Tax Type
Retail Sales and Use Tax
Description
Government contractor; "True object" of delivery order
Topic
Property Subject to Tax
Date Issued
01-04-2001
January 4, 2001
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which you seek a ruling regarding the application of the retail sales and use tax to certain contracts with the federal government. I understand you have provided additional information to my staff regarding this issue.
FACTS
***** (the "Taxpayer") operates as a government contractor with respect to information technology, communications, software evaluation, and other technology-related functions. At issue in this ruling request is a three-party contract executed by (1) the Taxpayer, (2) the federal Small Business Administration ("SBA"), and (3) the Government Contract Office. This contract is issued under the authority of the Federal Systems Integration and Management Center ("FEDSIM"). FEDSIM, a part of the General Services Administration ("GSA"), provides information technology and other technology support to a wide range of federal government clients. These client agencies include the Department of Defense, Department of Justice, Department of the Interior, etc.
The contract that FEDSIM and the Taxpayer executed is a fixed price Indefinite Delivery/Indefinite Quantity ("ID/IQ") contract. The contract includes hourly rates for each labor category and specifies that all supplies and services will be ordered by individual delivery orders. Neither FEDSIM nor the client agencies are obligated to purchase any goods or services from the Taxpayer until a delivery order is executed.
The contract's broadly-worded Statement of Work indicates that the objective of the contract is to obtain information processing "goods and services to enable FEDSIM to support its clients [the client agencies] in a timely manner." Upon acceptance, the Taxpayer may solicit FEDSIM's client agencies for specific tasks covered under the objectives set out in the contract and in accordance with the contracted rates. Alternatively, client agencies in need of the property or services addressed in the contract may contact the Taxpayer. Subsequently, these individual tasks, which may be for the provision of property, services, or both, are provided to the client agencies under authority of individual delivery orders.
You indicate that the Taxpayer has been issued about 125 delivery orders under this contract since its 1995 effective date. A number of these delivery orders from a variety of FEDSIM's client agencies are included in your correspondence. You indicate that these delivery orders are representative of all the delivery orders issued under this contract in the following ways: (1) each delivery order specifically references the underlying FEDSIM contract, and (2) each delivery order contains either its own Statement of Work (issued by the client agency) or its own Bill of Material. The Bill of Material is simply a list of computer hardware, software, and related equipment to be delivered by the Taxpayer to the client agency.
Further, payment on each delivery order is as follows: The client agency transfers funding to GSA prior to awarding the delivery order. The Taxpayer subsequently invoices and is paid by GSA. GSA adds an administrative fee to the total charge and bills the client agency for this administrative fee.
You request that the department issue a ruling in this case that the Taxpayer's purchases made pursuant to delivery orders issued under this FEDSIM ID/IQ contract be deemed to be exempt purchases for resale to the federal government if the delivery orders call only for the provision of equipment or for the delivery of equipment and some incidental services (e.g., installation and training).
RULING
The application of the tax to government contracts, set out in Title 23 of the Virginia Administrative Code ("VAC") 10-210-693, is based on whether the contract is for the sale of tangible personal property or for the provision of exempt services. If a particular contract involves both the provision of a service and the transfer of tangible personal property, the department relies on the true object test set out in 23 VAC 10-210-4040 to determine whether the contract constitutes a sale of tangible personal property or the provision of an exempt service.
If the true object of the 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 those services, even though title to some or all of the property may pass to the government, or the contractor may be fully and directly reimbursed by the government, or both. Conversely, if the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia §58.1-609.1(4).
The underlying ID/IQ contract in this case provides little evidence of the government's true object. FEDSIM itself does not know at the time the contract is executed what specific property or services, if any, its client agencies will need or request from the Taxpayer under individual delivery orders. Accordingly, the application of the sales and use tax in this case will be based on individual delivery orders and not on the underlying FEDSIM contract: If the true object of the delivery order issued pursuant to the FEDSIM contract is for the provision of services, the Taxpayer will be deemed to be the taxable user or consumer of all tangible personal property used in performing its services.
However, if the true object of the delivery order issued pursuant to the FEDSIM contract is for the sale of property to the federal government, the Taxpayer may purchase that property exempt of the tax for resale. Of course, the resale exemption assumes that title to the property passes to the government and the Taxpayer makes no taxable use of the property. Further, the provision of services that are incidental to the sale of property to the client agency does not negate the resale exemption. In this regard, see the attached Public Document 88-159 (6/23/88) which addresses, among other services, training activities. Other services that are incidental to the sale of property include installation, storage, demonstration, and display of the property.
I have reviewed the three specific delivery orders that were included with your correspondence concerning the following client agencies: ****************************************************************** In each case, I find that the true object of the delivery orders is for the sale of property to the federal government. Accordingly, property purchased pursuant to these delivery orders may be purchased exempt of the tax for resale provided that title to the property passes to the government and that the Taxpayer makes no use of the property (except as specified above). However, any tangible personal property which is used and consumed by the Taxpayer in fulfilling its contractual obligation under these delivery orders and does not convey to the government is taxable to the Taxpayer.
Finally, the determination set out in this response is based on the specific facts of this case as those facts apply to the FEDSIM contract and delivery orders submitted by the Taxpayer. This ruling has no application to any other government contracts.
I trust that this information addresses your concerns. If you have any questions, you may contact *** in the department's Office of Tax Policy at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/27077I
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which you seek a ruling regarding the application of the retail sales and use tax to certain contracts with the federal government. I understand you have provided additional information to my staff regarding this issue.
FACTS
***** (the "Taxpayer") operates as a government contractor with respect to information technology, communications, software evaluation, and other technology-related functions. At issue in this ruling request is a three-party contract executed by (1) the Taxpayer, (2) the federal Small Business Administration ("SBA"), and (3) the Government Contract Office. This contract is issued under the authority of the Federal Systems Integration and Management Center ("FEDSIM"). FEDSIM, a part of the General Services Administration ("GSA"), provides information technology and other technology support to a wide range of federal government clients. These client agencies include the Department of Defense, Department of Justice, Department of the Interior, etc.
The contract that FEDSIM and the Taxpayer executed is a fixed price Indefinite Delivery/Indefinite Quantity ("ID/IQ") contract. The contract includes hourly rates for each labor category and specifies that all supplies and services will be ordered by individual delivery orders. Neither FEDSIM nor the client agencies are obligated to purchase any goods or services from the Taxpayer until a delivery order is executed.
The contract's broadly-worded Statement of Work indicates that the objective of the contract is to obtain information processing "goods and services to enable FEDSIM to support its clients [the client agencies] in a timely manner." Upon acceptance, the Taxpayer may solicit FEDSIM's client agencies for specific tasks covered under the objectives set out in the contract and in accordance with the contracted rates. Alternatively, client agencies in need of the property or services addressed in the contract may contact the Taxpayer. Subsequently, these individual tasks, which may be for the provision of property, services, or both, are provided to the client agencies under authority of individual delivery orders.
You indicate that the Taxpayer has been issued about 125 delivery orders under this contract since its 1995 effective date. A number of these delivery orders from a variety of FEDSIM's client agencies are included in your correspondence. You indicate that these delivery orders are representative of all the delivery orders issued under this contract in the following ways: (1) each delivery order specifically references the underlying FEDSIM contract, and (2) each delivery order contains either its own Statement of Work (issued by the client agency) or its own Bill of Material. The Bill of Material is simply a list of computer hardware, software, and related equipment to be delivered by the Taxpayer to the client agency.
Further, payment on each delivery order is as follows: The client agency transfers funding to GSA prior to awarding the delivery order. The Taxpayer subsequently invoices and is paid by GSA. GSA adds an administrative fee to the total charge and bills the client agency for this administrative fee.
You request that the department issue a ruling in this case that the Taxpayer's purchases made pursuant to delivery orders issued under this FEDSIM ID/IQ contract be deemed to be exempt purchases for resale to the federal government if the delivery orders call only for the provision of equipment or for the delivery of equipment and some incidental services (e.g., installation and training).
RULING
The application of the tax to government contracts, set out in Title 23 of the Virginia Administrative Code ("VAC") 10-210-693, is based on whether the contract is for the sale of tangible personal property or for the provision of exempt services. If a particular contract involves both the provision of a service and the transfer of tangible personal property, the department relies on the true object test set out in 23 VAC 10-210-4040 to determine whether the contract constitutes a sale of tangible personal property or the provision of an exempt service.
If the true object of the 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 those services, even though title to some or all of the property may pass to the government, or the contractor may be fully and directly reimbursed by the government, or both. Conversely, if the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia §58.1-609.1(4).
The underlying ID/IQ contract in this case provides little evidence of the government's true object. FEDSIM itself does not know at the time the contract is executed what specific property or services, if any, its client agencies will need or request from the Taxpayer under individual delivery orders. Accordingly, the application of the sales and use tax in this case will be based on individual delivery orders and not on the underlying FEDSIM contract: If the true object of the delivery order issued pursuant to the FEDSIM contract is for the provision of services, the Taxpayer will be deemed to be the taxable user or consumer of all tangible personal property used in performing its services.
However, if the true object of the delivery order issued pursuant to the FEDSIM contract is for the sale of property to the federal government, the Taxpayer may purchase that property exempt of the tax for resale. Of course, the resale exemption assumes that title to the property passes to the government and the Taxpayer makes no taxable use of the property. Further, the provision of services that are incidental to the sale of property to the client agency does not negate the resale exemption. In this regard, see the attached Public Document 88-159 (6/23/88) which addresses, among other services, training activities. Other services that are incidental to the sale of property include installation, storage, demonstration, and display of the property.
I have reviewed the three specific delivery orders that were included with your correspondence concerning the following client agencies: ****************************************************************** In each case, I find that the true object of the delivery orders is for the sale of property to the federal government. Accordingly, property purchased pursuant to these delivery orders may be purchased exempt of the tax for resale provided that title to the property passes to the government and that the Taxpayer makes no use of the property (except as specified above). However, any tangible personal property which is used and consumed by the Taxpayer in fulfilling its contractual obligation under these delivery orders and does not convey to the government is taxable to the Taxpayer.
Finally, the determination set out in this response is based on the specific facts of this case as those facts apply to the FEDSIM contract and delivery orders submitted by the Taxpayer. This ruling has no application to any other government contracts.
I trust that this information addresses your concerns. If you have any questions, you may contact *** in the department's Office of Tax Policy at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/27077I
Related Documents
Rulings of the Tax Commissioner