SC PRIVATE LETTER RULING #92-3
TO: ABC Company
SUBJECT: Federal Government
(Sales and Use)
TAX MANAGER: Jerry Knight
REFERENCE: S.C. Code Ann. Section 12-36-2120(1) (Supp. 1991)
S.C. Code Ann. Section 12-36-2120(2) (Supp. 1991)
AUTHORITY: S.C. Code Section 12-4-320
SC Revenue Procedure #87-3
SCOPE: A Private Letter Ruling is a temporary document
issued to a taxpayer, upon request, and it applies
o_n_l_y_ to the specific facts or circumstances related
in the request.
Private Letter Rulings have no precedential value
and are not intended for general distribution.
Q_u_e_s_t_i_o_n_:
Are sales to ABC Company ("ABC") exempt from South Carolina sales and use
taxes as sales to the federal government, pursuant to Code Section
12-36-2120(2)?
F_a_c_t_s_:
ABC is a Delaware corporation whose corporate headquarters is located in
South Carolina. ABC was organized for the exclusive purpose of managing
and operating the XYZ Site ("Site"), the primary purpose of which is to
produce certain items for the federal government. In carrying out this
function, ABC regularly purchases a wide variety of goods from in-state
and out-of-state vendors. ABC has a so-called "direct pay" certificate
issued by the Commission, which allows ABCC to make purchases free of the
sales and use tax and to directly pay to the Commission any taxes which
may be due.
The Site was operated by another company for the federal government from
August 1, 1950 until April 1, 1989, at which time ABC assumed
responsibility for the Site's management and operation.
D_i_s_c_u_s_s_i_o_n_:
South Carolina Code Section 12-36-2120(2) exempts from the sales and use
taxes "the gross proceeds of sales, or sales price of tangible personal
property sold to the federal government". Therefore, it must be decided
if sales to ABC are tantamount to sales to the federal government.
In U_n_i_t_e_d_ _S_t_a_t_e_s_ _o_f_ _A_m_e_r_i_c_a_ _a_n_d_ _E_._I_._ _d_u_ _P_o_n_t_ _d_e_ _N_e_m_o_u_r_s_ _a_n_d_ _C_o_._ _v_._ _
L_i_v_i_n_g_s_t_o_n_, 170 F. Supp. 9 (1959), a U.S. District Court case, it was
ruled that sales of tangible personal property to de Pont for use in
operating the Savannah River Site were exempt from the South Carolina
sales and use tax, as du Pont acted as the "alter ego" of the federal
government and contracts entered into by du Pont were "entered into...by
or on behalf of the United States".
In arriving at its decision, the court pointed to the following facts:
Du Pont's credit was not to be advanced or risked. Its
disclosures in its requests for quotation and its
purchase orders that the goods were being procured for
the United States, to whom title would directly pass,
and its imposition of the terms required of public
contracts with the United States, negatived
[demonstrated against] any individual liability of its
own. What obligations did arise from the purchase
orders were discharged by drawing directly upon public
funds.
****
It is clear that du Pont's procurement activities were
authorized, and were openly on behalf of the United
States....
An examination of ABCC's contract with the federal government reveals
that, like du Pont, ABCC is also acting on behalf of the federal
government. This determination is made based upon:
1. Information from ABC's contract with the Federal Government
S_e_c_t_i_o_n_ _I_._5_5_,_ _p_a_g_e_ _I_-_6_0_:
"Title to all property acquired by the Contractor [ABC] under such an
authorization shall vest in the Government unless otherwise specified
in the contract".
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S_e_c_t_i_o_n_ _I_._7_5_,_ _p_a_g_e_ _I_-_8_2_:
"c. S_p_e_c_i_a_l_ _b_a_n_k_ _a_c_c_o_u_n_t_ _-_ _u_s_e_. All advances of Government funds
shall be withdrawn pursuant to a letter of credit in favor of the bank
or, in the option of the Government, shall be made by check payable to
the Contractor [ABCC], and shall be deposited only in the Special Bank
Account referred to in the Agreement for Special Bank accounts. No
part of the funds in the Special Bank Account shall be (1) mingled
with any funds of the Contractor or (2) used for a purpose other than
that of making payments for costs allowable under this contract or
payments for other items specifically approved, in writing, by the
Contracting Officer......"
"d. ....the Contractor acquires no right, title or interest in or to
such advance other than the right to make expenditures therefrom, as
provided in this clause."
S_e_c_t_i_o_n_ _I_._7_9_,_ _p_a_g_e_ _I_-_8_8_:
"b.....Subcontracts shall be in the name of the Contractor [ABC], and
shall not bind or purport to bind the Government".
S_e_c_t_i_o_n_ _I_._5_2_,_ _p_a_g_e_ _I_-_5_7_:
"If the Contracting Officer authorizes supplies to be shipped on a
commercial bill of lading and the Contractor [ABC] will be reimbursed
these transportation costs as direct allowable costs, the Contractor
shall ensure before shipment is made that the commercial shipping
documents are annotated with....the following notations.:
Transportation is for the [Federal Government] and the actual
total transportation charges paid to the carrier(s)....shall be
reimbursed by the Government."
2. Information from the "Special Bank Account Agreement" -
P_a_g_e_ _1_:
"This agreement is entered into this 15th day of December, 1989
between the UNITED STATES OF AMERICA, represented by a [Federal
Agency]; ABC Company....; and The Citizens and Southern National Bank
of Georgia...."
E_x_h_i_b_i_t_ _C_,_ _P_a_g_e_ _1_:
"1. G_E_N_E_R_A_L_ _I_N_F_O_R_M_A_T_I_O_N_
The checks-paid letter of credit is a technique used by the Federal
Government to provide payment to a recipient [ABC] who is performing
services or providing goods to the [Federal Agency]. Under this
method, the recipient issues checks for program purposes. When these
checks are presented to the servicing financial institution (C&S) for
payment, the checks will be totaled and the financial
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institution will draw funds from the servicing Federal Reserve Bank to
cover them. The financial institution is compensated for services
performed in the form of non-interest bearing time deposit."
3. ABC's Purchase Orders contain the following statement: "U.S. [FEDERAL
GOVERNMENT AGENCY] CONTRACT --- ".
In summary, ABC's credit is not advanced or risked; ABCC's purchase
orders disclose certain purchases are made on behalf of the federal
government; title to property acquired by ABCC vests in the federal
government; and vendors are paid directly from the federal government's
special checking account.
C_o_n_c_l_u_s_i_o_n_:
Purchases of tangible personal property by ABC on behalf of the federal
government under the provisions of the aforementioned contract are exempt
from the South Carolina sales and use taxes pursuant to Code Section
12-36-2120(2). Purchases made by ABC which are not on behalf of the
federal government are subject to the South Carolina sales and use taxes.
NOTE: This document does not address purchases of tangible personal
property by subcontractors and other entities performing work at the XYZ
Site. Whether such purchases are taxable or not must be determined on a
case-by-case basis.
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