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Keywords

contract
contractstatutetax law

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Sweet Associates, Inc. v. Gallman, 36 A.D.2d 95, 318 N.Y.S.2d 528

Facts

The petitioner, a general contractor, was awarded a contract by the City School District of Schenectady for the construction of Halsey Elementary School. The contract specified that the contractor would purchase materials for resale to the school district, which is exempt from sales tax. After an audit, the Tax Commission assessed additional sales taxes on these transactions, leading the contractor to seek a refund for taxes paid under protest, which was denied by the Commission.

During 1965 and 1966 petitioner made various purchases of building materials under the contract which were resold to the School District, and on which petitioner did not pay a sales or use tax.

Issue

Whether the contract between the school district and the contractor constituted a 'time and materials contract' exempt from sales tax, or a 'lump sum contract' subject to sales tax.

Whether the contract involved here is a lump sum contract for the construction of the school building and, since the materials purchased were incorporated into realty prior to the transfer from the contractor to the School District, no tax exemption was available.

Rule

Sales tax exemptions apply to sales made to certain governmental entities, including school districts, when the sale is for resale and not for consumption.

Section 1105(a) of the Sales and Use Tax Law imposes a tax upon the receipts of every retail sale of tangible personal property, with certain exceptions.

Analysis

The court analyzed the nature of the contract and determined that it was structured as a 'time and materials contract' rather than a 'lump sum contract.' The court emphasized that the method of bidding and the contract's provisions allowed the contractor to purchase materials for resale to the school district, which is exempt from sales tax. The court found that the Tax Commission's interpretation of the contract as a lump sum was incorrect.

The method of bidding and contract entered into here resulted in a ‘time and materials' contract and not a ‘lump sum’ contract which is not prohibited by statute.

Conclusion

The court annulled the Tax Commission's determination and remitted the matter for further proceedings, affirming that the contractor's sales of materials to the school district were exempt from sales tax.

The determination should be annulled, with costs, and matter remitted for further proceedings not inconsistent herewith.

Who won?

The petitioner, the general contractor, prevailed because the court found that the sales of materials to the school district were exempt from sales tax under the applicable law.

The record supports a finding that the amount of the sales tax was not included in the bid estimate and that the real beneficiary of the tax exemption was the school district itself.

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