Tax Type
Retail Sales and Use Tax
Description
Government contractor provides various training courses in firearms and security
Topic
Exemptions
Government Contractor
Tangible Personal Property
Date Issued
05-21-2013
May 21, 2013
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 October 2006 through September 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a government contractor that provides various training courses in firearms and security. The Taxpayer entered into a contract with an agency of the United States government to provide such training. The contract required the Taxpayer to provide instructors, as well as weapons, ammunition, and other equipment to be used in the training courses. The Department's auditor deemed the contract at issue a contract for services, and all tangible personal property purchased in performance of the contract was held taxable in the audit. The Taxpayer contends that certain purchases made pursuant to the contract qualify for exemption from the tax.
DETERMINATION
True Object Test
The Taxpayer maintains that the true object test should be applied to each contract line item number ("CLIN") to determine the correct application of the retail sales and use tax. Relying on Example 9 of Title 23 of the Virginia Administrative Code 10-210-693, the Taxpayer contends that the CLINs that require the provision of instructors only are for services and are not subject to the tax. The Taxpayer further contends that the CLINs that require the provision of instructors and equipment are for the sale of tangible personal property to the government agency because the cost of the equipment sold to the government agency far exceeds the cost of the services (instructors) provided.
Virginia Code § 58.1-609.1 4 provides 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."
Title 23 of the Virginia Administrative Code (VAC) 10-210-693 B states, 'Where a transaction between a government entity and a contractor involves both the rendering of a service and the provision of tangible personal property, the transaction is deemed a mixed transaction, and the true object of the transaction must be examined."
Title 23 VAC 10-210-693 C states:
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- In order to determine whether a particular transaction that involves both the rendering of a service and the provision of tangible personal property constitutes a sale of a service or of tangible personal property, the true object of the transaction must be examined. The appropriate tax treatment of purchases of tangible personal property by persons who contract with the government or its political subdivisions is based upon whether the transaction is for the sale of tangible personal property (e.g., a computerized data retrieval system) or for the provision of an exempt service (e.g., real property facilities management). If a transaction is for the sale of tangible personal property, a contractor may purchase the tangible personal property exempt of the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.
With respect to a transaction that is for the provision of services, Section C of the regulation further provides, "the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property provided may pass to the government or the contractor may be fully and directly reimbursed by the government or both."
Title 23 VAC 10-210-693 E states, "As of July 1, 2006, the application of the sales and use tax to all mixed contracts and indeterminate purpose contracts shall be based on application of the true object test to each individual order and not the original
contract." Title 23 VAC 10-210-693 A defines order as:
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- A specific task assigned to a contractor pursuant to a contract with a government entity. For purposes of this regulation, the term "order" shall include, but not be limited to, task orders, delivery orders, work orders, contract line item numbers (CLINs), and shall also include orders issued under a subcontract for fulfillment of work or products required under a general contractor's prime contract with the government and add-ons to existing contracts or orders. The term "order" shall not include a vendor order issued by a contractor to a vendor.
The contract provided by the Taxpayer has been reviewed. Based upon Title 23 VAC 10-210-693, each CLIN has been evaluated to determine the application of the Virginia retail sales and use tax. The true object of the CLINs that provide for instructors only is for services, and the charges are not subject to the retail sales and use tax.
Based upon Title 23 VAC 10-210-693, the true object test is applied to the CLINs that require the Taxpayer to provide instructors and equipment (weapons and ammunition) to the government agency. Based upon the application of the true object test to these CLINs, it is determined that these CLINs are for the provision of services by the Taxpayer to the government agency. While the weapons and ammunition are utilized during the provision of the service, it is the training that the government agency receives that is the true object of the transaction. The goal of the contract at issue is the training that the government agency receives with respect to the weapons, not the acquisition of the weapons themselves. Accordingly, all tangible personal property purchased in the performance of the contract is used and consumed by the Taxpayer as a service provider and subject to the retail sales and use tax. The analysis of the true object test is based upon what is being provided by the Taxpayer, not the cost of what is being provided. The fact that the cost associated with the tangible personal property greatly exceeds the cost associated with the instructors provided does not guide the determination of whether the transaction is for an exempt service or for the taxable sale of tangible personal property.
Taxpayer Use of the Tangible Personal Property
The Taxpayer maintains that it does not use the tangible personal property at issue. Additionally, the Taxpayer states that federal law regarding firearms and ammunition prohibits the Taxpayer from using the tangible personal property purchased in the performance of the contract. The Taxpayer also contends that it was acting as a procurement agent for the U.S. government and that no tax can be assessed in accordance with the Supremacy Clause of the U.S. Constitution. The Taxpayer maintains that the firearms and ammunition at issue were purchased for use by the federal government agency and not for use by the Taxpayer. Accordingly, the Taxpayer maintains that the assessment of tax on these purchases in the audit is incorrect.
As stated previously, the CLINs that required the Taxpayer to provide services and tangible personal property are deemed orders for the provision of services following an application of the true object test. Pursuant to Title 23 VAC 10-210-693 C, when an order is for the provision of a service, the taxpayer is deemed to be the user and consumer of the tangible personal property at issue, even though title to the purchased property passes to the government. Accordingly, the Taxpayer is liable for the tax on the tangible personal property at issue, even though federal law prohibits the using or owning of the property at issue. The concept of use in the federal statute is different as compared to use in the Code of Virginia with respect to the application of the Virginia retail sales and use tax.
Additionally, I find no evidence to support the Taxpayer's contention that it was acting as a procurement agent for the U.S. government with respect to the contract at issue. There is no indication from the documentation provided that the Taxpayer was officially appointed as a procurement agent for the government agency. Furthermore, there is no evidence that the credit of the government agency was bound directly to the transactions at issue1. Accordingly, I find that the property at issue was purchased by the Taxpayer, and that the Taxpayer was not acting as a procurement agent for the U.S. government with respect to this contract.
Sales with No Connection to Virginia
The Taxpayer asserts that there are purchases of ammunition that have no connection to Virginia. The Taxpayer maintains that the ammunition at issue is not subject to the tax because it was never used or even stored in Virginia. The Taxpayer contends that 27.01 percent of the ammunition at issue is not subject to the tax because it was shipped directly to the Taxpayer's facility in California.
Relying on Commonwealth v. Miller-Morton, 220 Va, 852, 263 S.E.2d 413 (1980), the Taxpayer maintains that 25.26 percent of the ammunition at issue is not subject to the tax because while temporarily stored in Virginia, it was not used nor consumed by the Taxpayer, nor did the Taxpayer exercise any control over the property in Virginia. Relying on Title 23 VAC 10-210-780, the Taxpayer further contends that the interstate commerce exemption applies because neither title to, nor possession of the property was transferred to the Taxpayer in Virginia. The Taxpayer maintains that the property was merely placed in interstate commerce for delivery, and that no sales occur in Virginia.
Virginia Code § 58.1-602 defines use, in pertinent part, as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of property in the regular course of business."
Title 23 VAC 10-210-230 A states:
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- 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 within Virginia.
With respect to the ammunition that the Taxpayer maintains was shipped directly to its facility in California, the interstate commerce exemption may be applicable. In order to determine whether the exemption applies, the Taxpayer must provide invoices that apply to these transactions for review by the Department's field audit staff. The Taxpayer is given 30 days from the date of this letter to provide the required documentation. If the required documentation is not received within the allotted time frame, the purchases at issue will remain in the audit.
With respect to the ammunition that the Taxpayer maintains was temporarily stored in Virginia before being shipped out of the state, the interstate commerce clause is not applicable. The storage of tangible personal property in Virginia is deemed an exercise of rights by the Taxpayer incident to the ownership of the property, as considered in Commonwealth v. Miller-Morton. Storage of the property represents a taxable use of the property in Virginia. Subsequent delivery of the property out of the state does not change the application of the tax to the property2. Accordingly, the ammunition at issue was property held taxable in the audit and will not be removed from the assessment.
Improper Assessment for Other Reasons
The Taxpayer contends that even if the assessment is deemed correct, portions of the assessment are incorrect because the tax has been levied on goods for which the tax has already been paid and the tax has been levied on services. Each transaction is addressed separately below.
Line Item 118 - Contested Contract
The Taxpayer maintains that the items at issue were returned because they were not usable. The Taxpayer is given 30 days from the date of the letter to provide documentation to the field audit staff supporting its contention that this transaction is incorrectly included in the assessment. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Item 50 — Contested Contract
The Taxpayer maintains that a portion of the transaction at issue was for repair services and is not subject to the sales tax. Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax does not apply to "Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made; services rendered by repairmen for which no separate charge is made...." Further, Va. Code § 58.1-609.5 2 provides that the retail sales and use tax does not apply to "An amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold."
The Taxpayer is given 30 days from the date of this letter to provide documentation to the appropriate field audit staff supporting its contention that the repair services at issue are not subject to the tax. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Item 42 — Contested Contract
The Taxpayer states that this transaction is for the purchase of a trailer that was registered through the Department of Motor Vehicles. The Taxpayer maintains that the retail sales and use tax does not apply to this transaction.
Virginia Code § 58.1-609.1 2 provides that the retail sales and use tax does not apply to "Motor vehicles, trailers, semitrailers, mobile homes and travel trailers."
Title 23 VAC 10-210-990 A further provides:
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- Sales, leases, and rentals of motor vehicles are not subject to the retail sales and use tax provided they are subject to the Virginia motor vehicle sales and use tax administered by the Department of Motor Vehicles and further provided that such tax has been paid. Any type of motor vehicle which is not subject to the motor vehicle sales and use tax shall be subject to the retail sales and use tax when sold, leased, or rented.
In accordance with the aforementioned authorities, the Taxpayer must provide documentation to support its contention that the trailer at issue is subject to the Virginia motor vehicle sales and use tax and that the Taxpayer has remitted such tax to the Department of Motor Vehicles. The Taxpayer is given 30 days from the date of this letter to provide such documentation to the appropriate field audit staff. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Items 20-22 — Contested Contract
The Taxpayer maintains that these charges are for services and are not subject to the retail sales and use tax. These transactions are listed in the audit as being for purchases of targets.
In accordance with Va. Code § 58.1-609.5 1, the Taxpayer must provide documentation to support its contention that the transactions at issue are for the provision of nontaxable services and not for the purchase of targets. The Taxpayer is given 30 days from the date of this letter to provide such documentation to the appropriate field audit staff. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Item 14 — Contested Contract
The Taxpayer asserts that this charge is for services and is not subject to the retail sales and use tax. The transaction is listed in the audit as being for the purchase of trailer rails and a platform.
In accordance with Va. Code § 58.1-609.4 1, the Taxpayer must provide documentation to support its contention that the transaction at issue is for the provision of a nontaxable service and not for the purchase of trailer rails and a platform. The Taxpayer is given 30 days from the date of this letter to provide such documentation to the appropriate field audit staff. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Item 39 — Contested Contract
The Taxpayer states that this transaction is for cars that were purchased by the Taxpayer and registered through the Department of Motor Vehicles. The Taxpayer maintains that the retail sales and use tax does not apply to this transaction.
In accordance with Va. Code § 58.1-609.1 2 and Title 23 VAC 10-210-990, the Taxpayer must provide documentation to support its contention that the cars at issue are subject to the Virginia motor vehicle sales and use tax and that the Taxpayer has remitted such tax to the Department of Motor Vehicles. The Taxpayer is given 30 days from the date of this letter to provide such documentation to the appropriate field audit staff. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Item 28 — Contested Purchases
The Taxpayer maintains that this item was reported on its personal property return. The Taxpayer maintains that this item should not have been included in the audit assessment.
The Taxpayer must provide documentation to support its contention that the tax has been paid and that this transaction should not be included in the audit assessment. The Taxpayer is given 30 days from the date of this letter to provide such documentation to the appropriate field audit staff. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Line Items 19, 31, 43, 51, 129 and 130
The Taxpayer maintains that these items were shipped directly to facilities outside of Virginia and should not be included in the audit assessment.
The interstate commerce exemption may be applicable in this instance. In order to determine whether the exemption applies, the Taxpayer must provide the invoices that apply to these transactions for review. The Taxpayer is given 30 days from the date of this letter to provide the required documentation to the appropriate field audit staff. If the documentation is not received within the allotted timeframe, the transactions will remain in the audit.
Line Item 44 — Contested Contract
The Taxpayer asserts that it never received the property at issue in this transaction, and that it was refunded the amount paid by the supplier. The Taxpayer maintains that this transaction should not be included in the audit assessment.
The Taxpayer must provide documentation to support its contention that the property at issue was never received. The Taxpayer is given 30 days from the date of this letter to provide documentation to the appropriate field audit staff for review. If the required documentation is not received within the allotted timeframe, the transaction will remain in the audit.
Exempt Sales
The Taxpayer states that certain property it purchased was for resale to ***** (the "customer") and is not subject to the tax. The Taxpayer provides the customer's Manufacturing Exemption, Form ST-11 to support its contention that the customer is an exempt purchaser. The property at issue includes firearm and weapon parts and ammunition.
In accordance with Va. Code § 58.1-623, the exemption certificate presented to the Taxpayer is valid on its face and was accepted in good faith by the Taxpayer at the time the sale took place. The transactions associated with this customer will be removed from the audit.
CONCLUSION
Based upon this determination, the Taxpayer is given the opportunity to provide additional documentation in certain instances as stated above. Based upon a review of the required documentation, revisions will be made to the assessment as warranted. A member of the appropriate field audit staff will contact the Taxpayer to schedule a time to review the documentation. Additionally, the transactions addressed in the Exempt Sales section of this letter will be removed from the audit. Following this process, an updated bill, with interest accrued to date, will be mailed 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, 600 E. Mail Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this response, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5004601219.P
1.See, Public Document 08-190 (12/1/08)
2.See, Commonwealth v. Miller-Morton
Rulings of the Tax Commissioner