Tax Type
Retail Sales and Use Tax
Description
Government transactions; Individual purchase orders
Topic
Taxability of Persons and Transactions
Date Issued
02-14-1997
February 14, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in response to your letters in which you seek correction of a sales and use tax assessment issued to ********* (the "Taxpayer") for the period July 1992 through June 1995. I note that the assessment on the uncontested items has been paid.
FACTS
The Taxpayer operates as a government contractor providing information management services and related products. At issue in this case is tangible personal property purchased by the Taxpayer through individual purchase orders or individual delivery orders.
The contested purchases were made in connection with two contracts issued by two federal government agencies. You indicate that these contracts are indicative of multiple award contracts currently in use by the federal government. You further point out that these types of contracts are characterized by broad statements of work which are subsequently defined and focused through individual delivery orders. The delivery orders may be used to provide services, procure equipment, or both.
You further maintain that the individual delivery orders are issued only after a competitive bidding and negotiation process among contractors. You therefore suggest that individual purchase orders represent separate contracting actions which are distinguished as stand alone contracts. In effect, you contend that tangible personal property purchased pursuant to a delivery order may represent purchases of property for resale to the federal government.
In addition to the issue of purchases made under individual delivery orders, the Taxpayer questions the application of the tax to property which is intended for use outside of Virginia, but which passes through the Taxpayer's Virginia facility.
DETERMINATION
Government Contract Purchases
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.
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 contractual services, even though title to some or all of the property may pass to the government. Conversely, if a contract is for the sale of tangible personal property, the contractor may purchase such property exempt from the tax for resale. The subsequent sale of the property to the government is exempt under Code of Virginia § 58.1-609.1(4).
The statements of work submitted with your correspondence call for the Taxpayer to provide information technology services. The services required under the first contract include, for example, support for business process re-engineering studies, preparation of data models, business system design support, and database administration. The second contract calls for the Taxpayer's expertise to evaluate the information technology and other technology resources at the government's facility.
Based on the statements of work which indicate that the instant contracts are for the provision of services, the Taxpayer is the taxable user or consumer of all tangible personal property purchased pursuant to the contracts. Further, the department has consistently considered an entire contract, including any purchase orders, delivery orders or task directives issued with or separate from the original contract, as one transaction which is either taxable (for the provision of services) or exempt (for the procurement and sale of property). In this regard see the enclosed Public Documents 89-154 (4/28/89) and 93-196 (9/23/96).
Delivery order No. 10, which calls for the delivery of communications equipment and operating software, is explicitly issued under authority of the first service contract
and is clearly an integral part of that contract. Similarly, the letter from the federal government authorizing the purchase of computers is tied to the second service contract. In this regard, the government's reimbursement to the Taxpayer for this purchase is specifically authorized by the contract's provisions. Accordingly, I cannot agree at this time that the delivery orders are themselves separate contracts.
Notwithstanding this determination, however, I take note of your declaration that the individual delivery orders in this case are issued only after a bid and negotiation process. This is contrary to the department's understanding that delivery orders or purchase orders, issued under authority of a specific contract, are not subject to a solicitation and bidding process separate from that required for the underlying contract. I have therefore asked the department's audit staff to further review this issue with you. By doing so, the department can better understand the contract requirements which apply to your transactions.
Delivery for Use Outside of Virginia
Code of Virginia § 58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." This section goes on to define "use tax" as "the tax imposed upon the use, consumption, distribution, and storage as herein defined." "Storage" is defined as "any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than sale at retail in the regular course of business." (Emphasis added)
Based on the above, a government service contractor makes a taxable use of tangible personal property which is delivered to Virginia, regardless that the property may ultimately be deployed at a federal facility outside of Virginia. The assessment of the use tax on such property is therefore applicable. I would also point out that the tax applies regardless if such property is purchased from Virginia vendors or from vendors located outside of Virginia. This is because the tax liability is triggered by delivery of the property to Virginia.
Property delivered outside of Virginia is not taxable, provided that the transaction is exempt interstate commerce as set out in VR 630-10-51. This is because there is no use of the property in Virginia. Further, no tax would apply in this instance regardless of the vendor's location.
Summary
As noted above, the audit staff will contact the Taxpayer as soon as applicable to investigate the solicitation and bidding process pertaining to the issuance of individual delivery orders in this case. While it currently appears that the assessment was correctly made, I will certainly review any additional information this investigation reveals. Further, I will continue to suspend collection activity on the outstanding assessment until this issue can be resolved.
If you have any questions regarding this letter, please contact********* in my Office of Tax Policy at********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11500I
Rulings of the Tax Commissioner