Texas Court of Appeals Releases Opinion on Overhead Materials Purchased by Government Contractor

The Texas Court of Appeals, Third District, at Austin released its opinion in Raytheon E-Systems, Inc. v. Carole Keeton Strayhorn partially upholding the lower court's decision and remanding a portion to the lower court for factual determination. As was the case in the 200th Judicial District Court proceeding that occurred last year, the Court of Appeals ruled that purchases of materials by Raytheon that were allocated to qualifying contracts with the Federal Government qualify as exempt purchases for resale.

This case involved the purchase of indirect materials that were allocated to contracts with the Federal Government containing specific title-passage provisions in accordance with Federal Acquisition Regulations ("FAR"). Because title to the materials passed to the customer, the items were deemed purchases for resale even though possession never transferred to Raytheon's customer.

The Texas Court of Appeals relied on a former Texas Supreme Court decision, Day & Zimmerman, Inc. v. Calvert (Tex. 1975), and similar cases involving indirect materials in other jurisdictions including Aerospace Corp. v. State Board of Equalization (Cal. Ct. App.1990), and Motorola, Inc. v. Arizona Dep't of Revenue (Ariz. Ct. App. 1999), to reach the conclusion that the purchases in question were not subject to tax. The sole issue remanded to the lower court deals with the applicability of Texas Tax Code Ann. §111.104(f) and whether these taxes were indeed collected from the Federal Government.

It is expected that the State will appeal this decision to the Texas Supreme Court.

If you have any questions regarding the above information, please contact Mr. G. Brint Ryan or Mr. Randy Donald at 972.934.0022. You may also contact Mr. Ryan and Mr. Donald by e-mail.