Government].... The Contractor is required to use its best efforts to staff, manage and operate the Plant for the performance of "production and related work" and "research and development work".

In Contact Clause 64, payment made to Contractor for work and services under the Contract is in the form of an allowable cost, a base fee, and an award fee. The term allowable cost is defined in Contract Clause 64(c) as the "... costs and expenses that are actually incurred by the Contractor in the performance of the contact work...." Such allowable cost is enumerated in Contract Clause in 64(d)(6) as:

"Materials, supplies and equipment, including freight, transportation, material handling, inspection, storage, salvage, and other usual expenses incident to the procurement, use and disposition thereof, subject to approvals required under other provisions of this contract."

Other allowable costs include bonds and insurance; communication costs; consulting services; litigation expenses; losses and expenses; patents, purchased design, and royalty payments; salaries and wages; and, any taxes,

fees and charges levied by public agencies.

Importantly, the Contract also excludes, as described in Contract Clause 64(e), purchases by Contractor of certain advertising and public relations costs represented by, among others, the cost of models, gifts and souvenirs; certain travel and subsistence expense; central and branch office expenses of Contractor; entertainment expense; and, unless approved, the lease of vehicles.

The funds under the Contract are provided for the use of Contractor under the "advance funding" method. The Contractor establishes a separate bank account, as described in Contract Clause 66(c), into which funds flow from Government by way of a letter of credit, direct Government check, or by electronic transfer. Contractor uses this account to pay for allowable costs and other authorized expenditures.

The title to property purchased by Contractor, including all materials, equipment, supplies, and tangible personal property of every kind and description for the cost of which Contractor is entitled to reimbursement shall, as specified in Contract Clause 69(b), "... Pass directly from the vendor to the Government."

Contract Clause 71 provides a procedure for payment of state and local taxes, the protest of, and the defense against the levy of such taxes. In Appendix B entitled, Scope of Work, the Contractor's responsibilities are far ranging and include the fabrication and assembly of electronic, electromechanical and mechanical components of atomic weapons as well as performance of reimbursable work including development support and other development work.

This brief review of Contractor's duties and responsibilities is presented solely for the purpose of illustrating the vast diversity of transactions executed under the Contract. Clearly, Contractor should be distinguished from a manufacturer who simply buys a few discrete component parts and materials which are

incorporated in, or attached to, the finished product which is then sold to its customers.

Your alternative argument is that any purchase made by Contractor pursuant to the Contract is exempt as a sale for resale. This crabbed view of the Contract ignores the multifarious purchases made by Contractor. As described above, the transactions of the Contractor seem to include leases of personal property and perhaps leases also of real property; purchases of consumables and a host of other property including reimbursable costs as described in Contract Clause 69(b) which includes "... all materials, equipment, supplies, and tangible personal property of every kind and description..." The shield from taxation is also sought, it appears, from communication costs, advertising and promotional product purchases. Part I, Chapter 212, F.S., allows no manufacturer or reseller such sweeping exemptions.

For purposes of Part I, Chapter 212, F.S., Contractor cannot avoid the tax on all purchases made pursuant to the Contract under the guise that all such purchases are made for the sole purpose of resale to Government. In United States v. Forst, 569 F.2d 811, supra, the court found favor in the statement by the trial court that the resale exemption granted by state law did not provide a shield from the tax. As to the sale-for-resale position advanced by the contractor, the trial court said:

"This exemption is designed only to prevent multiple sales tax incidence for the same tangible personal property. The sales tax is designed to be legally incident only on the final consumer-purchaser. This exemption prevents the multiple imposition of the same tax as goods are distributed by middlemen before they are finally sold at retail. We find that [contractor] was the final consumer-purchaser of these items of tangible personal property." United States v. Forst, 442 F. Supp. 920, 925 (W.D. Virginia 1977).

Notwithstanding the support to be gained from Forst, the

Department changes a previously stated position and concedes that Contractor is indeed engaged in the manufacture of products for sale to Government.

Consequently, sales tax liability does not arise from certain purchases of tangible personal property made by Contractor. The statutory provision in s. 212.02(15)(a), F.S., which excludes a sale made for resale from the definition of a "retail sale", is interpreted in Rule 12A-1.038, Florida Administrative Code. Subsection (5) of the rule requires a showing that the tangible personal property itself was purchased for resale, or that the tangible personal property was incorporated as a "... material part of other tangible personal property to be produced for sale by manufacturing, assembling, processing or refining..."

Thus, the Department will view as free of sales tax, upon a tendering of a valid resale certificate by Contractor, discrete items of tangible personal property purchased by Contractor for the purpose of resale to Government, when such property is incorporated in or attached to the finished product which is then itself delivered to Government pursuant to the terms of the Contract. However, the sale of such discrete property must be made within the common meaning of a sale which is evidenced by some billing or charge for such property, and shall not be construed to include all expenditures made by Contractor as when such expenditures are given in exchange for property or leases as described, in brief, in (1)(a), (1)(b), (1)(c), and (1)(d) on Page Sixteen of this response and as more fully described on subsequent pages.

Accordingly, consumable materials and supplies, construction materials which are used to improve the real property of Government, leases of tangible personal property used by Contractor in performance of the Contract, tangible personal property consumed for the purpose of research and development which is not incorporated in or attached to any product which is then itself delivered to Government are not purchases for which Contractor may extend valid, resale certificates. The Department does not consider any such or

similar transactions as being discrete sales of tangible personal property to Government.

The Department asserts that Contractor in these instances is not leasing tangible personal property for subsequent leasing to Government, nor is Contractor purchasing equipment (either capital or non-capital), or materials and supplies for the purpose of resale, but rather is leasing such property and purchasing such equipment, material and supplies as the ultimate consumer thereof. Such transactions, since they are not contemplated by the Department as being made by Contractor for resale, are fully taxable.

This view is expressed in Goodyear Aircraft Corporation v. Arizona State Tax Commission, 402 P.2d 423 (Arizona Ct. App. 1965), the court found that contract provisions which explicitly stated that purchases by a contractor of "special tooling" were for resale, were not taxable to the contractor. The court found the purchases of the same tooling as taxable when the contract did not explicitly label the purchase as one made for resale. In the instant case the Department is not aware that any provision in the Contract specifies that such purchases are made for resale to the Government.

With respect to the issuance of resale certificates when discrete tangible personal property is sold to Government, or when such property is incorporated in or attached to the finished product, the Department holds that such purchases are taxable in the absence of a resale certificate. In the instant case, no evidence has been provided the Department that resale certificates, which are required by statute and rule, have been extended by Contractor to its suppliers.

In United States v. District of Columbia, 669 F. 2d 738 (D.C. Cir. 1981), the resale issue was not argued because the contractor had not extended a resale certificate. See, id.. N. 2 at 740. Similarly, in Stotts-Friedman v. Lindley, 432 N.E.2d 202 (Ohio 1982), a government contractor was not relieved of the duty to extend a certificate of exemption to its suppliers.

In this respect, Rule 12A-1.038, F.A.C., requires a resale certificate to be issued to suppliers. In subsection (1) of the rule this requirement is expressed in the following manner:

"Unless the dealer shall have taken from the purchaser a certificate to the effect that the property or service was purchased for resale... the sale shall be deemed a taxable sale."

In a communication styled, Florida Sales and Use Tax Applicable to Government Contractors and Sub-Contractors, dated January 10, 1963, Mr. J.E. Straughn, then Director, Sales Tax Division, Comptroller's Office, on page 2, emphasized in the following manner the obligation of government contractors to extend resale certificates:

"To purchase tangible personal property for any exempt purpose, a contractor or sub-contractor must furnish the vendor or supplier a certificate of resale or a certificate of exemption in lieu of tax."

Consequently, the Department concludes that only those purchases by Contractor of tangible personal property which were purchased for the sole purpose of subsequent discrete sales to Government, or purchases of tangible personal property which became incorporated in or attached to the finished product delivered to Government pursuant to the terms of the Contract are not subject to tax provided that, with respect to all such purchases, Contractor has extended to the suppliers valid resale certificates.

(2) The Department next answers the question to what extent the letter dated November 28, 1961, signed by Mr. Straughn, limits the tax liability of Contractor.

The Department also takes cognizance of the letter dated August 22, 1961, signed by Mr. J.E. Straughn, a copy of which you attached to your letter. However, the exemption granted in this letter is qualified in the third paragraph

to apply only to a specific contract identified as Contract XXXX. The exemption from tax as granted in the paragraph "... shall not be construed to apply to any other contract now in effect or later entered into between XXXX and the government, or between any other contractor and the United States." Further, in the fourth paragraph it is stated that "... the terms of each contract, and the facts thereunder, shall be the basis of determining taxable or exempt status".

Therefore, the liability of Contractor with respect to the applicable state tax on the transactions described in this letter is determined solely by the application of the statutes and administrative rules. The Department does not consider the limited exemption expressed by Mr. Straughn as shielding the Contract from the imposition of sales tax.

Pointedly, and prophetically in the January 10, 1963, communication, on page 3., Mr. Straughn alerted all government contractors of the duty to determine their tax status:

"Contractors with the government to improve realty, perform services or manufacture or fabricate tangible property for sale, or engage in research and development, should determine accurately in advance precisely their taxable status. Failure to do so will be almost certain to result in misunderstanding, overpayment or underpayment of tax, confusion and cost of detailed audits, penalties, interest, etc."

The amount of the sales tax liability of Contractor will be determined by provisions of the limitation of actions statutes found in Chapter 95, F.S., and applicable statutes relative to interest and penalties. The transactions subject to tax, as herein established, occurred pursuant to the Contract, as it has been identified herein as Contract XXXX, and not under Contract XXXX.

Alternatively, should the Department consider that the transactions which have been declared taxable herein did

occur within the terms of Contract XXXX, which agreement has been modified 146 times, the liability of [Contractor] for payment of such tax and any applicable interest and penalties shall begin at the date [Contractor] was first notified by agents of the Department that the transactions of [Contractor] were subject to tax. Your letter states that the Department advised [Contractor] in October, 1988, that the self-accrual process heretofore used by
[Contractor] to effectuate the exemption granted by Mr. Straughn would not be recognized and that the Department would not issue an exemption permit for purchases made by
[Contractor] in furtherance of the Contract.

Thus, if the agreement under which the subject transactions were performed is identified as Contract XXXX, and if Contractor was first notified in October, 1988, that the prior exemption was, in effect, withdrawn, then the tax liability including any interest and penalties thereon would accrue from that date.

This response constitutes a technical assistance advisement under s. 213.22, F.S., which is binding on the department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated upon those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the department before disclosure. In an effort to protect confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Tax Policy and Dispute Resolution

Ctrl. No. 25739