Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013

Sales and Use Tax Annotations

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Annotation 565.1362


565.1362 Overhead Materials. A taxpayer builds, converts, and repairs ships for the U.S. Navy. The taxpayer is not reimbursed by the government for overhead materials as direct items of cost. It has fixed price contracts which contain progress payment clause 252.217–7106 which states, in relevant part:

"(e) All material, equipment, and other property or work in process covered by progress payments made by the government shall upon the making of such progress payments become the sole property of the government, and shall be subject to the provision of Clause 252.217–7105 entitled TITLE hereof."

Clause 252.217–7105 states, in relevant part:

"Unless title to materials and equipment acquired or produced for, or allocated to, the performance of this agreement shall have vested previously in the government by virtue of the other provisions of this agreement, title to all materials and equipment to be incorporated in any vessel or part thereof, or to be placed upon any vessel or part thereof in accordance with the requirements of the job order, shall vest in the government upon delivery thereof . . . . "

"[A]ll such contractor-furnished materials and equipment not incorporated in any vessel or part thereof, or not placed upon any vessel or part thereof, shall become the property of the contractor, except those materials and equipment the cost of which has been reimbursed by the government to the contractor."

In order for title to the overhead materials to pass to the government prior to use by the contractor, there must be an appropriate title provision between the contractor and the government such as in the Aerospace case. The only title provision included in this contract is the progress payment clause. That clause provides that the payment is measured by the labor and materials incorporated in the vessel. In fact, the title clause provides that contractor-provided materials not incorporated in the vessel become the property of the contractor. Overhead materials do not include materials which are incorporated in the vessel. Thus, the government does not acquire title to the overhead materials at all in this contract, let alone prior to the taxpayer's use. Therefore, the taxpayer is liable for the use tax on the cost of the overhead items. 2/15/96.