A recent sales tax ruling out of Louisiana provides an excellent, and unfortunate, example of a government contractor thinking they are an agent of the government and therefore exempt from tax on its purchases of materials. On February 12, 2014, the Louisiana Court of Appeal affirmed an approximately $400,000 sales tax assessment on the purchases of materials made by a government contractor performing a construction project. Bridges v. Cepolk Corporation, Case No. 13-1051, La. Ct. App. 3rd Cir., 2/12/2014.
The main issue in the case, which is one that is relevant for government contractors in most states, was whether the contractor had an agency relationship with the exempt government entity, allowing the contractor to purchase materials on behalf of the government. The court concluded that the contractor was not acting as an agent of the government because (1) there was no written agreement or provision in the contract authorizing the contractor to act as a purchasing agent for the government; (2) the government agency did not acquire title to the property at the time of the purchase. Further, the contractor was deemed the taxable user of the materials because the contract was for the performance of services. This prevented the contractor from claiming that its purchases were exempt from tax as purchases made for resale.
Although this case involved construction services, an industry that does have its own specific rules for sales tax, the requirements for when a contractor is considered a purchasing agent for the government general apply to all service providers. One important aspect to of this rule is that simply having a provision stating that title immediately passes to the government is not always sufficient. A number of jurisdictions have concluded that a title-passing provision is irrelevant if the contractor is using the property to perform services because the contractor is the taxable user of the property. For example, in Virginia, a contractor performing a service contract will only be able to make exempt purchases if the credit of a governmental entity is bound directly and there is an official designation that the contractor is the purchasing agent for such governmental entity.
Still, the rules do vary from state to state. Contractors that may be exempt from tax on its purchases in one state (e.g., because the state has a specific exemption for contracts performed for a certain government agency) should not assume that its purchases are similarly exempt from sales tax for a contract performed in another state. The last thing a contractor wants two years after the completion of a contract is a $400,000 sales tax.
If you have any questions about sales tax compliance, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
About the Author: Michael Colavito is a senior manager in the state and local tax practice of Aronson’s Tax Services Group. Michael assists clients with a broad range of state and local tax issues. His expertise extends to many areas of multi-state taxation, including income, franchise, sales and use, and property taxes.