Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Aerospace Corporation v. State Board of Equalization . . . (1990)

Tax Does Not Apply to Overhead Materials Purchased by Aerospace Company Pursuant to Contract with Federal Government

The Board assessed sales and use taxes against taxpayer, an aerospace company, on supplies and materials taxpayer obtained to perform a contract with the United States for research and development of space and military systems. For accounting and billing purposes, taxpayer charged materials to "indirect costs" included in "overhead", and allocated the overhead materials to specific contracts by multiple accounting methods. Taxpayer purchased the items pursuant to resale certificates given to the vendors, and no sales tax was paid at the time of purchase. Taxpayer's contract with the federal government contained a clause specifying when title to the overhead materials passed to the federal government. Based on an interpretation of a Board-issued general bulletin, and, later, a revision of Regulation 1618, the Board determined that taxpayer was liable for tax on the purchase of certain categories of overhead materials. Regulation 1618 requires proof of allocation of overhead material to a specific contract in order for title to such materials to vest in the government. Taxpayer asserted that the Board's interpretation was improper and that Regulation 1618 was invalid.

The court found Regulation 1618 to be arbitrary and in conflict with the court's holding in Lockheed Aircraft Corp. v. State Board of Equalization (1978) 81 Cal.App.3d 257, that title to property acquired for the performance of a contract with the federal government vests in the government in accordance with the title provisions of the contract. While Regulation 1618 states that title passes to the federal government in accordance with the terms of the contract, other provisions of the regulation ignore the contract. The court concluded that taxpayer's resale of overhead materials to the federal government pursuant to the contracts was exempt from sales tax under Revenue and Taxation Code Section 6381. Further, since taxpayer's use of the materials occurred after title passed to the government under the title clauses in the contracts, such use was exempt from use tax. Aerospace Corporation v. State Board of Equalization (1990) 218 Cal.App.3d 1300.