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Texas Supreme Court Upholds Sale for Resale Exemption for Items Resold to Fulfill Certain Federal Contracts.

DALLAS, June 7, 2013 /PRNewswire/ -- The Texas Supreme Court ("Court") has upheld a refund of sales taxes paid by a Ryan client on items resold to the United States government. In Combs v. Health Care Services Corporation, Nos. 11-0283, 11-0652 (Tex., June 7, 2013), the Court ruled that Health Care Services Corporation (HCSC), successor to Blue Cross and Blue Shield of Texas, Inc., could claim a sale-for-resale exemption on tangible personal property and taxable services purchased to fulfill contracts with the federal government to administer Medicare Part A, Medicare Part B, and the Federal Employees Health Benefit Program ("FEP"). The Texas Comptroller of Public Accounts ("Comptroller") denied HCSC's administrative refund claims, and HCSC subsequently filed suit. Mark W. Eidman and Doug Sigel of the Ryan Law Firm, LLP represented HCSC before the Court.

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Ryan analyzed the facts and developed HCSC's theories for recovery during the administrative refund process. HCSC sought refunds of Texas sales and use taxes paid on:

  1. Allowable Items – tangible personal property, such as office supplies and furniture;
  2. Capitalized Assets – capital assets that HCSC booked as assets, depreciated, and claimed as depreciation expenses to the federal government;
  3. Utilities – gas and electricity;
  4. Leases of office equipment, telephones, postage machines, water coolers, etc.;
  5. Software/Software Maintenance – licenses to use software and maintenance of software;
  6. Taxable Services on Tangible Personal Property – repairs of equipment, purchases of burglar or fire alarm services; and
  7. Maintenance on tangible personal property.

HCSC contended that the foregoing items, on which HCSC paid tax at the time of purchase, were actually resold to the federal government under the Medicare and FEP contracts. The contracts contained title-passage provisions incorporated from the Federal Acquisition Regulations (FAR), which generally provided that items purchased for the performance of the contracts became the property of the federal government upon delivery to HCSC. The Court upheld the sale-for-resale exemption on purchases of tangible personal property and taxable services but denied the exemption for leases of tangible personal property.

First, the Court held that HCSC was entitled to the sale-for-resale exemption on purchases of tangible personal property that was automatically transferred to the federal government under the title passage provisions. The Comptroller presented the Court with a novel interpretation of the "essence of the transaction" test, contending that the sale-for-resale exemption did not apply because HCSC's "primary purpose" in buying property was to use it in the performance of nontaxable services and not to resell it in the form or condition in which it was acquired. The Court rejected this argument because it is not supported by the plain language of the statute.

Furthermore, the Court reaffirmed its earlier decision in Day & Zimmerman, Inc. v. Calvert, 519 S.W.2d 106 (Tex. 1975). The Court held that the title transfer provisions at issue in Day & Zimmerman are indistinguishable from those in the present case and that subsequent changes in the law neither modified nor abrogated Day & Zimmerman. The Court held that "Day & Zimmerman cuts squarely in HCSC's favor" and "stands for the proposition that automatic title transfer upon purchase qualifies for the sale-for-resale exemption."

The Court rejected the Comptroller's argument that "absurd" consequences would flow from a ruling in favor of HCSC. The Comptroller pointed out that a provider of a taxable service may issue a resale certificate only for the purchase of tangible personal property that will be transferred to the care, custody, and control of the purchaser of the service, whereas the provider of a nontaxable service (such as HCSC) could claim the exemption under automatic title transfer provisions in its contracts. First, the Court noted that "absurdity" is an issue only if a statute is ambiguous and that there is nothing "absurd" about treating providers of taxable and nontaxable services differently. The Court wrote that even "odd" or unexpected results do not compel it to rewrite an unambiguous law. The Court said that the Legislature has had decades since Day & Zimmerman to close this alleged "loophole" but has not done so.

Next, the Court held that HCSC's purchases of taxable services also qualified for the sale-for-resale exemption. The Comptroller argued that the title transfer provisions applied only to tangible personal property. The Court responded that HCSC acquired taxable services and resold them to the government "by directing that they be performed on the government's behalf with the purpose of receiving reimbursement and compensation (consideration) from the government…" Such services were resold "in the form or condition" in which they were acquired. Therefore, they qualified for the exemption under the plain language of the statute.

The Court denied the sale-for-resale exemption for HCSC's leases of tangible personal property. Although the Court acknowledged that a lease of property for the purpose of re-leasing it would qualify for the sale-for-resale exemption, it held that there was no evidence that HCSC re-leased property to the federal government. Using the property to perform nontaxable services under a federal contract was not the same as "formally re-leasing" the property to the government. The subsequent transfer of leased property to a new contractor after the expiration of HCSC's contract was insufficient to establish that HCSC originally leased the property for the purpose of re-leasing it, as required by the exemption.

Finally, the Comptroller argued that HCSC could not obtain a refund because the government reimbursed HCSC for the sales taxes it paid to its suppliers. The Comptroller relied on Tex. Tax Code section 111.104(f), which provides that "[n]o taxes…may be refunded to a person who has collected the taxes from another person unless the person has refunded all the taxes and interest to the person from whom the taxes were collected." The Court held that "reimbursement" and "collection" of taxes are two different things, and HCSC did not "collect" taxes from the federal government within the meaning of the statute.

The Court remanded the case to the trial court for entry of judgment based upon these holdings. At press time, it was not known whether the Comptroller would ask the Court to reconsider.

About Ryan
Ryan is an award-winning global tax services firm, with the largest indirect tax practice in North America and the seventh largest corporate tax practice in the United States. Headquartered in Dallas, Texas, the Firm provides a comprehensive range of state, local, federal, and international tax advisory and consulting services on a multi-jurisdictional basis, including audit defense, tax recovery, credits and incentives, tax process improvement and automation, tax appeals, tax compliance, and strategic planning. Ryan is a three-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 1,600 professionals and associates serves over 9,000 clients in 40 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at www.ryan.com.


Randy W. Donald
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Ginny Buckner Kissling
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John D. Christian
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