Document Number
08-164
Tax Type
Retail Sales and Use Tax
Description
Taxpayer was an information technology consulting services firm that performed defense related contracts primarily for the federal government.
Topic
Amnesty
Exemptions
Records/Returns/Payments
Tangible Personal Property
Date Issued
08-29-2008

August 29, 2008





Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to the letters submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the audit period May 1997 through December 2001. I apologize for the delay in responding to your appeal.

FACTS


During the audit period, the Taxpayer was an information technology consulting services firm that performed defense related contracts primarily for the federal government. In its original appeal, the Taxpayer contests the tax assessed as a result of the Department's audit and presents four issues that are addressed separately below. The Taxpayer contests other issues that were addressed in a supplement to its appeal. Those issues will also be addressed separately below.

DETERMINATION


Original Appeal


Contested Invoices

Relying on Va. Code § 58.1-609.5 1, the Taxpayer contends that several invoices listed as exceptions in the audit report are for the acquisition of professional services. The Taxpayer further contends there are invoices specifying the delivery of property to locations outside of Virginia that are not subject to the tax. The Taxpayer requests that the invoices for the purchase of professional services and the delivery of property outside of Virginia be removed from the audit. The Taxpayer has presented nine separate invoices to be considered for removal.

Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax does not apply to "[p]rofessional, insurance or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . ."

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A states:
    • Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable. Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated.

Title 23 VAC 10-210-4040 D states, "[i]n order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the 'true object' of the transaction must be determined."

Virginia Code § 58.1-609.1 4 provides, in pertinent part, that the retail sales and use tax does not apply to "tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States."

The Department has traditionally held that in considering the tax treatment of a federal government contract, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. For contracts executed during the audit period at issue, the true object test described in Title 23 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 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 for resale. The contractor may then sell the property exempt of the tax to the government in accordance with Va. Code § 58.1-609.1 4.

Contested New Issues - Line 1: The Taxpayer contends that this charge is for professional services and is not taxable. The invoice provided by the Taxpayer indicates that the charge is for technical services, and that the "services shall be performed in accordance with the attached proposal dated April 17, 1996." Pursuant to additional explanation and documentation provided by the Taxpayer, this purchase was made pursuant to a contract the Taxpayer entered into with an agency of the federal government. The contract is for the provision of a tangible computer system. Pursuant to Va. Code § 58.1-609.1 4, sales of tangible personal property to government agencies are exempt of the tax. Accordingly, this transaction is exempt of the tax and will be removed from the audit.

Non-Contested Purchases - Line 18: The Taxpayer contends that this transaction is for professional services and is not taxable. The invoice provided by the Taxpayer indicates that the charge is for technical services for software configuration management under the TAPSYS-2 contract.

The Taxpayer provided the contract and additional documentation to support its contention that this transaction represents a nontaxable professional service. However, the prime contract number listed on the invoice is different from the prime contract number listed on the contract and additional documentation provided with respect to this transaction. In order to make a determination with respect to this transaction, the Department will need for the Taxpayer to clarify that the invoice and contract information provided are related.

Non-Contested Purchases - Line 20: The Taxpayer contends that this transaction is for professional services and is not taxable. The documentation provided indicates that the transaction was made in accordance with a contract between the vendor and the Taxpayer. The Taxpayer has provided contract documentation to further support its contention that the tax is not applicable to this transaction.

The documentation provided has been carefully reviewed. However, the documentation does not clearly define what is being provided to the Taxpayer in this transaction. It is unclear if the true object of the contract is for the provision of tangible personal property or for the provision of a service. If the contract is for the provision of tangible personal property to the government agency, the Taxpayer would be able to purchase the tangible personal property exempt of the tax using a resale exemption certificate. If the true object of the contract is for the provision of a service, the Taxpayer would be liable for the tax on any purchases of tangible personal property used in the performance of the service. Accordingly, the Taxpayer will be given 30 days from the date of this letter to clarify the nature of the contract and invoice at issue.

Non-Contested Purchases - Lines 23-29, 31-33, 36 and 49: With respect to lines 23 and 24, the Taxpayer asserts that these transactions are for professional services and are not taxable. With respect to lines 25-29 and 49, the Taxpayer contends that these transactions are for items shipped out of state or services performed out of state and are not taxable. Additionally, the Taxpayer contends that the research and development exemption applies to lines 31-33 and 36. These transactions will be addressed together as they relate to the same contract. Please see the response to the Taxpayer's research and development argument below in the Amended Appeal section of this determination.

Non-Contested Purchases - Line 40: The Taxpayer contends that the tangible personal property in this transaction was delivered to a site in Canada and is not subject to the tax. Virginia Code § 58.1-604 imposes the use tax "upon the use or consumption of tangible personal property in this Commonwealth." Pursuant to Va. Code § 58.1-602, use is defined as the exercise of any right or power over tangible personal property incident to the ownership thereof."

Virginia Code § 58.1-609.10 4 provides that the retail sales and use tax does not apply to the "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth. Delivery of goods destined for foreign export to a factor or export agent shall be deemed to be delivery of goods for use or consumption outside of the Commonwealth." Title 23 of the Virginia Administrative Code 10-210-780 A interprets this exemption and provides that:
    • The tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made in Virginia.

The invoice provided by the Taxpayer indicates that the customer address and the destination for delivery of the property are both located in Virginia. There is no indication from the documentation provided that the property was delivered from the vendor to the Taxpayer outside Virginia. Based on the documentation provided, title to the property passed to the Taxpayer in Virginia. Accordingly, this transaction does not represent a sale in interstate or foreign commerce. The tax as assessed is correct and this transaction will not be removed from the audit.

Non-Contested Purchases - Line 42: The Taxpayer contends that this transaction represents professional services performed in Massachusetts and is not subject to the sales tax. Based on the documentation provided, the contract is for the provision of services by the Taxpayer to an agency of the federal government. The transaction at issue is for the purchase of tangible personal property and labor to be used in the performance of the service contract. The Order For Supplies or Services dated November 16, 1998, indicates that the property purchased pursuant to the contract is to be delivered to the federal agency located in Massachusetts. However, the Taxpayer has not provided the invoice, and I am unable to determine whether the property was shipped directly to Massachusetts. Before a determination can be made with respect to the application of tax, it must first be determined if the Taxpayer made use of the property in Virginia as defined in Va. Code § 58.1-602.

Non-Contested Purchases - Line 7: The Taxpayer states this transaction is for professional services performed in Colorado. The invoice provided by the Taxpayer indicates that the tangible personal property was purchased from a vendor in Colorado and was shipped to the Taxpayer at a location in Colorado. The property did not enter the Commonwealth and no use of the property was made in Virginia. Pursuant to Va. Code § 58.1-609.10 4 and Title 23 VAC 10-210-780, this transaction is not subject to the Virginia retail sales and use tax. Accordingly, this line item will be removed from the audit.

Non-Contested Purchases - Line 15: The Taxpayer contends that this transaction is for professional services and is not taxable. The documentation provided with the appeal shows the purchase of a software upgrade. It is unclear from the documentation provided whether this transaction constitutes a service sold in connection with tangible personal property. No additional documentation has been provided to clarify the nature of the transaction. Accordingly, this transaction will not be removed from the audit.

Related Entity Purchases

The Taxpayer contends that purchases were made by a related entity of the Taxpayer and by a separate legal entity from the Taxpayer. The Taxpayer represents that the related entity is registered for the sales tax and filed sales tax returns. The Taxpayer maintains that purchases made by the related entity should not be included as exceptions for purposes of the Taxpayer's audit. The Taxpayer has provided additional documentation and explanation to support its contention that these purchases should not be included in the audit.

The Taxpayer provided its Federal Form 851, filed for the tax year ending July 30, 2000. The form indicates that at the time the purchases were made, the Taxpayer and the related entity were subsidiary corporations of a common parent corporation. The Taxpayer and its subsidiary had separate federal tax identification numbers for the period at issue. The subsidiary filed its own federal corporate income tax returns for the periods July 31, 2000 through April 3, 2001 and April 4, 2001 through December 31, 2001. For the periods January 1998 through December 2001, the subsidiary filed quarterly sales tax returns with the Department.

Based on the documentation provided, the Taxpayer and the subsidiary are separate legal entities. Accordingly, the purchases will be removed from the Taxpayer's audit.

AWIPS Purchases

Public Document (P.D.) 00-111 (6/19/00) explains that, during the periods at issue, the Department 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. This public document reflects the Department's policy regarding the treatment of federal government contracts at the time the contract at issue was executed.

The Taxpayer contends that the contested sales tax liability represents purchases made pursuant to a contract. The Taxpayer further contends that in the audit, the Department erroneously concluded that purchases in connection with this contract are consumable supplies when in fact the terms and conditions of the contract indicate that the contract is for the procurement of a product, and as such the purchases are not subject to the tax. The Taxpayer provided a copy of Section C of the contract at issue for consideration in its appeal. The purpose of the underlying contract is for the Taxpayer to "design, develop, deploy, and operate a system" for the AWIPS program. Additionally, the underlying contract requires the Taxpayer to perform a number of services during each phase of the contract, to include telecommunications services, hardware maintenance and logistics support services, software maintenance and support, and others.

The AWIPS System is a high-speed computer and communications network utilized by the Taxpayer's customer. The system allows the customer's forecasters to deliver more accurate and timely weather warnings and forecasts. The customer's forecasters actively use the system as a part of their job responsibilities. The Taxpayer does not actively operate the system as part of its responsibilities under the contract. Rather, the Taxpayer provides troubleshooting services to the customer and ensures proper maintenance of the system.

Based on a review of the contract and an understanding of the AWIPS System, I have determined that the true object of the contract is for the provision of a tangible computer system. While it is true that certain services are provided pursuant to the terms of the contract, these services are not the true object of the contract. Accordingly, purchases of tangible personal property that were transferred to the government agency were properly made exempt of the tax. Any purchases of tangible personal property that will be used by the Taxpayer in performing under the contract are subject to the tax. Based on this determination, the purchases at issue will be reviewed by the audit staff, and those items of property that transferred to the federal agency and were not used by the Taxpayer in performing under the contract will be removed from the audit.

Amnesty Penalty

Virginia Code § 58.1-1840.1 F 1 states, "if any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains any outstanding balance after the close of the Virginia Tax Amnesty Program because of nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the taxpayer."

The Taxpayer contends that the amnesty penalty should not have been assessed. The Taxpayer represents that it filed its tax returns in a timely manner, remitting in full the amount of tax believed to be owed at the time of the filing. As evidenced by the results of the audit, the Taxpayer failed to pay all taxes due to the Commonwealth. The Taxpayer was under a duty to ensure that it complied with the requirements of the Virginia Tax Code with regard to the retail sales and use tax and should have been aware of any discrepancies in its tax remittance procedures. Given that additional tax was due and because the compliance penalty was applied, the amnesty penalty was properly assessed. If warranted, the amnesty penalty will be adjusted following the adjustments to the audit based on the decisions in this letter.

Amended Appeal

Nontaxable Services

Noncontested Purchases - Line 55: The Taxpayer contends that it conducted a research study on a Chinese database and that the vendor did not sell a tangible database to the Taxpayer. The Taxpayer asserts that it researched the database on the vendor's website. Pursuant to Va. Code § 58.1-609.5 1, the Taxpayer contends that this transaction is a nontaxable service.

Based on the information provided, the Taxpayer did not receive tangible personal property as a result of this transaction. Pursuant to Va. Code § 58.1-609.5 1, the transaction will be removed from the audit.

Noncontested Purchases - Line 6: The Taxpayer contends that the vendor provides government search, review and copying services. Pursuant to Va. Code § 58.1-609.5 1, the Taxpayer asserts that the services represent nontaxable professional services.

Based on the documentation provided and a review of the vendor's website, the vendor provided a professional service to the Taxpayer. Accordingly, this transaction will be removed from the audit.

Purchases Shipped Out-of-State and Services Performed Out-of-State

The Taxpayer contends that the tangible personal property purchased as a result of the following transactions is not subject to the tax because the property was shipped directly out of the state.

Noncontested Purchases - Line 45: The vendor in this instance is located in Canada. The invoice indicates that the property is to be shipped to bonded storage in Canada. Pursuant to Va. Code § 58.1-602 and Title 23 VAC 10-210-780, the Taxpayer does not make use of the property in Virginia, and title and possession passed outside Virginia. Accordingly, the property is not taxable in Virginia and this transaction will be removed from the audit.

Noncontested Non-Virginia Assets - Line 3: The Taxpayer provides a Delivery/Installation Certificate that indicates that the property is to be located in San Diego, California. The "ship to" address on the invoice is located in McLean, Virginia. None of the documentation provided indicates that the property was shipped directly to California from the vendor.

Based on the information provided, the Taxpayer made first use of the property in Virginia. The purchase is not subject to the exemption for interstate commerce because the Taxpayer took title to or possession of the property in Virginia. Accordingly, this transaction was properly included in the audit and will not be removed.

***** This transaction was not included on the exceptions list in the audit. Rather, it was only included in the pick list. Accordingly, this transaction is not a part of the noncontested purchases measure that was extrapolated in the audit.

Noncontested Purchases - Line 52: The Taxpayer asserts that it purchased a license and dual in-line memory module for printers. The Taxpayer further asserts that these items were shipped to Japan for its customer's use in Japan.

The "ship to" address on the invoice is located in Arlington, Virginia. None of the other documents provided indicate that a different "ship to" address is to be used. Additionally, the Taxpayer has not provided evidence to demonstrate that the property was actually shipped to Japan. Based on these facts, and pursuant to Va. Code § 58.1­602 and Title 23 VAC 10-210-780, the Taxpayer took title to or possession of the property in Virginia. Accordingly, this transaction was properly included in the audit and will not be removed.

Maintenance and Repair Contracts

The Taxpayer purchased maintenance contracts from its vendors. The Taxpayer contends that the tax should have been assessed on 50% of the amount of the contract.

Pursuant to Va. Code § 58.1-609.5 9, "[b]eginning January 1, 1996, maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only. Persons providing maintenance pursuant to such a contract may purchase repair or replacement parts under a resale certificate of exemption." [Emphasis added.]

Noncontested Assets - Lines 20, 174 and 242: The invoices provided do not state that the maintenance contracts are for repair parts and labor. The Taxpayer was given the opportunity to provide the contracts, but was unable to secure such documentation. In order for the exemption to apply the Taxpayer must be able to demonstrate that the maintenance contracts were for repair parts and labor as required by the statute. Pursuant to Va. Code § 58.1-205, "[a]ny assessment of a tax by the Department shall be deemed prima facie correct." The Taxpayer has the burden of proving that the tax as assessed is incorrect. The Taxpayer has not done so in this instance and the tax is upheld.

Noncontested Assets - Line 3: The invoice provided does not state that the maintenance contract is for repair parts and labor. Additional information provided by the Taxpayer from its vendor indicates that the support provided with respect to this transaction includes: unlimited calls to the Support Center, no-charge upgrades to the latest versions of support products, software enhancements, modifications and fixes, on-line access to the vendor's knowledge center and enhancement request process. Based on the additional information provided, I find that the contract at issue is for repair parts and labor. Accordingly, pursuant to Va. Code § 58.1-609.5 9, this transaction is subject to tax upon one-half of the total charge for the contract. An adjustment will be made to the audit with respect to this transaction.

Noncontested Assets - Line 219: The invoice provided does not state that the maintenance contract is for labor and repair parts. Since this transaction occurred, the vendor was sold to another entity. That entity provided a copy of the license agreement that it currently uses. The license agreement does not indicate whether the maintenance contracts are for labor and repair parts. Additionally, it is unclear that this was the contract/license agreement that was used by the vendor in this transaction with the Taxpayer. Pursuant to Va. Code § 58.1-205, the Taxpayer has not met the burden of proving that the tax as assessed is incorrect. Accordingly, the tax assessed on this transaction is upheld.

Real Property Improvements and Repairs

Noncontested Assets - Lines 103 and 109: Relying on Va. Code § 58.1-610 A, the Taxpayer contends that these transactions were made pursuant to real property improvement contracts and are not subject the retail sales and use tax.

Virginia Code § 58.1-610 A provides that:
    • Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.

Title 23 VAC 10-210-410 A provides, in pertinent part, that "[t]angible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor." In addition, Title 23 VAC 10-210-230 A states, in pertinent part:
    • A monitored system is defined as burglar, security and fire alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such systems. Charges for monitored systems constitute charges for a service which is not subject to the tax. The person selling/leasing and installing the monitored system is deemed to be the consumer of all property used in providing the service and must pay the tax on such property at the time of purchase.

Title 23 VAC 10-210-230 B provides, in pertinent part, that "[p]ersons engaged in the sale or lease and installation of burglar, security or fire alarm systems are engaged in making retail sales, the total charge for which is subject to the tax. Separately stated installation charges are not subject to the tax."

In P.D. 05-121 (7/20/05), the taxpayer made retail sales of nonmonitored fire and security systems. Monitoring services were not sold to the purchaser as part of the same sales transaction. Pursuant to Title 23 VAC 10-210-230, the taxpayer should have collected retail sales tax from the customer on the sales price of the system and remitted it to the Department.

In order to determine the application of tax on these transactions, it must be determined if the security systems at issue are monitored systems as described in the regulation. If the systems are monitored by the vendor that installed the system, then the tax will not apply to these transactions. However, if the systems are monitored by a third party, these transactions will be subject to the tax. The Taxpayer must provide documentation that clarifies whether these transactions are for a monitored system.

Noncontested Assets - Line 170: The Taxpayer contends that this transaction represents the installation of electrical devices into realty and qualifies as a real property improvement. The purchase order provided denotes that the cost is for materials and labor for demolition of old and installation of various electrical devices. The "Division Capital Justification" form provided by the Taxpayer indicates that this transaction was for leasehold improvement. The Taxpayer also provides the "Payment Voucher and Delivery/Installation Certificate for Capital Assets" form. By signature of the Taxpayer's representative on this form, the Taxpayer acknowledges "complete and satisfactory delivery and installation" of the tangible personal property at issue.

The documentation provided does not provide sufficient detail to make a determination as to whether this transaction is subject to the retail sales and use tax. Thus, the inclusion of this transaction in the audit is correct. In order to determine if this transaction can be removed from the audit, the Taxpayer must provide additional documentation that more specifically describes the materials that were installed pursuant to this transaction.

Noncontested Assets - Line 121: The Taxpayer contends that this transaction required the vendor to maintain electrical wiring in the Taxpayer's buildings.

The Department has issued numerous public documents on cabling issues and has consistently held that cable installed in walls and ceilings constitutes an installation service with respect to realty. See, P. D. 06-131 (10/25/06), P.D. 99-107 (5/7/99) and P.D. 90-210 (11/28/90). As such, persons who purchase and install cable, wire, connectors and related materials are considered the taxable consumers of these items. See, Title 23 VAC 10-210-410 A and Va. Code § 58.1-610.

The invoice and purchase order provided do not indicate that the vendor is responsible for installing the tangible personal property purchased. The purchase order lists the buildings that the tangible personal property applies to, and indicates that the purpose of the order is "Cat. 5 data cabling for office." The Taxpayer provided a copy of its "Delivery/Installation Certificate for Capitalization of Capital Equipment" form. By signature of the Taxpayer's representative, the Taxpayer acknowledges "complete and satisfactory delivery and installation" of the tangible personal property in question. The profile ID on the form is for "leasehold improvements."

Based on the documentation provided, it seems likely that the Taxpayer purchased both the property and installation from its vendor. However, nothing in the documentation specifically indicates that the installation was provided by the vendor. Accordingly, the transaction was properly held taxable in the audit. In order to determine if this transaction can be removed from the audit, the Taxpayer must provide additional documentation to clarify whether the property was installed by its vendor.

Tax Paid on Invoices

Noncontested Purchases - Line 35: The Taxpayer contends that the tax was paid to the vendor at the time of purchase. The Taxpayer provides invoices of other purchases made from this vendor where tax was included in the invoice charge. However, the Taxpayer has not provided the invoice for the transaction at issue. In order to determine whether the Taxpayer is liable for the tax with respect to this transaction, the actual invoice would have to be reviewed. Because the invoice is not available for review, the transaction will remain in the audit.

Noncontested Assets - Line 216: The Taxpayer contends that the tax was paid on the original purchase order. The Taxpayer provides that the vendor reduced the amount of the invoice due to problems incurred with the product purchased. The Taxpayer contends that the invoice at issue represents the remaining balance following the reduction by its vendor. The Taxpayer also provides a statement from its vendor explaining the circumstances surrounding this invoice.

Virginia Code § 58.1-625 requires that a dealer separately state the amount of tax on invoices provided to its customers. In this instance, the invoice at issue does not depict the separately stated tax as required by Va. Code § 58.1-625. Generally, in a situation like this, the Taxpayer would be held liable for the tax. However, based on the facts and the statement provided by the Taxpayer's vendor, which explains the circumstances surrounding this invoice and the transaction that preceded it, I will allow this transaction to be removed from the audit.

Research and Development Services

Noncontested Purchases - Lines 23-29, 31-33 36 and 49: Relying on Va. Code § 58.1-609.3 5, the Taxpayer contends that the tangible personal property was purchased for research and development. The Taxpayer asserts that the property was purchased with respect to its contract with NASA. The Taxpayer further asserts that the property was purchased to accomplish specific scientific research and development in solar physics, planetary atmospheres and other disciplines. Relying on Title 23 VAC 10-210-3070, the Taxpayer contends that the activities, during which the property is used, constitute basic research and research and development.

Title 23 VAC 10-210-3070 A defines basic research as "a systematic study or search in a scientific field of endeavor with the ultimate goal of advancing knowledge or technology in that field. The development of a tangible product or process need not occur in basic research."

Based on a review of the documentation provided and a review of the customer's website, the items purchased pursuant to this transaction are used in basic research, with the ultimate goal of advancing knowledge. Accordingly, the research and development exemption applies to this transaction. These transactions will be removed from the audit.

Purchase for Resale

Noncontested Purchases - Line 50: The Taxpayer contends that the purchases made were for an agency of the federal government. The Taxpayer provides an e-mail from the vendor to support its contention. This purchase was made pursuant to a contract with an agency of the federal contract.

The contract is for the design, development, implementation and maintenance of information systems, applications and databases. Applying the true object test, I have determined that the contract is for the sale of tangible personal property - the provision of a tangible computer system. Pursuant to Va. Code § 58.1-609.1 4, the contract is for the sale of tangible personal property for use or consumption by an agency of the federal government. Accordingly, the Taxpayer is not liable for the tax, and this transaction will be removed from the audit.

Noncontested Purchases - Line 41: The Taxpayer contends that this purchase was made under government order and that the property was shipped directly to the government agency. As such, the Taxpayer contends that this transaction was incorrectly included in the audit and requests that it be removed.

The invoice provided indicates that the tangible personal property was shipped directly to the government agency from the vendor. The property is for use or consumption by an agency of the federal government. Accordingly, the Taxpayer is not liable for the tax, and this transaction will be removed from the audit.

Noncontested Purchases - Line 58: The Taxpayer contends that the purchase was made for resale to an agency of the federal government. The invoice indicates that the purchase is for a security workstation, encryptors and a smartcard. The purchase order provided indicates the property at issue is for use or consumption by an agency of the federal government. Accordingly, the Taxpayer is not liable for the tax, and this transaction will be removed from the audit.

CONCLUSION


The Taxpayer is given 60 days from the date of this letter to provide the additional documentation and clarification as indicated in the responses above. This information and the audit will be forwarded to the audit staff to make revisions to the audit as warranted by this determination. If such documentation is not provided within the allotted time, the item(s) at issue will remain taxable in the audit.

Once the revisions are made, the Taxpayer will receive a revised bill with interest accrued to date. The Taxpayer will have 30 days from the date of the revised bill to remit payment and avoid the accrual of additional interest. The Taxpayer should remit 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 sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner



AR/54814P


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46