Despite a recent court ruling upholding federal contractors’ right to a sales tax refund on items resold to the U.S. government, the House will soon consider a “fix” to the exemption that could end up costing taxpayers $200 million or more over the next two years.
The proposed change, buried inside Senate Bill 1811, would work by redefining the “sale for resale” exemption in Texas. In the past, items purchased by contractors for the performance of federal government contracts were exempt from the state’s sales tax. However, under SB 1811, the resale exemption would be restricted to taxable resales and would only be extended to items serving as “an integral part of performing a contract with the federal government.” Given that the definition of “integral part” is somewhat subjective, one can only imagine the legal fights to come over its interpretation.
Perhaps even more troubling, the “fix” was originally intended to reverse the court’s previous decision as it pertained to one company-the Health Care Services Corporation. However, in its current form, the bill will be felt by all contractors in Texas working with the federal government. This could potentially lead to many government contractors relocating to other, more tax-friendly states.
While the state’s finances are undoubtedly a challenge, removing exemptions and raising taxes on businesses and taxpayers is not the right course of action, especially in today’s economy.