October 26, 2021
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), requesting a ruling on the application of the Virginia retail sales and use tax to government contracts involving United States Navy ships. I apologize for the delay in responding to your ruling request.
FACTS
The Taxpayer contracts with the United States Navy to repair and replace various command, communication, control, intelligence, surveillance and reconnaissance systems on Navy ships. In the performance of its contracts, the Taxpayer installs cabling pathways, cabling and metal racks in addition to the systems. The Taxpayer requests a ruling to determine whether it is considered a retailer or a consuming contractor when performing contract work on Navy ships.
RULING
The Department’s government contractor regulation found in Title 23 of the Virginia Administrative Code (VAC) 10-210-693 and Public Document (P.D.) 18-104 (5/31/2018) are instructive in this instance. Based on the information provided, the Taxpayer provides services and tangible personal property when it performs its contracts on Navy ships. Such an agreement would be considered to be a mixed government contract or a mixed transaction. See Title 23 VAC 10-210-693 B.
Relying on the cited regulation, the Department has traditionally applied a “true object” test to mixed government contracts to determine whether a government contract is for the sale of tangible personal property or for the provision of services. In accordance with Title 23 VAC 10-210-693 C, if the true object of 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, Form ST-10. The subsequent sale of the property to the government is exempt from the sales and use tax pursuant to Virginia Code § 58.1-609.1 4. However, if the true object is to obtain the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing such services.
In P.D. 18-104, the Department addressed the application of the temporary storage exemption for contractors to a government contractor that furnished and installed communications equipment on naval ships. The Department opined that the temporary storage exemption was not applicable and applied only to construction materials incorporated into real property construction. This is supported by Title 23 VAC 10-210-693 H which discusses real property contracts between a contractor and a government entity. Alternatively, the true object test was applied to the taxpayer’s contract to furnish and install communications equipment on a naval vessel was found to be a retail sale.
Although the Taxpayer provides repair, labor and subcontracted services in conjunction with the systems’ equipment and materials, it appears that the true object of the contracts is to secure replacement of the systems and the tangible equipment and materials associated with the systems. Consistent with Title 23 VAC 10-210-693 and P.D. 18-104, the Taxpayer’s contracts appear to constitute the sale of tangible personal property or a retail sale. Purchases of equipment, materials and other tangible personal property associated with the systems for transfer to the federal government may be purchased exempt for resale. The Taxpayer must issue a completed Form ST-10 to its vendors to claim the resale exemption on qualifying purchases for resale to the Navy as a federal government entity.
I trust that the guidance provided in this ruling responds to your inquiry. This response is based on the facts provided as summarized above, and without review of the Taxpayer’s contracts. Any change in facts or the introduction of new facts may lead to a different result.
Accordingly, the Taxpayer is advised to review its contracts to verify whether the true object of its current and future contracts with the government are for the sale of tangible personal property or the provision of services.
The Code of Virginia section, regulation 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 web site. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3279L