From a seminar last week:
A company sold a federal agency a LOT of equipment. The equipment was delivered directly to the federal agency although it was paid for by the subcontractor. The equipment dealer assumed that the sale was to the feds and therefore wasn't taxable. They were wrong.
Sales to our beloved federal government are dicey. In this situation, the title and possession passed directly to the federal government. A reasonable person would have thought the sale would be exempt from tax. However, many states say that what counts isn't who the product is delivered to, or even who takes title. In those states, the real test is who paid for the goods. If the check is printed by the US Treasury, then the feds bought it. If the check was printed by the contractor, then the contractor bought it.
The moral of the story is that if you sell to government agencies, you need to make sure of three things before you even bid.
1. Is the sale exempt in that state? There's at least one state where sales to the US government are taxable.
2. Does the state tax state and local government sales differently from federal sales?
3. How does the state handle the tax when a subcontractor is involved? It varies all the way from, if the contractor is acting as an official agent of the feds, to who takes title, to who pays the check.
In this particular real situation, the company was assessed over $100,000 in taxes that they should have charged the contractor. They were eventually able to recover it from the contractor, but it took time and a lot of effort.
Be careful and do it right.
Sales Tax Guy
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photo note: I had to come up with a representation for the federal government...I thought this would do nicely. You can see more of the picture here.