Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 565.1140


565.1140 Aerospace Claim for Refund. Advice was requested as to whether a taxpayer is entitled to a tax refund under the case of Aerospace Corp. v. St. Bd. of Equalization. The following two situations were involved.

(1) A manufacturer is a supplier of parts and a subcontractor to a U.S. Government prime contractor. The subcontractor allocates overhead purchases to the prime contractor contract. The subcontractor's contract, (fixed price) does not have the progress payment clause nor FAR reference numbers. However, the prime contractor's contract does contain the progress payments clause.

The fact that the manufacturer allocates all or a portion of overhead purchases to a contract with a government contractor does not, in itself, operate as a title-passage method. Therefore, sales to the manufacturer of overhead items consumed in pursuance of its contract with a government contractor are subject to tax when the requisite title-passage clauses are absent in its contract.

(2) An Aerospace company manufacturers products only for the U.S. Government. All of its contracts are prime government contracts of which some have "Progress Payment" title clauses, FAR 52.232-16 and some do not. All of the contracts are managed by the same cost accounting systems and contract costs (including overhead material), are charged to the government monthly.

The Aerospace court's decision pertained only to the second sentence of Regulation 1618 (b) (2). The court left the remaining principles embodied in the regulation intact. Therefore, the manufacturer's purchase of overhead materials are considered to be taxable except for those materials allocated to contracts which have the appropriate "progress payment" title clauses. Purchases of overhead allocated to others contracts remain subject to tax. 10/15/91.