Tax Type
Retail Sales and Use Tax
Description
Services; Miscellaneous service enterprise; Government contracts
Topic
Taxability of Persons and Transactions
Date Issued
01-27-1995
January 27, 1995
Re: §58.1-1821 Appeal: Retail Sales and Use Tax
Dear**********************
This will respond to your letter of November 9, 1994 in which you seek correction of a sales and use tax assessment to your client,************** (the "Taxpayer"), for the period January 1989 through June 1994.
FACTS
The Taxpayer, a government contractor, contests a recent sales and use tax assessment. While your letter indicates that the Taxpayer contests five audit issues, it is my understanding that the first three issues relating to the inclusion of various items in the audit sample, have been resolved and the assessment has been revised accordingly. The remaining issues under appeal include the tax assessed with respect to purchases of tangible personal property in connection with two contracts ("Contract C" and "Contract D") with the federal government. You assert that the "true object" of Contract C is the procurement of repair and replacement parts and the provision of repair and taxable maintenance services, rather than the provision of services.
In addition, you assert that the separate delivery orders issued in connection with Contract D should be viewed as separate contracts, all of which were for the provision of tangible personal property. Accordingly, you maintain that all tangible personal property purchased in connection with the contracts was not subject to the tax as it was purchased for resale to the federal government. The auditor, however, determined that the purchases were taxable as made in connection with service contracts with the federal government.
DETERMINATION
The department has traditionally held that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. The "true object" test described in Virginia Regulation (VR) 630-10-97.1 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service. [See P.D. 94-197 (6124194), 92-229 (11/9/92), copies enclosed]
As explained in P.D. 88-159 (6122188), copy enclosed, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or ail of the property may pass to the government. If a contract is for the sale of tangible personal property to the government, the contractor may purchase such tangible personal property exempt from the tax under a resale exemption certificate. The subsequent sale of the property is exempt from the tax under Code of Virginia §58.1-609.1(4).
Contrary to the Taxpayer's assertions, these same rules are used in analyzing contracts between two private-sector individuals or entities. When the true object of a non-public contract is a service, the contractor bears the burden of the tax; when the true object is a sale of tangible personal property, the party who let the contract typically bears the burden of the tax, unless an exemption from the tax is applicable.
I will address the Taxpayer's contracts, and the issues raised with respect to each, separately below:
Contract C
A review of the Statement of Work for Contract C reveals that the true object of Contract C is the provision of services by the Taxpayer to the federal government. The objective of the contract, as stated in the Statement of Work, is to "provide management, labor, materials, administrative services, janitorial services, and material handling equipment and tools to manage, maintain, and operate two...bases and five...complexes; and to provide, on a per case basis, services for the performance of all phases of salvage-related, offshore, and other oil and hazardous materials pollution control operations...."
Accordingly, notwithstanding the fact that the Taxpayer was required to purchase repair and replacement parts in connection with the contract, the contract was appropriately classified as a service contract by the auditor and thus, the Taxpayer was appropriately held taxable on its purchases in connection with such.
The contract clearly indicates that the tangible personal property is functionally an inconsequential element of the contract -- the contract specifies in clear terms that the Taxpayer is to manage facilities on behalf of the government. You also point out that the value of the property being transferred in connection with the contract amounted to over 38% of the total expenditures under the contract; this would appear to indicate that the tangible personal property is also economically less consequential to the contract than the services rendered.
You liken the Taxpayer's Contract C to contracts in other public documents for which the department determined that the "true object" was the tangible personal property provided. However, the Taxpayer's contract is readily distinguishable from the public documents cited, as in each case, the taxpayer was required to develop, deliver, and install an automated system and various services were provided which were incidental to the sale of the systems. Those contracts were clearly for the sale of tangible personal property. In the instant case, however, the Taxpayer is responsible for a wide range of services involving the complete operation of the government facilities, including maintenance. Although repair and maintenance services generally are taxable when repair and replacement parts are provided, in the instant case, the repair and maintenance services are in furtherance of the overall services provided by the Taxpayer and are not the primary objective of the contract. Instead, they are one subfunction of the entire operation. [See P.D. 94-155 (5123194), copy enclosed]
Furthermore, you cite several public documents involving "umbrella" contracts in which the department held the contracts as service contracts and point out how each of those situations is readily distinguishable from the instant case. However, I find that all but one case, P.D. 89-154 (4128194) in which tangible personal property was purchased at the end of a services contract at the specific request of the federal government, are substantially similar to the instant case. Particularly, P.D. 93-203 (9127193) and P.D. 92229 (11/9/92), are instructive with respect to the instant case as in both cases the contractor was required to manage an inventory/facility and to purchase various items in connection with the contracts. However, the department ruled that the overall purpose of the contracts was for the provision of services.
I am enclosing copies of rulings in substantially similar cases which support the department's position with respect to Contract C. In P.D. 86-243 (11128186) the taxpayer was responsible for overseeing administrative operations, providing tour guides, and coordinating special events at a center owned by the federal government. In addition, the taxpayer was responsible for the procurement of certain exhibits, including model airplanes and space vehicles for use and display at the center. In P.D. 94-231 (7129194) the contractor was required to furnish all personnel, facilities, services, equipment and materials necessary for the performance of certain services required.
Finally, you assert that the department's interpretation of the court's determination in United States v. Forst, 442 F. Supp. 920 (W.D.Va 1977), aff'd, 569 F.2d 881 (4th Cir. 1978), as related in numerous public documents, is erroneous. You suggest that the message conveyed by the court in Forst is that only when a taxpayer has "beneficial use" of the items of property such as in the case of office furniture and equipment, is the taxpayer subject to the tax. However, in Forst, the court held that items used in the performance of a contract were held taxable. Furthermore, the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer/purchaser of the items. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, they were not "resold" to the United States.
While we agree with your assertion that the facts of the instant case are similar in certain respects to the taxpayer in Forst, you should note that in Forst, the taxpayer operated a manufacturing facility, and stored and maintained the manufactured items. In the instant case, the Taxpayer does not operate a manufacturing facility, but operates and staffs a storage facility, performs maintenance on the equipment as necessary, and procures repair and replacement parts for the government equipment. In Forst, the taxpayer was entitled to an exemption only for items used directly in manufacturing (raw materials and equipment). All other items purchased in connection with the contract were held taxable. Thus, as in Forst, the Taxpayer in the instant case was held taxable on its purchases in connection with the service contract with the government.
Contract D: The objective of Contract D, as stated in the Statement of Work, is to provide:
-
- services to perform all phases of salvage-related offshore and other oil and hazardous materials pollution control operations as assigned under individual Delivery Orders issued by the Contracting Officer or SUPSALV. These operations may include, but are not limited to, the following: spill containment and collection; use of chemical agents; petroleum, oil and lubricants heating and transfer; oil and hazardous materials handling and storage; beach cleanup,....
- services to perform all phases of salvage-related offshore and other oil and hazardous materials pollution control operations as assigned under individual Delivery Orders issued by the Contracting Officer or SUPSALV. These operations may include, but are not limited to, the following: spill containment and collection; use of chemical agents; petroleum, oil and lubricants heating and transfer; oil and hazardous materials handling and storage; beach cleanup,....
$20,000 minimum guaranteed to cover essentially the costs of soliciting the original contract. Furthermore, you point out that each delivery order does not have to be for the provision of property to the entity listed in the contract and that property has been provided to other branches of the armed forces and to other divisions of the armed services under delivery orders. Finally, you assert that the true object of each delivery order must be examined to determine whether the property was purchased for resale.
In numerous public documents, the department has considered an entire contract, including any task directives or work/delivery orders issues with or separate from the original contract, as one transaction, which is either taxable or exempt. Although the original contract was modified by Delivery Order POOOO4 to provide that "the contractor shall provide labor, services, equipment and materials to perform all phases of salvagerelated, offshore, and other oil and hazardous materials pollution control operations," it is clear that the intent of both the original contract and the modification was to contract for the provision of services.
You suggest that the situations in P.D. 92-229 and P.D. 93-196 (9123193) are readily distinguishable from the instant case, however, I find that these determinations are particularly instructive because the contracts and task directives in those cases were not unlike Contract D and the delivery orders issued pursuant thereto. In P.D. 92-229, the contract specifically stated that "the exact nature and extent of the Contractor's work will be based on Technical Work Requirements...." In P.D. 93-196, the various tasks to be performed under the contract were provided for in "Major Job Orders" which specified how the tasks were to be performed and identified the equipment and materials necessary to satisfy the directives. In the instant case, the contract provides that the "contractor shall provide services...under individual Delivery Orders issued by the Contractor. The specific requirements/operations will be detailed in each delivery order...."
Accordingly, the department finds no basis to revise the assessment. A revised Notice of Assessment with accrued interest will be mailed to the Taxpayer shortly.
While it is my understanding that you have requested a meeting to discuss this case, department policy and caselaw are clear on these issues. Unless we have misinterpreted the facts set out in the contracts, a meeting most likely would not change the department's position. Nonetheless, if you have any questions or concerns, please feel free to contact**********************
-
-
-
-
-
-
-
-
-
-
-
- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
-
-
-
-
-
-
-
-
-
-
OTP/8703H
Rulings of the Tax Commissioner