A recent decision by the Texas Court of Appeals, Combs v. Health Care Services Corporation, 2011 WL 1005419 (Tex. App. Mar. 16, 2011), clarified Texas’s sale-for-resale exemption to the state’s sales and use tax and held that a government contractor was entitled to a sales tax refund under the exemption.
The taxpayer, Blue Cross and Blue Shield of Texas, Inc., was a private insurance carrier that entered into contracts with the federal government to provide Medicare and health benefit programs to federal employees. These contracts required Blue Cross to provide services like reviewing claims and paying benefits. To provide these services, Blue Cross purchased various types of tangible personal property and taxable services, including utilities, leases, software, and maintenance on tangible personal property. Pursuant to provisions of the Federal Acquisition Regulations (FAR), title to all property purchased by Blue Cross passed to the federal government if the property was reimbursable by the federal government.
Blue Cross sought a refund of the sales tax it paid on these purchases on the theory that they fell under the sale-for-resale exemption. The claim was denied by the Comptroller. The Texas Court of Appeals, however, held that Blue Cross qualified for the exemption and was entitled to a refund of over $4.8 million.
In so holding, the court reached the following conclusions. First, a reseller of property is not precluded from qualifying for the exemption merely because it also provides a nontaxable service, even if the property being resold is used in the provision of the nontaxable services, and even if the contract does not require the seller to purchase the property. Second, failure to provide an exemption certificate does not disqualify the reseller from claiming the exemption. Third, a sale-for-resale may qualify for the exemption even if the resale is not taxable. Fourth, a taxable service may qualify for the exemption despite the fact that there is no subsequent transfer of title to the service. Fifth, there is no impermissible “double recovery” of sales tax where the reseller’s cost reimbursed by the purchaser includes sales tax but the reseller does not separately state or explicitly pass through the sales tax.
Based on the Texas Court of Appeals’ liberal interpretation of the sale-for-resale exemption, government contractors may be entitled to a refund of sales tax associated with performance of those contracts.