Court rules against Raytheon in sales-tax case
Says refunds are not justified for expenses tied to federal work
As it turns out, Raytheon’s toilet paper is not tax-exempt, after all.
The highest court in Massachusetts yesterday ruled that the Waltham-based defense company and other contractors should not get refunds for sales taxes paid on expenses related to work done for the federal government. Courts in other states had allowed such refunds.
The ruling by the Supreme Judicial Court bars
Raytheon had argued that because it was acting on behalf of the federal government, the government was the ultimate owner of the items, and the company should not have been obligated to pay sales taxes when they were purchased. The company invoked an exemption in state law that prevents taxes from being paid on items twice - once when they are bought, and again when they are resold.
But the court found that the items bought by Raytheon were only indirectly related to its work for the government, and therefore the exemption did not apply. “The resale of indirect cost items to the United States was incidental to Raytheon’s business, facilitative rather than central to it,’’ the court wrote.
The ruling also noted that under its contracts, Raytheon is already reimbursed for taxes on indirect cost items by the federal government.
A spokesman for Raytheon declined to comment.
If the company had won, the state would have owed Raytheon more than $1 million when all the interest charges were included. “We’re very pleased with the decision,’’ said Robert Bliss, a spokesman for the Department of Revenue. He declined to comment further.
The ruling conflicted with the outcomes of similar cases in California and Texas, where Raytheon and other government contractors prevailed in refund disputes.
In the Texas case, Strayhorn v. Raytheon E-Systems, the court found that Raytheon was entitled to a refund because it purchased the items in question during the normal course of its contract work, and therefore could be considered to have resold them to the government.
But in Massachusetts, the court was guided by precedents in which companies were required to show a more direct connection between their core business and the items they were reselling. In the Raytheon ruling, the court cited a 1989 decision involving Burger King, which had argued that it was owed a refund for sales taxes paid on straws, napkins, and plastic utensils provided to its customers.
The court found, however, that those items were incidental to Burger King’s main business of selling food and drink, and were not subject to the resale exemption.
Karl Fryzel, a tax attorney with the Boston firm Edwards, Angell, Palmer & Dodge, said the court simply applied the same logic in the Raytheon ruling and did not break any new ground. “These were previously established principles,’’ he said. “The court essentially said, ‘It’s all well and good what was decided in those other cases, but the law has been applied differently here.’ ’’
In its filings in the case, Raytheon had also argued that the Massachusetts application of the law places the firm at a competitive disadvantage with contractors in states that provide the refunds. But the court ruled that the remedy to such a hardship could only be provided by the state Legislature.
Casey Ross can be reached at cross@globe.com. 
