News and Insights

Texas Court of Appeals Upholds Sale for Resale Exemption for Items Resold to Fulfill Certain Federal Contracts

Tax Development Mar 30, 2011

The Texas Court of Appeals, Third Circuit ("Court") recently upheld a refund of sales taxes on items resold to the United States government. In Combs v. Health Care Services Corporation, No. 03-09-00617-CV (Tex. App. – Austin, March 16, 2011, no pet. h.), the Court considered whether Health Care Services Corporation (HCSC), successor to Blue Cross and Blue Shield of Texas, Inc., could claim a sale-for-resale exemption on goods and services purchased to fulfill contracts with the federal government to administer Medicare Part A, Medicare Part B, and the Federal Employees Health Benefit Program (“FEP”).

Ryan analyzed the facts and developed HCSC’s theories for recovery during the administrative refund process. HCSC sought refunds of Texas sales and use taxes paid on:

  1. Allowable items – tangible personal property, such as office supplies and furniture
  2. Capitalized assets – capital assets that HCSC booked as assets, depreciated, and claimed as depreciation expenses to the federal government
  3. Utilities – gas and electricity
  4. Leases of office equipment, telephones, postage machines, water coolers, etc.
  5. Software/software maintenance – licenses to use software and maintenance of software
  6. Taxable services on tangible personal property – repairs of equipment and purchases of burglar or fire alarm services
  7. Maintenance on tangible personal property

HCSC contended that the foregoing items, on which HCSC paid tax at the time of purchase, were actually resold to the federal government under the Medicare and FEP contracts. The contracts contained title-passage provisions incorporated from the Federal Acquisition Regulations (FAR), which generally provided that items purchased for the performance of the contracts became the property of the federal government upon delivery to HCSC.

The Texas Comptroller of Public Accounts (“Comptroller”) contended that HCSC was not entitled to the sale-for-resale exemption on multiple grounds. First, the Comptroller argued that HCSC provided nontaxable services and was thus disqualified from the sale-for-resale exemption. In response, the Court noted that HCSC both provided nontaxable services and conveyed tangible personal property and taxable services to the federal government under the contracts, and that the sale-for-resale exemption does not disqualify providers of nontaxable services.

Next, the Comptroller noted that the transactions with the end consumer (the federal government) were not taxable, and that granting the sale-for-resale exemption to HCSC would allow the items to escape taxation entirely. The Court replied that the sale-for-resale exemption does not require tax to be imposed on the sale to the ultimate consumer, citing Roark Amusement & Vending L.P. v. Combs, No. 03-10-00105-CV (Tex. App. – Austin, January 26, 2011, no pet. h.).

Finally, the Comptroller argued that HCSC received reimbursement for the tax from the federal government and should not be allowed to "double recover" the tax. The Court responded that HCSC was not recovering the sales tax twice. Although Tex. Tax Code § 111.104(f) provides that retailers must refund taxes collected from consumers before obtaining refunds themselves, the Court noted that HCSC never collected tax from the federal government. HCSC did not bill the government for "sales tax." Instead, any tax HCSC paid to its vendors was simply included among all of the allowable costs for which HCSC received reimbursement. Furthermore, the Court rejected the Comptroller’s contention that HCSC was required to prove, transaction-by-transaction, that it did not collect tax from the federal government.

The Court upheld a district court judgment awarding HCSC a refund of sales tax paid on all of the above categories of purchases. At press time, it was not known whether the Comptroller would pursue further appeals.