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