Tax Type
Retail Sales and Use Tax
Description
Government contracts, computer hardware and software
Topic
Basis of Tax
Property Subject to Tax
Date Issued
10-06-2002
October 6, 2002
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter of April 23, 2002, in which you request a ruling on the application of the retail sales and use tax to tangible personal property purchased by a subsidiary under contract with the federal government.
FACTS
Under a prime contract with an agency of the federal government, ***** (the "Parent Corporation") has contracted to supply integrated computer hardware and software systems to federal locations throughout the country, including Virginia. In performance of this contract, the Parent Corporation procures component parts of computer hardware and various services under subcontracts with a number of vendors.
The Parent Corporation has entered into a subcontract with ***** (the "Subsidiary Corporation"). Under the subcontract, the Subsidiary Corporation is to manage and provide depot logistics support, such as procurement, maintenance, distribution and repair/replacement of materials, to the federal government.
RULING
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 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 exempt from the tax for resale that property resold to the government for exclusive use by the government. The subsequent sale of the property to the government is exempt under Code of Virginia § 58.1-609.1(4).
In the instant case, the true object of the contract is to supply tangible personal property to the federal government. Although the Subsidiary Corporation is responsible for some services (such as managing a supply system, repairing supply items, and distributing supplies), the preponderance of tasks set out in the Statement of Work call for the Subsidiary Corporation to use its expertise to provide tangible personal property to the federal government.
Based on this determination, the Subsidiary Corporation may purchase spares, replacement parts, and other items under the resale exemption when such items are for the use or consumption by the federal government. The sale of these items to the federal government is also exempt pursuant to Code of Virginia § 58.1-609.1(4). However, the Subsidiary Corporation is liable for the sales or use tax on any materials, tools, equipment or machinery that it buys for its own use or consumption in the provision of its services to the government.
Code of Virginia, regulations and public documents are cited for reference purposes. These and other reference documents are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
If you have any questions about this ruling, you may contact ***** department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/40458R
Rulings of the Tax Commissioner