Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 565.1700


565.1700 Special Tooling. A taxpayer entered into a contract with the Navy to develop and deliver two prototype aircraft. As part of the contract, the taxpayer would acquire or manufacture certain items of special tooling (ST) and special test equipment (STE). The ST/STE are so highly specialized that their use is restricted to testing the particular aircraft being developed and related supplies and parts.

Contract Clause H, "Contractor Investment in Special Tooling and Special Tooling Equipment," provides in part that the contractor will acquire, own, and retain title to all new production special tooling and special tooling equipment. This clause also states that in the event the contractor elects to dispose of the ST/STE, the government will have the right of first refusal to acquire ST/STE at a mutually agreed price.

The contract also contains FAR contract clauses in the agreement. Clauses 52.245–17, Special Tooling (Apr 1984) and 52.245–18, Special Tooling Equipment (Apr 1984), were checked off as being included in the contract. The designation for each clause also had under it, in handwriting, the following phrase: "Also see section H, Special Contract Requirements entitled 'Contractor Investment in Special Tooling and Special Test Equipment'."

Under these facts, the taxpayer purchased ST/STE, or the materials to make them, as a consumer, and did not transfer title to the Navy prior to using the property. The fact that the Navy reimbursed the taxpayer for its costs of manufacturing or acquiring the ST/STE and that its acquisition provided a benefit to the Navy does not in itself create a sale to the Navy. (United States v. New Mexico (1982) 455 U.S. 720, 735). A contract must contain clauses specifically providing for the transfer of title to the property in question to the government prior to any use by the contractor to be regarded as purchasing the property for resale (no tax). (Lockheed Aircraft Corp. v. S.B.E. (1978) 81 Cal.App.3d 257; 265–266.)

No such clauses exist in this contract. Actually, Clause H specifically provides that the taxpayer retains title to ST/STE. The provisions of FAR 52.245–17 and 52.245–18 do not mandate a different result since these clauses were modified in handwriting to incorporate the provisions of Clause H. Even if these two FAR clauses provided for some sort of title transfer, those terms were modified by the terms of Clause H.

Thus, the taxpayer retains full title to the ST/STE with the government getting a right of first refusal in the event the taxpayer decides to dispose of the property. There was no sale to the Navy. Therefore, the taxpayer owes tax measured by the cost of the ST/STE. 8/28/95.