09-97 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Systems integrator develops and implements systems solutions for federal government

Topic

Government Contractor

Date Issued

06-11-2009

June 11, 2009

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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period July 2003 through June 2006. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a systems integrator that develops and implements systems solutions for agencies of the federal government. The contested purchases relate to the ***** (the "System"). The purchases were made pursuant to a contract ("System Contract") between the Taxpayer and the ***** (the "Federal Agency") regarding the System. The Taxpayer contends the contract is for the provision of tangible personal property, and the auditor incorrectly classified it as a services contract. As such, the
Taxpayer maintains that the purchases at issue should be removed from the audit and the assessment recomputed. In the alternative, the Taxpayer contends that should the contract be deemed for services in this determination, there are purchases that should be removed from the audit for other reasons that will be addressed below.

DETERMINATION

System Contract

The Taxpayer contends that the System Contract at issue is a U.S. General Services Administration (GSA) Schedule contract. As a result, the Taxpayer believes that the contract is, by definition, an indefinite delivery contract. The Taxpayer further contends that the true object should have been determined based on each separate order.

GSA Schedule

According to Federal Acquisition Regulation (FAR) § 38.101(a):

- The Federal Supply Schedule program, pursuant to 41 U.S.C. 259(b)(3)(A), provides Federal agencies with a simplified process of acquiring commercial supplies and services in varying quantities while obtaining volume discounts. Indefinite delivery contracts are awarded using competitive procedures to firms. The firms provide supplies and services at stated prices for given periods of time, for delivery within a stated geographic area such as the 48 contiguous states, the District of Columbia, Alaska, Hawaii, and overseas.

Federal Acquisition Regulation § 8.402(a) states:

- The Federal Supply Schedule program is also known as the GSA Schedules Program of the Multiple Award Schedule Program. The Federal Supply Schedule program is directed and managed by GSA and provides Federal agencies with a simplified process for obtaining commercial supplies and services at prices associated with volume buying. Indefinite delivery contracts are awarded to provide supplies and services at stated prices for given periods of time.

The GSA website for GSA Schedules states that the GSA establishes long-term contracts with commercial firms to provide access to over 11 million commercial supplies (products) and services. www.gsa.gov These products and services can be ordered directly from GSA Schedule contractors or through the GSA's online shopping and ordering system. ld. In order to become a GSA Schedule contractor, a vendor must first submit an offer in response to an applicable GSA Schedule solicitation. Id GSA awards contracts to responsible companies that offer commercial items at a fair and reasonable price. Id.

Based on the information provided in the aforementioned sections of the FAR and the GSA website, the fact that the Taxpayer is a GSA Schedule contractor and that its customer made purchases from the GSA Schedule, does not make the contract between the Taxpayer and the Federal Agency an indefinite delivery contract. The language in FAR §§ 8.402 and 38.101 regarding indefinite delivery contracts is in reference to the contracts entered into by vendors and the GSA for the purpose of a vendor becoming a GSA Schedule contractor. The Taxpayer entered into a contract with the Federal Agency. The Taxpayer utilized the GSA Schedule to procure the tangible personal property necessary to perform under its contract with the Federal Agency. The Taxpayer's use of the GSA Schedule has no bearing on whether its contract with the Federal Agency is classified as an indefinite delivery contract. Accordingly, the System Contract is not deemed an indefinite delivery contract for the purposes of the audit at issue or for this determination. The System Contract will be reviewed as a government contract pursuant to Title 23 of the Virginia Administrative Code (VAC) 10210-693.

True Object Test

The application of tax to government contracts issued during the audit period is governed by Title 23 VAC 10-210-693. The application of the tax is based upon whether the contract is for the sale of tangible personal property or for the provision of exempt services. If a 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 Title 23 VAC 10-210-4040 to determine whether the contract constitutes the 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 is exempt from the tax pursuant to Va. Code § 58.1-609.1 4.

Based on a review of the contract and statement of work documentation provided, the System Contract is for the provision of a service to the Taxpayer's customer. The statement of work indicates that the contractor (Taxpayer) is required to provide support services for the Federal Agency. The Taxpayer is also required to provide the services on a continuous, 24 hour, 7 day a week, 365 day a year basis. Additionally, the documentation states that the purpose of the contract is to provide "for the continuity of the mission critical support services ensuring continued operations and maintenance of the" System and other services provided by the Federal Agency. Accordingly, pursuant to Title 23 VAC 10-210-693, the Taxpayer is liable for the tax on purchases of tangible personal property used in the performance of the services at issue in the contract.

The Taxpayer also contends that Military Interdepartmental Purchase Request (MIPR) forms and Form 1-R, should be used to determine the true object of the contract at issue. Relying on language in Title 23 of the Virginia Administrative Code 10-210-693, the Taxpayer contends that these documents should be considered work orders for the purpose of determining the true object. Neither of these documents demonstrates that a transaction took place and will not be considered in making a determination on the issues presented in this appeal.

Nontaxable Transactions

The Taxpayer contends that some of the purchases held taxable in the audit represent nontaxable services. These transactions will be addressed separately below.

Software Transactions

Pursuant to Va. Code §§ 58.1-602 and 58.1-603, the transfer of tangible personal property for a consideration constitutes a retail sale subject to the Virginia retail sales and use tax. It is the Department's longstanding policy to apply the tax to the licensing of prewritten computer software if the license provides the customer not only the right to use the software, but also a copy of the software in some tangible form. See, Public Document (P.D.) 01-103 (8/25/01).

In instances where a taxpayer receives the right to use software, and no tangible personal property is transferred, Virginia Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax for:

- Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . and services not involving an exchange of tangible personal property which provide access to or use of the international network of computer systems commonly known as the Internet and other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.

*****

The Taxpayer contends this transaction represents the extension of software site licenses for use by the Federal Agency. The Taxpayer provides a Bill of Materials to support its contention that this transaction is exempt from the tax. This document is not dated and does not specifically state how the licenses were delivered to the Taxpayer. Additionally, it is unclear whether this document is associated with the transaction held taxable in the audit. In order for a determination to be made with respect to the application of tax on this transaction, the invoice associated with this transaction must be provided. Additionally, the Taxpayer must provide documentation to support its contention that the licenses were transferred by electronic means. If the Taxpayer can provide such documentation, I will reconsider removal of this transaction from the audit.

*****
The Taxpayer asserts that the transaction with this vendor represents the extension of a software license for use by the Federal Agency, the purchase of a software license agreement and the purchase of professional services. The Taxpayer indicates that the software license was delivered electronically. The Taxpayer also states that the software updates provided pursuant to the maintenance agreement were provided by electronic means. The Taxpayer further contends that the professional services were for the installation and/or modification of the software.

The documentation provided by the Taxpayer demonstrates that the licenses and maintenance agreements at issue were transferred to the Taxpayer via e-mail. Pursuant to Va. Code § 58.1-609.5 1, the Taxpayer is not liable for the tax on this transaction. Accordingly this transaction will be removed from the audit.

The Taxpayer contends this transaction is comprised of four components - software license agreement, software maintenance agreement, software documentation and a commission-type fee that was paid to another government contractor for use of its GSA Schedule. The Taxpayer states that the license agreement represents the renewal/expansion of software licenses previously held by the Federal Agency, and the Taxpayer did not receive any new tangible software. The Taxpayer further contends that the software support agreements were electronically delivered.

The documentation provided by the Taxpayer is a price quote from its vendor, not an invoice. There is no indication on the document that the support services were delivered electronically to the Taxpayer. Based on these facts, this transaction cannot be removed from the audit. The Taxpayer must provide the invoice associated with this transaction as support for its position that the software support agreements were transferred electronically.

The Taxpayer represents that it purchased an anti-viral, anti-spam system that included hardware, software, maintenance or support agreements, and services required to install the system and modify and integrate its software components. The Taxpayer contends that the Contested Software exceptions list includes three progress payments that are bundled transactions and consist of charges for hardware, software, and services.

Specifically, the Taxpayer contends that lines 3 and 4 of the Contested Software exceptions list are for intangible software license keys, with the exception of ***** which represents payments for hardware captured in the Noncontested DR Assets exceptions list. The Taxpayer contends that line 5 includes ***** for hardware maintenance that was captured in the Noncontested DR Assets exceptions list. The balance of ***** represents intangible software license keys.

The Taxpayer provides an e-mail explaining that the Taxpayer's vendor uses the network to transfer license extensions to its customers. The e-mail also indicates the vendor uses e-mail to send the license keys to its customers. Additionally, the Taxpayer provides an e-mail that was used by the vendor to send license keys electronically for the Federal Agency's system. The date on the e-mail used to transfer the license keys is different from the dates of the transactions at issue. As a result, I am unable to make a determination about whether these transactions should be removed from the audit because it is unclear if the e-mail relates to the transactions at issue in the audit. The Taxpayer must provide documentation demonstrating that the transactions at issue and the e-mail provided are related.

The cost of hardware for ***** included in the cost for the license keys will be removed from the audit. The cost of hardware for ***** cannot be removed from the audit because the Taxpayer has not provided documentation to support its contention that this amount is included in the cost for the license keys or that the transaction is included on the noncontested DR Assets exceptions list. If the Taxpayer can provide the necessary documentation, I will reconsider removal of this cost as requested.

Contested 526 ODC Purchases

The Taxpayer contends that certain transactions included in this exceptions list are for software licenses and software updates that were delivered by electronic means.

Pursuant to Va. Code § 58.1-609.5 1, purchases of software licenses and software updates that are delivered by electronic means are not subject to the retail sales and use tax.

Line Items 1 and 3: The documentation provided by the Taxpayer indicates the products purchased from its vendor were delivered by electronic means. However, the documentation does not provide any costs to associate with the charges that were taxed in the audit. Additionally, there is no way to determine if the products depicted in the documentation provided are related to the transactions held taxable in the audit. Accordingly, I am unable to remove these line items from the audit. If the Taxpayer can provide the necessary documentation, I will reconsider removal of these items from the audit.

Line Item 10: The documentation (e-mail) provided by the Taxpayer indicates that the license keys were delivered by electronic means. However, it is unclear from the documentation provided whether the transaction held taxable in the audit is related to the email provided. Accordingly, I am unable to remove this line item from the audit. If the Taxpayer can provide the necessary documentation, I will reconsider removal of this item.

Line Item 39: The documentation provided by the Taxpayer acknowledges and verifies proof of delivery of software licenses. However, the documentation provided does not indicate how the licenses were delivered. Additionally, it is unclear whether the documentation provided is related to the transaction held taxable in the audit. Accordingly, I am unable to remove this item from the audit. If the Taxpayer can provide the necessary documentation, I will reconsider removal of this item from the audit.

Line Item 53: This line item will be addressed in the section related to the *****.

Line Item 67: In this instance, the software maintenance agreement provides that vendor will provide telephone support for issues concerning the software. Additionally, all upgrades are transferred electronically from the vendor's service site. Pursuant to Va. Code § 58.1-609.5 1, this transaction is not subject to the retail sales and use tax and will be removed from the audit.

Line Items 70 and 71: The Taxpayer provides copies of the "Right to Use Certificates" issued by its vendor. The Taxpayer contends that these types of certificates are only issued in situations where there is no tangible software delivery. Based on research conducted by a member of my staff, Right to Use Certificates are issued in instances where software is transferred in tangible form and in instances where software is transferred electronically. Accordingly, the fact that a Right to Use Certificate was issued to the Taxpayer does not prove that the software was transferred electronically. Additionally, it is unclear whether the documentation provided is related to the transactions held taxable in the audit. Accordingly, these line items will remain in the audit.

Line Item 75: The Taxpayer provides a copy of the invoice associated with this transaction. The invoice indicates that the software is to be downloaded, i.e., delivered electronically. Pursuant to Va. Code § 58.1-609.5 1, this transaction is not subject to the retail sales and use tax because the software was transferred electronically. Accordingly, this line item will be removed from the audit.

*****

These transactions are represented by line items 53-55 on the contested 526 ODC Purchases exceptions list. The Taxpayer contends these transactions do not represent the purchase of a tangible product. Rather, the Taxpayer asserts that the purchases were for a hosted Internet application that did not involve the transfer of any tangible personal property. The Taxpayer provides an invoice and contends that it demonstrates that the transaction is for a managed online service for monitoring the System at various Internet points of presence.

The invoice indicates that part of the transaction is for the purchase of software. However, the shipping information does not indicate how this software was delivered. As explained in P.D. 05-44 (4/4/05), software that is transferred in a tangible form is subject to the retail sales and use tax. Software that is transferred electronically is not subject to the tax. In instances where transactions include both the provision of a service and the sale of tangible personal property, the true object test established in Title 23 VAC 10-210-4040 must be applied to determine whether the transaction is subject to the tax. According to the invoice provided, this transaction was made pursuant to the Systems Contract that has been deemed a contract for the provision of services. In order for a determination to be made with respect to this transaction, the Taxpayer must provide documentation to support its contention that this transaction is for a service. Upon receipt of such documentation, the true object test will be applied. If it is determined that the transaction is for the provision of a service, these line items will be removed from the audit. However, if it is determined that the transaction is for tangible personal property, the tax as assessed will be correct and will not be removed from the audit.

CONCLUSION

The audit staff will contact the Taxpayer to determine a time for the Taxpayer to furnish the documentation requested in this determination. The Taxpayer is given 30 days from such contact to provide the requested documentation. If such documentation is not received within the allotted time, the assessment will be upheld and become immediately due and payable.

If the documentation is provided and adjustments are warranted, the Taxpayer will be issued a revised bill with interest accrued to date. To avoid the accrual of additional interest, the Taxpayer must remit payment within 30 days of the date of the bill. 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, regulation 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 Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1532562121.P

Rulings of the Tax Commissioner