Texas – Taxability of Purchases Used to Administer Federal Health Insurance Program

SALT Report 2562 – The Texas Supreme Court issued a ruling and guidance regarding a sales tax refund claim for a government contractor who administered federal health insurance programs. While performing the federal contracts, the Taxpayer paid sales and use tax on its purchases. The Taxpayer was reimbursed by the federal government for those expenses which resulted in the Taxpayer applying for a refund of the sales tax paid.

The Comptroller denied the refund request, and as a result the Taxpayer filed two separate tax refund suits claiming the sale-for-resale exemption for the following property and services that were used to perform the federal contracts:

  • Tangible personal property, such as chairs, printers, and office supplies,
  • Taxable services, such as printer repair services, landscape maintenance, and copier maintenance, and
  • Leases of certain tangible personal property, such as leases of computers, audio equipment, and printers

In both cases the trial court determined that the Taxpayer was entitled to the refund claims. Because of this the Comptroller requested that the Supreme Court consolidate both cases and decide what categories of purchases qualified for the state’s sale for resale exemption. The Court’s decision follows.

Tangible Personal Property

The resale exemption applied to its purchases of tangible personal property such as, chairs, printers, and office supplies, because the Taxpayer purchased the property to resell it in the normal course of business. The statute governing the sale for resale, Section 151.006(a)(1), only requires that the sale have “the purpose” of reselling the property.

The Court determined that the Taxpayer satisfied this requirement by purchasing the property for the purpose of transferring title to the federal government. The property was automatically resold to the federal government as soon as it was acquired by the Taxpayer due to a title-transfer clause in the contract.

Further, the Court rejected the Comptroller’s argument that the resale exemption should only apply if “the primary purpose of the original sale was to resell the property to the federal government in the form or condition in which the property was acquired.

Taxable Services

The Court determined that the resale exemption applied to the Taxpayer’s purchase of taxable services such as, printer repair services, landscape maintenance, and copier maintenance, because the Taxpayer resold the services to the government . The Taxpayer was able to demonstrate that the services were performed on the government’s behalf. Further, the Taxpayer was able to demonstrate that it resold the services “with the purpose of receiving reimbursement and compensation from the government.”

Leases of Tangible Personal Property

In this case, the resale exemption did not apply to the Taxpayer’s leases of tangible personal property, such as, leases of computers, audio equipment, and printers; because the Taxpayer could not demonstrate that it leased the property for the purpose of re-leasing it. Additionally, the Court found that the Taxpayer’s use of the property to perform the federal government contracts was not the same as re-leasing the property to the federal government.

Documentation of Reimbursements

Finally, the Supreme Court ruled that the Taxpayer was not required to produce documentation that would prove that it did not receive reimbursement from the federal government for the sales taxes it paid as required by section 111.104(f). This statute is designed to prevent double recovery by requiring anyone claiming a tax refund to provide documentation that it was never reimbursed for the taxes it is seeking to have refunded.

The Court ruled that the statute did not apply in this case because the Taxpayer never collected tax from the federal government. Further, the court rejected the Comptroller’s argument that being reimbursed for a tax was equivalent to collecting a tax.

For Further Information

Texas Supreme Court – Decision Nos. 11-0283 and 11-0652