Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 565.1810


565.1810 Title Passage Clauses. A prime contract between the U.S. government and a prime contractor contains a title passage clause from the Federal Acquisition Regulation (FAR) such that title to overhead supplies and direct consumables passes from the prime contractor to the U.S. government prior to any use by the prime contractor. According to Regulation 1628(b)(3)(D), similarly patterned title passage clauses in a subcontract between the prime contractor and its subcontractor(s) or in a supply contract between the subcontractor(s) and its supplier(s) also serve to pass title to the U.S. government prior to any use by the prime contractor. When the prime contract does not include a FAR title passage clause, tax will be owed by one of the parties, depending upon where the title has vested when the use of the property occurs.

These clauses can be in one of two forms. The first form is an actual rewriting of the FAR clause with the name of the prime contractor substituted for the federal government and the name of the subcontractor substituted in place of the name of the prime contractor. The second form is an incorporation of the FAR clause by reference and the addition of a paragraph to the contract stating that where the FAR clause states the buyer is the government, the parties intend that the buyer is the prime contractor, and where the FAR clause refers to the prime contractor as retailer or seller, the parties intend such reference to be to the subcontractor. Either type of clause should be effective to avoid the application of sales tax or use tax to that transaction. 06/26/02. (2003–2).