To the Moon: Minimizing Tax Liabilities and Maximizing Profits as a Government Contractor in Alabama

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In early September 2025, the President re-crowned the “Rocket City” of Huntsville, AL as the home of the U.S. Space Force—bringing with it all the economic activity that comes with running an entire branch of the military. Just a few weeks later, the U.S. Army’s Contracting Command-Redstone Arsenal (also here in the Rocket City) closed out FY25 by awarding over $34 billion in contract awards. Gazing into the future, the President’s “Golden Dome” initiative is posturing for over $150 Billion in contracts, much of which will likely flow through the Army’s Missile Defense Command at Redstone Arsenal. It’s a good time to be, or to become, a government contractor.

But that doesn’t mean that there aren’t considerations to be made when interfacing with the government. While everyone can generally agree that taxes are complicated and nuanced, there’s a specific complexity that works in favor of government contractors doing business here in the Yellowhammer State: not all purchases made in Alabama, while performed under and for a federal government contract, are taxable. This means that there may be ways to reduce sales tax liability if the shoe fits.

In true Huntsville fashion, this tax question has its origins in the Space Race.  In 1968, Boeing was working on a government contract for NASA’s first stage booster rocket, the “S-IC for the Apollo Saturn Space Vehicle," which would eventually become the Saturn V that reached the moon the very next year.^[1] Unfortunately for Boeing, the State of Alabama believed certain purchases that the aerospace company had made were subject to taxation, leaving tens of thousands of 1968 dollars in unpaid taxes. Boeing contended that its purchases should not be taxed, as those taxes would be passed onto NASA and the United States Government which would violate the doctrine of sovereign immunity, a doctrine that prevents the federal government from being taxed without its consent. In the end, the Supreme Court of Alabama ruled against Boeing. The Court focused on the relationship Boeing had with the government and decided that Boeing had not “been so incorporated into the government structure as to become an instrumentality of the United States and thus enjoy governmental immunity.”^[2]

Fast forward to today, the law has evolved to provide a bit of clarity while still leaving some questions. While a contractor acting as an official purchasing agent of the government still stands to alleviate a sales tax burden, Alabama courts have continued to interpret varying situations regarding sales tax under these federal government contracts. For example, the Alabama Court of Civil Appeals ruled in 1991 that when assessing sales tax liability, the location of the goods or ultimate user may be indicators of a sales exemption, but not completely determinative. Instead, the Court noted that the primary purpose for which the purchaser uses the goods carried more weight, and not all purposes were sufficient for tax protection—such as goods purchased purely for research and development.^[3] However, R&D activity in and of itself is not a binary “sales tax exempt” or “not sales tax exempt” trigger. In some cases, as in a manufactured product used to test a final deliverable product for the government—like testing a rocket booster to validate its successor’s usefulness to the government—might be research and development, but it is manufactured and tested as a necessary requirement for delivery to the U.S. Government.^[4]  This, in turn, would make those materials and purchases tax-exempt.

On the other hand, goods used in the production of a final product such as “machinery, tools, or products” are still subject to taxation because they are not part of the final deliverable product to the United States Government.^[5]  But this doesn’t mean the tax liability for government contractors is wide open. There are still ways to reduce your burden. For contractors purchasing furniture, equipment, or tools used to produce a product for the government, the “machine rate” applies rather than the straight sales tax rate. Likewise, some of these same instruments may qualify as property that is subject to depreciation allowances for Alabama income tax.^[6]  Of course, circumstances may vary, and comparing the rates that apply to various products in order to maximize benefit is imperative.

In conclusion, as Huntsville's role in the U.S. space ecosystem continues to launch into new heights—with billions in contracts on the horizon—Alabama's nuanced sales tax rules offer government contractors a strategic edge to minimize liabilities and fuel growth. Whether you are navigating R&D exemptions, machine rates, or full project certifications, proactive planning is key to turning tax complexities into competitive advantages. Our team at Maynard Nexsen specializes in Alabama tax matters for defense and aerospace contractors. Contact us today for a review of your contracts and a customized roadmap to optimize your tax position—let's get you to the moon without the extra baggage.

^{[1] See generally NASA Historical Reports on Saturn V Development.
[2] Hamm v. Boeing Co., 283 Ala. 310, 216 So. 2d 288 (Ala. 1968).
[3] State v. Thiokol Chem. Corp., 46 Ala. App. 558, 246 So. 2d 447 (Ala. Civ. App. 1970), aff'd, 286 Ala. 739, 246 So. 2d 454 (Ala. 1971).
[4] Id. at 451-52
[5] Id.
[6] See Ala. Code 40-23-1(a)(9)(b) (1.5% machines rate); Ala. Code § 40-18-16 (depreciation allowances); Sizemore v. Franco Distributing Co., 594 So. 2d 143, 147 (Ala. Civ. App. 1991).}