A significant decision by the Texas Court of Appeals clarified the size and scope of the Texas sales tax resale exemption. In Combs v. Health Care Services. Corp., the taxpayer purchased tangible personal property and services for use in administering employee benefit programs for the federal government. After paying sales tax on the purchases, Health Care filed refund claims on the theory that the purchases qualified for the sale-for-resale exemption.
Health Care claimed that its purchases made pursuant to its federal government contract qualified for the resale exemption. While title to the purchased property automatically passed to the government, Health Care retained possession of the property. In finding that the purchases qualified for the resale exemption, the court reached the following important conclusions:
- 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;
- Failing to provide an exemption certificate does not disqualify the reseller from claiming the exemption;
- A sale-for-resale may qualify for the exemption even where the resale is nontaxable;
- A taxable service may qualify for the exemption despite the fact that there is no subsequent transfer of title to the services; and
- 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.
Taxpayers making sales to Texas exempt entities should consider the implications of this case as it relates to their operations and consider filing refund claims as appropriate.