Did contract language immediately vesting title in the United States make overhead materials used by a federal service contractor tax-free purchases for resale?

Plain-English summary

A federal contractor sought an approximately $10 million refund for tax paid on overhead materials used to perform a service contract. Its contract said title vested in the United States immediately when the company bought the materials.

The Comptroller denied the refund on the assumed facts. Overhead items consumed while providing a taxable service, without transfer of care, custody, and control as an integral part of the service, were taxable to the provider. Items used to perform a nontaxable service were also consumed by the provider, whether or not later transferred.

Contract language alone did not create a resale. Only items whose title and possession both passed directly to the federal government before any use by the contractor qualified as actually resold.

The letter also said tax paid to vendors had to be recovered from those vendors unless they assigned the refund right in writing under Rule 3.325.

What this means for you

A government customer and immediate-title clause did not exempt a contractor's own operating inputs. The letter focused on possession, use, and whether the materials were truly transferred before the contractor consumed them.

Common questions

Did federal title language make the overhead materials exempt? No.

When could an item qualify as resold to the government? When both title and possession transferred before the contractor used it.

Could the contractor directly claim tax paid to a vendor? Only with the vendor's written assignment of the refund right.

Citations and references

• 34 Tex. Admin. Code Rule 3.325 — refund claims for tax paid to vendors
• 34 Tex. Admin. Code Rule 3.285 — current STAR reference for resale and care-custody-and-control guidance
• Aerospace Corporation v. State Board of Equalization, 218 Cal. App. 3d 1300, 267 Cal. Rptr. 685 (1990) — California decision the letter declined to follow

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1129E04

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

August 29, 1991

Dear **:

Thank you for your recent letter. As I understand it, you are requesting
a refund of approximately $ 10 million in tax paid to vendors and/or directly
to the State of Texas on "overhead materials" used to fulfill a service
contract with the United States government. Title to these materials vested in
the United States immediately upon purchase by your company, which used the
materials to fulfill the contract. You cite the case of Aerospace Corporation
v. State Board of Equalization, 218 Cal. App. 3d 1300, 267 Cal. Rptr. 685
(1990) in support of your position that the overhead materials were "resold" to
the federal government.

For purposes of this reply, I assume that the "overhead materials" in
question are items that were either (a) consumed by your company in the
performance of a taxable service (and not physically transferred to the
customer's care, custody and control as an integral part of the taxable
service), or (b) used by your company in the performance of a nontaxable
service (whether or not the items were transferred to the customer).

For several reasons, it is our opinion that the tax was properly due and
payable, and no refund is due.

First, this office may refund tax only to a person who either paid that
tax directly to the State, or has received from such a person a written
assignment of the right to a refund. At least a portion of your claim is for a
refund of taxes paid directly to vendors. Such tax must be recovered from the
vendor unless the vendor assigns to you, in writing, the right to a refund.
Rule 3.325.

Further, this state is not bound by the decision of the California Court
of Appeals in the Aerospace case, because that court has no authority over the
State of Texas.

Finally, on numerous occasions, in hearings and opinion letters, we have
addressed fact situations similar to the Aerospace facts without arriving at
the same conclusion as the Aerospace court. In general terms, we have
consistently held that "overhead items" (as I have defined that term in
paragraph 2, above) that are purchased by and used by a service provider to
perform a service for the United States government are considered to be
consumed by (and taxable to) the service provider. This is in spite of any
language in the contract that purports to make the overhead items property of
the United States.

The exception would be for items that were actually resold to the federal
government. This includes only items to which both title and possession
transferred directly from the service provider to the federal government prior
to any use by the service provider. Otherwise, such overhead materials are
presumptively purchased not for resale, but for use by the provider of the
service.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers.

You are entitled to a refund hearing before an Agency Administrative Law
Judge. If you would like to request a hearing, please send your written
request within thirty (30) days of the date of this letter to the address shown
below.

Comptroller of Public Accounts
Revenue Accounting Division
P.O. Box 13528
Austin, TX 78711-3528

If you have further questions, feel free to write or call me at l-800-252-5555,
ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration