Tax Type
Corporation Income Tax
Description
Government contractor; NASA research
Topic
Taxability of Persons and Transactions
Date Issued
03-31-2000
March 31, 2000
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in response to your letter of October 19, 1999, regarding the application of the retail sales and use tax to a contract with the federal government. I apologize for the delay in responding to your letter.
FACTS
****** (the "Taxpayer") recently entered into a contract to provide services at a NASA research facility in Virginia. Based on the contract's Statement of Work, the Taxpayer will provide operational and maintenance services for transonic wind tunnel research systems. Some of the specific activities set out in the contract require that the Taxpayer:
RULING
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).
Research and Development
Notwithstanding the true object of a government contract, Code of Virginia § 58.1-609.3(5) provides a sales and use tax exemption for"[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added.) The department interprets this statute in 23 VAC 10-210-3070 through 3074. These regulations define "research and development" as "a systematic study or search directed toward a new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process." The term "basic research" is defined as "a systematic study or search in a scientific or technical field or endeavor with the ultimate goal of advancing knowledge or technology in that field."
By way of contrast, the regulations provide that exempt research does not include secondary activities such as administration, general maintenance, and other activities collateral to the actual research. Further, in order to qualify for the exemption, tangible personal property must be used directly and exclusively in an actual research process and must be purchased by the organization that performs the exempt research activities.
Applying the government contractor and research and development guidelines to the contract in the instant case leads to the following conclusions:
First, the true object of the contract is for the provision of services. Although the Taxpayer is responsible for some tangible deliverables (primarily consumables used in routine maintenance and corrective repairs), the preponderance of tasks set out in the Statement of Work call for the Taxpayer to use its operational and organizational expertise to provide services for the NASA facility.
Further, the research and development exemption would not apply to the Taxpayer's purchases under this contract. I agree that the NASA facility in general, and the transonic wind tunnels in particular, are used for research and development purposes. However, the sales and use tax exemption is limited to tangible personal property used directly in an actual research activity. The activities performed by the Taxpayer are collateral to the research. Therefore, tangible personal property purchased by the Taxpayer for use at the NASA facility is not used directly in exempt research.
Based on this determination, the Taxpayer must pay the sales and use tax on all tangible personal property purchased for use in providing services under authority of this contract.
I trust that this information is helpful. Please contact **** in the department's Office of Tax Policy at **** if you have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25616I
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in response to your letter of October 19, 1999, regarding the application of the retail sales and use tax to a contract with the federal government. I apologize for the delay in responding to your letter.
FACTS
****** (the "Taxpayer") recently entered into a contract to provide services at a NASA research facility in Virginia. Based on the contract's Statement of Work, the Taxpayer will provide operational and maintenance services for transonic wind tunnel research systems. Some of the specific activities set out in the contract require that the Taxpayer:
- operate the fluids operation facilities, including operation of fluid compressors, heavy gas reclamation systems, and nitrogen delivery services;
- efficiently operate the Main Drive Systems for specified wind tunnels;
- provide support for the National Transonic Facility wind tunnel; and
- perform routine maintenance and corrective repairs on these systems.
RULING
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).
Research and Development
Notwithstanding the true object of a government contract, Code of Virginia § 58.1-609.3(5) provides a sales and use tax exemption for"[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added.) The department interprets this statute in 23 VAC 10-210-3070 through 3074. These regulations define "research and development" as "a systematic study or search directed toward a new knowledge or new understanding of a particular scientific or technical subject and the gradual transformation of this new knowledge or new understanding into a usable product or process." The term "basic research" is defined as "a systematic study or search in a scientific or technical field or endeavor with the ultimate goal of advancing knowledge or technology in that field."
By way of contrast, the regulations provide that exempt research does not include secondary activities such as administration, general maintenance, and other activities collateral to the actual research. Further, in order to qualify for the exemption, tangible personal property must be used directly and exclusively in an actual research process and must be purchased by the organization that performs the exempt research activities.
Applying the government contractor and research and development guidelines to the contract in the instant case leads to the following conclusions:
First, the true object of the contract is for the provision of services. Although the Taxpayer is responsible for some tangible deliverables (primarily consumables used in routine maintenance and corrective repairs), the preponderance of tasks set out in the Statement of Work call for the Taxpayer to use its operational and organizational expertise to provide services for the NASA facility.
Further, the research and development exemption would not apply to the Taxpayer's purchases under this contract. I agree that the NASA facility in general, and the transonic wind tunnels in particular, are used for research and development purposes. However, the sales and use tax exemption is limited to tangible personal property used directly in an actual research activity. The activities performed by the Taxpayer are collateral to the research. Therefore, tangible personal property purchased by the Taxpayer for use at the NASA facility is not used directly in exempt research.
Based on this determination, the Taxpayer must pay the sales and use tax on all tangible personal property purchased for use in providing services under authority of this contract.
I trust that this information is helpful. Please contact **** in the department's Office of Tax Policy at **** if you have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25616I
Rulings of the Tax Commissioner