Tax Type
Retail Sales and Use Tax
Description
Government contractor; Total contract vs. individual tasks
Topic
Taxability of Persons and Transactions
Date Issued
06-19-2000
June 19, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ****** (the "Taxpayer") for the period July 1997 through January 1999. I apologize for the delay in my response.
FACTS
The Taxpayer is a government contractor that provides engineering services and operational systems to the federal government. At issue in this case is the application of the tax to tangible personal property purchased by the Taxpayer pursuant to three government contracts: ***** ("Contract 1"), ***** ("Contract 2"), and ("Contract 3"). In each case, you maintain that the assessed property was purchased for resale to the federal government.
The application of the tax to government contracts generally, and to the three contracts at issue in this case, will be addressed below.
DETERMINATION
Government Contracts - Generally
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 Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 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).
Contract 1: You describe this contract as a basic ordering agreement. You also indicate that the government has placed this multi-year contract with the Taxpayer to facilitate the procurement of equipment, as well as the associated services necessary for the equipment's maintenance, calibration, and successful operation. The contractual obligations of the Taxpayer come into play at the time the government places a delivery order, and each delivery order carries its own Statement of Work ("SOW"). Further, you maintain that the contested property was purchased under SOWs that clearly called for the delivery of tangible personal property to the government.
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 that is either taxable (for the provision of services) or exempt (for the procurement and sale of property). For example, a work order might be issued which calls for the delivery of computer hardware. However, if the true object of the underlying contract is for the provision of services, the contractor's purchase of the computer hardware is taxable. This is because the work order is not a separate contract. See the enclosed Public Documents 89-154 (4/28/89), 95-16 (1/27/95) and 97-214 (4/30/97).
The department's position on this issue has been consistent and made publicly available to all taxpayers as evidenced by the enclosed public documents. The department's policy has also been upheld in the federal courts in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff=d. 569 F2d 811 (4th Cir. 1978). The court held that items used in the performance of a contract were taxable. Furthermore, the court held that the resale exemption was inapplicable to a government contractor. Even though the contractor never had legal title to the property and was reimbursed by the United States for the cost thereof, the property was not resold to the United States.
The audit staff reviewed the general SOW that accompanies the underlying contract and describes it as a contract for services. The contract is classified and is not available for further review. The courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct, and the burden is on the taxpayer to prove otherwise. See Code of Virginia § 58.1-205. Because the Taxpayer has not met this burden with respect to the contested Contract 1 purchases, I must determine that these purchases are correctly assessed.
Contract 2: I have reviewed the SOW associated with this nonclassified contract. As you concede, the contract language initially describes this as a contract for engineering and technical services. However, a closer reading indicates that the true object of Contract 2 is to provide for the replacement of two antennas at a government facility. I agree that the services associated with the replacement antennas, including integration and calibration, are incidental to the provision of tangible personal property (i.e., the antennas). Accordingly, Contract 2 purchases will be removed from the assessment.
Contract 3: You maintain that the government is buying primarily a software solution. In order for the software to be delivered, the government's equipment must be upgraded, and a new workstation on which the software is to be installed must be acquired. Both the modified software and the hardware are then delivered as an integrated system. You suggest that the goal of the contract is to provide the government with a tangible computer system consisting of hardware and software, and should therefore be treated as the sale of tangible personal property.
Based on the information before me, the true object of Contract 3 is for the provision of services relating to a signal acquisition system. The Taxpayer is required to provide support for the modification of government-furnished software. Using technical information that describes target signals, the Taxpayer is required to deliver code modification, test the modification, and to make further modifications as required.
Any provision of tangible personal property notwithstanding, it appears that the government's goal is for the Taxpayer to use its expertise to address advances in signal interception and collection technology through the modification of existing software. As such, I find that the true object of Contract 3 is for the Taxpayer's engineering and technical services. The contested Contract 3 purchases are correctly assessed.
Summary: Based on this determination, the assessment will be revised to remove the Contract 2 purchases, and a revised assessment will be sent to the Taxpayer. Because of the delay in responding to your appeal, interest on the revised assessment will be accrued only through the date of your appeal. No additional interest will accrue provided the revised assessment is paid within 30 days of the revised bill date.
If you have any questions regarding this letter, please call ***** in the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24531I
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ****** (the "Taxpayer") for the period July 1997 through January 1999. I apologize for the delay in my response.
FACTS
The Taxpayer is a government contractor that provides engineering services and operational systems to the federal government. At issue in this case is the application of the tax to tangible personal property purchased by the Taxpayer pursuant to three government contracts: ***** ("Contract 1"), ***** ("Contract 2"), and ("Contract 3"). In each case, you maintain that the assessed property was purchased for resale to the federal government.
The application of the tax to government contracts generally, and to the three contracts at issue in this case, will be addressed below.
DETERMINATION
Government Contracts - Generally
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 Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 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).
Contract 1: You describe this contract as a basic ordering agreement. You also indicate that the government has placed this multi-year contract with the Taxpayer to facilitate the procurement of equipment, as well as the associated services necessary for the equipment's maintenance, calibration, and successful operation. The contractual obligations of the Taxpayer come into play at the time the government places a delivery order, and each delivery order carries its own Statement of Work ("SOW"). Further, you maintain that the contested property was purchased under SOWs that clearly called for the delivery of tangible personal property to the government.
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 that is either taxable (for the provision of services) or exempt (for the procurement and sale of property). For example, a work order might be issued which calls for the delivery of computer hardware. However, if the true object of the underlying contract is for the provision of services, the contractor's purchase of the computer hardware is taxable. This is because the work order is not a separate contract. See the enclosed Public Documents 89-154 (4/28/89), 95-16 (1/27/95) and 97-214 (4/30/97).
The department's position on this issue has been consistent and made publicly available to all taxpayers as evidenced by the enclosed public documents. The department's policy has also been upheld in the federal courts in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff=d. 569 F2d 811 (4th Cir. 1978). The court held that items used in the performance of a contract were taxable. Furthermore, the court held that the resale exemption was inapplicable to a government contractor. Even though the contractor never had legal title to the property and was reimbursed by the United States for the cost thereof, the property was not resold to the United States.
The audit staff reviewed the general SOW that accompanies the underlying contract and describes it as a contract for services. The contract is classified and is not available for further review. The courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct, and the burden is on the taxpayer to prove otherwise. See Code of Virginia § 58.1-205. Because the Taxpayer has not met this burden with respect to the contested Contract 1 purchases, I must determine that these purchases are correctly assessed.
Contract 2: I have reviewed the SOW associated with this nonclassified contract. As you concede, the contract language initially describes this as a contract for engineering and technical services. However, a closer reading indicates that the true object of Contract 2 is to provide for the replacement of two antennas at a government facility. I agree that the services associated with the replacement antennas, including integration and calibration, are incidental to the provision of tangible personal property (i.e., the antennas). Accordingly, Contract 2 purchases will be removed from the assessment.
Contract 3: You maintain that the government is buying primarily a software solution. In order for the software to be delivered, the government's equipment must be upgraded, and a new workstation on which the software is to be installed must be acquired. Both the modified software and the hardware are then delivered as an integrated system. You suggest that the goal of the contract is to provide the government with a tangible computer system consisting of hardware and software, and should therefore be treated as the sale of tangible personal property.
Based on the information before me, the true object of Contract 3 is for the provision of services relating to a signal acquisition system. The Taxpayer is required to provide support for the modification of government-furnished software. Using technical information that describes target signals, the Taxpayer is required to deliver code modification, test the modification, and to make further modifications as required.
Any provision of tangible personal property notwithstanding, it appears that the government's goal is for the Taxpayer to use its expertise to address advances in signal interception and collection technology through the modification of existing software. As such, I find that the true object of Contract 3 is for the Taxpayer's engineering and technical services. The contested Contract 3 purchases are correctly assessed.
Summary: Based on this determination, the assessment will be revised to remove the Contract 2 purchases, and a revised assessment will be sent to the Taxpayer. Because of the delay in responding to your appeal, interest on the revised assessment will be accrued only through the date of your appeal. No additional interest will accrue provided the revised assessment is paid within 30 days of the revised bill date.
If you have any questions regarding this letter, please call ***** in the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24531I
Rulings of the Tax Commissioner