League staff has become aware of at least one federal defense contractor that has requested a refund of state and local sales taxes it paid on items purchased to fulfill a federal contract.  The comptroller, based partially on an opinion from the Third Court of Appeals in the case of Combs v. Healthcare Services Corporation, has ordered at least one city to refund those sales taxes to the contractor and not to collect them going forward (the comptroller is refunding the state’s share). 

The case and the comptroller’s refund order are based on the “sale for resale” provision in the Texas Tax Code.  Contractors claim that they purchase items – office supplies, office equipment, furniture, software, utilities, and so forth – that ultimately belong to the federal government.  Thus, the contractors’ position (and the opinion of the Third Court of Appeals) is that the items are sold for resale and thus exempt from sales tax.  The legal arguments as to why that is not the case are somewhat obscure, but may prove very important to some cities.

Senate Bill 1, passed during the 2011 special legislative session, made some minor changes to the sale for resale provision, but still allows federal contractors to claim exemptions for several type of contracts. 

The comptroller has appealed the case to the Texas Supreme Court, and the League will most likely file an amicus brief in support of the state.

If your city has received a sales tax refund order from the comptroller’s office related to a federal contractor’s claim, please contact Scott Houston, TML general counsel, at

TML member cities may use the material herein for any purpose. No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the Texas Municipal League.

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