A private insurance carrier (Blue Cross) was entitled to a sale-for-resale exemption from Texas sales and use tax on its purchases of various items and services used in administering three health insurance programs for the federal government, including two Medicare programs. The purchases at issue included office equipment, supplies, utilities, software, and taxable services and maintenance on real and tangible personal property.
[CCH Note: An earlier case involving the same parties and issues but a different refund period was reported in a previous story. (TAXDAY 2011/03/17, S.18)]
Eligibility to Claim Resale Exemption
The Texas Comptroller contended that the resale exemption did not apply because Blue Cross only resold nontaxable administrative services, the federal contracts did not require Blue Cross to purchase the taxable items at issue, and the purchases were only incidental to the performance of nontaxable administrative services.
Rejecting these contentions, the Texas Court of Appeals held that Blue Cross conveyed tangible personal property to the federal government in addition to providing nontaxable administrative services, and nothing in the resale exemption stated that Blue Cross could only do one and not the other. Also, nothing in the tax code indicated that Blue Cross had to be obligated to purchase the taxable items in order for a resale to occur.
Because Blue Cross purchased taxable items and sold them to the federal government in performing its contracts, it qualified as a purchaser and seller under the resale exemption. Further, the fact that the ultimate resale was not taxed did not disqualify Blue Cross from claiming a resale exemption.
Occurrence of Resale
The court rejected the comptroller’s claim that Blue Cross did not resell the property and services at issue to the federal government. The tangible personal property was resold when title passed to the federal government pursuant to the Federal Acquisition Regulations (FAR) clauses that were incorporated in the three contracts. The services and maintenance were resold when Blue Cross performed those services for the benefit of the federal government on property owned by the federal government.
Alternatively, the services at issue were exempt because they were performed on property owned by the federal government. This exemption did not require that the property be resold to the government.
Finally, allowing a resale exemption would not result in Blue Cross receiving an impermissible double recovery (i.e., both a sales tax refund and a reimbursement of sales taxes from the federal government) because the record indicated that Blue Cross never received sales tax payments from the federal government.
Combs v. Health Care Services Corp., Texas Court of Appeals, Third District, Austin, No. 03-10-00675-CV, July 7, 2011