Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 565.0628


565.0628 Title Clause. Generally, U.S. contractors are consumers of materials and fixtures used in the performance of contract with the United States for the construction of improvements to real property in this state. There are certain circumstances in which the inclusion of a specific contract provision may allow a contractor to avoid tax on materials and fixtures purchased by the contractor out of this state.

On April 1, 1984, the U.S. government adopted the Federal Acquisition Regulation (FAR) which replaced other acquisition regulations commonly referred to as ASPR, FPRS and DAR.

FAR provision 45.106(f)(1) requires, with certain exceptions, the insertion of clause 52.245–5, Government, Property, in contracts when a cost-reimbursement, time-and-materials, or labor-hour contract is contemplated. Subsection (c) of 52.245–5 states:

"(2) Title to all property purchased by the contractor for which the Contractor is entitled to be reimbursed as a direct item of cost under this contract shall pass to and vest in the Government upon the vendor's delivery of such property."

"(3) Title to all other property, the cost of which is reimbursable to the Contractor, shall pass to and vest in the Government upon—

(i) Issuance of the property for use in contract performance;

(ii) Commencement of processing of the property or use in contract performance; or

(iii) Reimbursement of the cost of the property by the Government, whichever occurs first."

Only property coming within subsection (c)(2) would pass title to the Government upon delivery to the Contractor. If that delivery takes place at an out-of-state point, the subsequent use of the property on a contract to improve realty in California would not be taxable, as title would have passed to the U.S. before the property entered this state. If the property involved comes within subsection (c)(3), the property would be subject to tax. 7/5/89.