Tax Type
Retail Sales and Use Tax
Description
User and consumer of tangible personal property is liable for the tax with purchase
Topic
Basis of Tax
Exemptions
Date Issued
08-25-2005
August 25, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****************:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 1999 through June 2002. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a government contractor that engineers software and systems to share, track and control critical information. The Taxpayer entered into a contract with the ***** an agency of the federal government (the "Agency"). Under the terms of the contract, the Taxpayer was tasked with designing and developing software systems and tools in support of the Agency's funded activities. You maintain that the true object of the transaction is a complete, integrated computer system and, therefore, the government exemption applies to the contract at issue.
DETERMINATION
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 it is determined that 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 Va. Code § 58.1-609.1 4.
Public Document 00-111 (6/19/00) explains that the Department has consistently considered an entire contract, including any purchase orders, delivery orders or task directives issued with or separate from the original contract, as one transaction that is either taxable (for the provision of services) or exempt (for the procurement and sale of property). For example, a work order might be issued which calls for the delivery of computer hardware. If, however, the true object of the underlying contract is for the provision of services, the contractor's purchase of the computer hardware is taxable.
In this instance, the purpose of the underlying contract is for the Taxpayer to "design and develop software systems and tools" for the Agency. Additionally, the underlying contract requires the Taxpayer to provide "contractor support services in areas such as requirements analysis, information systems, systems applications development, data base development/management and technical support." While subsequent contract modifications represent a substantial increase in contract funding attributable to hardware and software procurement for the system itself, the original contract, including the SOW and objectives, support the auditor's finding that the Agency's intent was to contract with the Taxpayer for the provision of a service. Accordingly, because the true object of the underlying contract is for the provision of a service, the Taxpayer is deemed the user and consumer of the tangible personal property at issue and is liable for the tax associated with the purchase of these items.
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia section, regulation and public document cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this response, 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/46409P
Rulings of the Tax Commissioner