May 31, 2018
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling regarding the application of the temporary storage exemption to the purchase and storage of tangible personal property in Virginia by ***** (the “Taxpayer”). The property is stored for future use in fulfilling a federal government contract outside the United States. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a government contractor headquartered outside Virginia with a branch office located in Virginia. The Taxpayer was awarded a contract with the federal government to furnish and install communications equipment on naval ships, one of which is docked in a foreign country. The Taxpayer will purchase the materials for the job and store the materials in a warehouse in Virginia. When all the equipment and materials needed for the job are accumulated, the materials are shipped to the foreign country where the work will be performed. The foreign country in which the Taxpayer will install the communications equipment for the federal government does not impose a sales or use tax but imposes a Value Added Tax (VAT).
The Taxpayer cites a ruling of the Tax Commissioner that was published as Public Document (P.D.) 08-156 (8/29/08). The ruling addresses the temporary storage exemption for contractors that is set out in Virginia Code § 58.1-609.3 1. The ruling discusses the application of the temporary storage exemption to contractors’ purchases of tangible personal property used in the performance of contract work in a foreign country that imposes a VAT. The Taxpayer requests guidance from the Department regarding the records and documentation required to support the application of the temporary storage exemption to the purchase of the tangible personal property to be installed on the naval vessel located in the foreign country.
RULING
Prior to responding to your request, I will address the application of the Virginia retail sales and use tax to government contracts. The tax is applied based upon whether a contract is for the sale of tangible personal property or for the provision of exempt services. A “true object test” is used to determine the correct application of the tax. The true object test is discussed in Title 23 of the Virginia Administrative Code (VAC) 10-210-693, which is the Department's government contractor regulation. Title 23 VAC 10-210-693 C, which addresses the true object test, states:
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 the 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. [Emphasis added.]
However, if a transaction is for the provision of services, 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.
Pursuant to Title 23 VAC 10-210-693 H, the true object test is not applicable to real property contracts with government entities. Title 23 VAC 10-210-693 A defines a “real property contract” as “a contract between a contractor and a government entity in which the contractor contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate, or fixtures thereon, including highways, and in connection therewith, to furnish tangible personal property.”
P.D. 08-156 discusses a government contractor that performed real property construction projects in other countries. Based on the information presented, the Taxpayer is not performing real property contract work for the federal government. As such, the temporary storage provisions for contractors in Virginia Code § 58.1-609.3 1 and the ruling in P.D. 08-156 are not applicable to the Taxpayer's contract work. In fact, P.D. 08-156 states that the exemption in Virginia Code § 58.1-609.3 1 “is restricted to construction materials that are to be incorporated into real property construction and could be purchased free from sales or use tax by the contractor in the other state or nation.”
Based on the true object test in Title 23 VAC 10-210-693 C and the information provided, the Taxpayer's contract with the federal government to furnish and install communications equipment on a naval vessel is a retail sale. Title 23 VAC 10-210-693 A defines a “purchase for resale,” in part, as “any tangible personal property or taxable service purchased by a government contractor with the intent of resale to a government agency and that is not used by the contractor for any purpose that is inconsistent with holding the property for resale to the government.” In this case, the Taxpayer's purchase of the communications equipment and materials for transfer to the federal government is an exempt purchase for resale. The Taxpayer should issue a completed Form ST-10 to its vendors to claim the resale exemption on qualifying purchases for resale to the federal government.
Recordkeeping Requirements
The Taxpayer requests guidance regarding the documentation requirements to support tax-exempt purchases made to fulfill this government contract. Title 23 VAC 10-210-693 M addresses documentation and recordkeeping requirements for government contractors and provides the following:
Generally, the department will rely on the language used in each individual order to determine the true object of the transaction. In cases where the department is unable to determine the true object of an individual order, the department may consider other source documents to make its determination. Other documents may include, but are not limited to, the government agency's request for proposal, basic ordering agreements, chart of accounts, individual transactions performed under a separate order, and confirmation of either goods or services delivered. Despite the change in policy, the underlying contract should also be made available for review. It is the contractor's duty to retain suitable records and documentation in order to accurately determine the true object of an order entered into with the government entities.
To determine whether a particular purchase was made to fulfill a particular order, the department shall rely on the normal books and records kept by the contractor in the ordinary course of its business. For example, if a contractor's books and records show that a purchase of property was charged to an account that identifies a specific order, those purchases should be deemed to be made to fulfill that order. The contractor may provide other information or documentation to identify the purchases that were made to fulfill that order, but shall not be required to produce any documentation not already kept by the contractor in the ordinary course of business. A particular purchase made by a contractor may be for resale even if the corresponding order does not expressly reference that specific purchase. The contractor is required to abide by the recordkeeping requirements set forth in Title 23 VAC 10-210-470.
In accordance with the regulation cited above, the Department generally relies on statements of work and individual work orders within a government contract to determine the true object of the contract. If the true object is for the sale of tangible personal property, the general books and records of the contractor should be sufficient to substantiate all purchases for resale. Likewise, if the true object is for the provision of services or the contractor performs real property construction services, the contractor should maintain the same general accounting records for the tangible personal property purchased for use and consumption by the contractor to fulfill the government contract.
CONCLUSION
The provisions of Virginia Code § 58.1-609.3 1 and the policy set out in P.D. 08-156 apply only to real property construction services performed by contractors. Based on the true object test and the information provided, the Taxpayer's contract with the federal government to furnish and install communications equipment on a naval vessel is for the retail sale of tangible personal property. The Taxpayer is entitled to purchase the equipment and materials for transfer to the federal government exempt of the tax pursuant to the resale exemption. The Department's Form ST-10 should be used to make qualifying exempt purchases for resale.
With regard to the Department's recordkeeping requirements, the Taxpayer should adhere to the Department's policies set out in Title 23 VAC 10-210-693 M, Title 23 VAC 10-210-470 and as explained in this ruling response.
This ruling is based on the facts presented by the Taxpayer as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.
The Virginia Code section, regulation sections, and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any questions concerning this ruling, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1175.S