Tax Type
Retail Sales and Use Tax
Description
Government Contractor; Taxability questions regarding necessary supplies to perform contract
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
12-21-2001
December 21, 2001
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This is in response to your letter of October 9, 2001, in which you request a ruling in regard to the application of the sales and use tax to materials, tools, and equipment purchased by ***** (the "Taxpayer") in connection with a contract with the federal government. Copies of cited sources are enclosed.
FACTS
The Taxpayer has contracted with the federal government to maintain and repair certain government facilities located in foreign countries, including the upgrade of fire protection equipment for such facilities. The Taxpayer is to provide qualified administrative, management, and technical skills, labor, materials and tools necessary to perform repairs and retrofit projects on a worldwide basis.
The Taxpayer is required to purchase materials, tools and equipment for overseas shipment. These items will be shipped directly from the vendor to the Taxpayer at a government-operated supply center located in Virginia. Government workers will re-pack and ship the items to the overseas destination where the Taxpayer will repair and renovate the government facilities.
The Taxpayer is responsible for monitoring and reporting to the government all procurement and transportation activities associated with the receipt of project materials and tools at the overseas destination. The Taxpayer is also responsible for identifying the specific work or task order, line item numbers, bill of material number, and a brief item description on each package for all shipments. Furthermore, the Taxpayer must assure that the packing, crating, shipping and receiving operation at the government's supply center is in accordance with approved plans.
The Taxpayer is also tasked to maintain an inventory of tools and equipment to execute the assigned task orders and to operate a tool management function at a maintenance assistance center in the Washington, D.C. metropolitan area ("WASHMAC").
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).
WASHMAC Contract
A review of the contract information presented reveals that the Taxpayer has been engaged to provide real property construction or repair services. Pursuant to Code of Virginia § 58.1-610, anyone who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon is deemed a real property service contractor. Under Virginia tax law, the general rule is that all real property service contractors are considered the final taxable users or consumers of all tangible personal property that they purchase in connection with the contract, if used, consumed or stored in Virginia, even if the storage is temporary and for subsequent use outside Virginia.
For the contract at issue, the Taxpayer is deemed to be a real property service contractor and generally liable for the sales or use tax on all purchases of construction materials, tools and equipment purchased to perform and complete any project under the contract.
Delivery of Property for Use Outside Virginia
As explained in Public Documents (P.D.) 97-67 (2/14/97) and 97-160 (4/4/97), 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 only exception to this general taxable rule is set out by Code of Virginia § 58.1-609.3(1), which provides an exemption from the retail sales and use tax for:
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- Personal property purchased by a contractor which is used solely in another state or in a foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or foreign country, and which is stored temporarily in Virginia pending shipment to such state or country.
Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-410(1), contractors entitled to this exemption may obtain certificates of exemption (i.e., Form ST-11A) upon written request to the Department of Taxation. Pursuant to 23 VAC 10-210-280(E), the request should include a description of the project, a list of the items being purchased, and the owner of the project. In addition, the Taxpayer should include information to show that the construction materials could be purchased by the contractor free from sales or use tax in the other state or foreign country.
Generally, the information that would need to be disclosed to the department is (i) the name of the foreign country where the materials will be exclusively used, and (ii) convincing evidence that such foreign country would not impose a sales or use tax on the materials if they had been purchased in such foreign country.
It is important to note that the above-cited exemption is restricted to construction materials incorporated into exempt real property construction in other states or foreign countries. However, the exemption does not extend to equipment, tools, supplies, etc., used to perform the construction contract.
Conclusion
Because you have not identified the foreign country for which the construction materials will be shipped and have not provided evidence that such foreign country would not impose a sales or use tax on such materials, the department has no basis upon which to issue an exemption certificate for the purchase of construction materials made under the contract. If the Taxpayer can establish the foregoing criteria, then it may request the ST-11 A exemption certificate from the department by writing to the Office of Customer Relations, Customer Services, at the Department of Taxation, Post Office Box 1115, Richmond, Virginia 23218-1115, or by faxing the request to the attention of ***** at *****. If you have any questions about filing this request, you may call ***** at *****.
Based on the above, the Taxpayer is liable for the sales or use tax on all purchases of tangible personal property pursuant to the contract and delivered to Virginia. If any vendor does not charge the tax, then the Taxpayer is responsible for reporting and remitting the use tax on all untaxed materials, tools, etc. If you have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/30709R
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner