Raytheon loses bid to avoid state sales tax

If Raytheon Co. had its way, every day would be a tax holiday.

The Waltham defense contractor unsuccessfully tried to persuade a Massachusetts state tax board that because most of the company's work is done for the federal government, it should be exempt from paying state sales taxes on much of what it buys here - items as diverse as toilet paper, a juke box, and promotional gifts such as golf umbrellas, pins, and key chains.

Raytheon argued that it "regularly needs to purchase many items in order to perform its government contracts."

The company is already exempt from paying sales taxes on many items it purchases specifically for the federal government, such as computer chips and metal sheets used to make missiles. But Raytheon said it should also be free from paying state sales taxes on its general overhead expenses, such as pads of paper used by company engineers to jot down notes.

Specifically, Raytheon estimated that more than 81 percent of its work was for the US government in 2001 and 2002. Therefore, the company told the state tax board, it deserved a refund of 81 percent of the sales and use taxes it paid on general overhead expenses during those years in Massachusetts - about $700,000, plus interest.

But in a ruling last month, the Massachusetts Appellate Tax Board denied the request, ruling the expenses, including snow removal and catering services, were "incidental" to the government contracts.

"Aside from the occasion when a paper-copy of a report or memorandum was delivered to the federal government, the indirect cost items at issue were generally not delivered to the federal government in connection with the performance of the government contracts," the board ruled.

Like many tax cases, however, the decision also turned on an arcane legal point - how integral golf umbrellas and toilet paper were to Raytheon's missiles and radar systems.

Companies don't normally have to pay sales tax on items they buy for resale, because otherwise customers would be forced to pay sales tax on the same item twice - once when companies purchase the item and again when they sell it. But they must prove they are reselling the items.

In a 1989 case, the state Supreme Court ruled that a Burger King franchise owner had to pay sales taxes for napkins, utensils, and wrappers it gave to customers, because it was selling burgers and soda - not the plastic forks.

But in a separate case, the state tax board ruled that McDonald's didn't have to pay sales taxes on toys it bought for Happy Meals, because the toys were a key part of the Happy Meal package it was selling (and thus part of the purchase price and sales taxes associated with the meal).

But in the Raytheon case, the board ruled that the office supplies and other items were more akin to burger wrappers at Burger King than a Happy Meal toy at McDonald's.

The tax board also wasn't persuaded by Raytheon's contention that some other states have already agreed with company's arguments, including Texas and California, because the board said the case was a matter of tax law specific to Massachusetts.

Raytheon initially tried to persuade the Department of Revenue to reduce its taxes in 2004. After its request was rejected, it filed an appeal with the state tax board in April 2005, which led to a series of filings and hearings.

Both Raytheon and the Department of Revenue declined to comment.

Todd Wallack can be reached at twallack@globe.com.