Tax Type
Retail Sales and Use Tax
Description
The application of the tax to government contracts
Topic
Basis of Tax
Exemptions
Date Issued
08-18-2004
August 18, 2004
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to the letter (copy enclosed) submitted by ***** requesting a ruling on the application of the retail sales and use tax to contract ***** (the "Contract") awarded by the U.S. Navy to the subsidiary company, ***** (the "Taxpayer"). I apologize for the delay in this response.
FACTS
As described in the Statement of Work ("SOW") for the Contract, its purpose is for the provision of "engineering, fabrication, integration, acquisition, installation and in service support of Navy Militarized and Commercial Off the Shelf (COTS) Command, Control, Communications, Computer, Intelligence, Surveillance, and Reconnaissance (C4ISR) systems." The Taxpayer will also be responsible for the provision of testing, inspecting, and other support services for shipboard and shore-based facilities.
The contract is classified as a cost plus fixed fee, indefinite delivery/indefinite quantity ("ID/IQ") contract, and the work is to be accomplished via individual task orders. The Taxpayer believes that purchases made pursuant to the Contract are exempt from the retail sales and use tax, except for purchases related to secondary or collateral activities, such as clerical or administrative duties.
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 10210-4040 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 true object of 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 Va. Code § 58.1-609.1(4).
Notwithstanding the above, the Tax Commissioner previously determined in Public Document 01-6 (1/4/01) that in some ID/IQ contracts, the application of the sales and use tax may be based on the true object of individual delivery orders (rather than the true object of the underlying contract). Because of the underlying ID/IQ nature of the Contract in this case, and the broadly worded SOW that involves both ship and shore repairs and installations that may or may not involve affixation to realty, there is no conclusive evidence of the government's true object. Accordingly, the application of the retail sales and use tax under the Contract will be based on individual delivery or task orders and not on the underlying Contract.
If the true object of the delivery or task order issued pursuant to the 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. Conversely, when the true object of the delivery or task order issued pursuant to the 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 federal government does not negate the resale exemption. In this regard see Public Document 88-159 (6/23/88), which addresses, among other incidental services, training activities. Other services that are incidental to the sale of property include installation, storage, demonstration, and testing.
Although the Taxpayer may perform services incidental to the sale of tangible personal property, the Taxpayer still remains liable, however, for the retail sales and use tax on the cost price of:
· Computer hardware and software, office supplies, furniture and other tangible personal property used or consumed by the Taxpayer to perform administrative and managerial duties;
As a precaution, there may be instances in which an order is for the delivery of materials that will be used for both taxable and exempt purposes, such as materials to build a tower on a ship (exempt) and on land (taxable, if the tower is permanently affixed to realty). In those instances, the tax applies to the Taxpayer's purchases unless a clear breakdown between taxable and exempt property can be determined.
This ruling is based on the specific facts of this case as those facts apply to the Contract. This ruling has no application to any other government contracts. The Code of Virginia sections, regulations and public documents cited are available on-line 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 ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/42641R
Rulings of the Tax Commissioner