Title Transfer Not Enough To Establish Resale In Massachusetts

Bucking a nationwide trend, the Massachusetts Supreme Court has denied a taxpayer's refund claim for sales and use tax paid on overhead items indirectly used in the performance of federal government contracts.1 The taxpayer, Raytheon Company, had claimed that its purchase of the overhead items fell within Massachusetts' resale exemption.

Raytheon was reimbursed by the federal government for both the direct costs incurred under its federal government contracts and the indirect costs incurred under those contracts. The indirect costs included amounts paid for items such as cellular telephones, toilet paper, trash bags and office furnishings. Under the Federal Acquisition Regulations (FARs), title for these indirect cost items transferred to the federal government. Citing cases in states such as Arizona, Missouri, California, and Texas, Raytheon argued that because the passage of title constituted a "sale," and the sale occurred in the ordinary course of its business of performing its contracts with the federal government, the items were purchased for resale and not subject to tax.

Massachusetts rejected Raytheon's argument, reasoning that while the items were technically resold to the federal government, Raytheon had not purchased the items with the "purpose" of reselling them, and therefore the purchase was still taxable. The court determined Raytheon's "purpose" in purchasing the overhead items by looking to the nature of Raytheon's business, which the court determined to be producing and selling defense systems and not purchasing indirect cost items for purpose of resale to the federal government. Since the indirect costs were merely incidental to its business, Raytheon did not purchase them for the purpose of resale, and the purchases were therefore taxable. In reaching its conclusion, the court refused to follow a recent Texas Court of Appeals decision involving Raytheon, in which the Texas court found that Raytheon's business was performing government contracts, and the overhead items purchased by Raytheon were resold in furtherance of that business.2

The Massachusetts ruling...