Tax Type
Retail Sales and Use Tax
Description
Government contractor
Topic
Taxability of Persons and Transactions
Date Issued
11-28-1986
November 28, 1986
Re: §58.1-1821 Application/Sales and Use Tax
Dear ******************
This will reply to your letter of November 6, 1985 and additional information submitted by letters dated March 6, and October 8, 1986 requesting correction of an assessment in the above referenced case for the audit period June, 1983 through September, 1985.
FACTS
In connection with its primary function as a government service contractor, **********(taxpayer), entered into a contract with the U.S. Government to manage the********** (the center) at ********* Pursuant to this contract, taxpayer was responsible for overseeing administrative operations, providing tour guides, and coordinating special events at the center. In addition, taxpayer was responsible for the procurement of certain exhibits, including model airplanes and space vehicles for use and display at the center. Taxpayer was audited by the department and held liable for the use tax on its untaxed purchases of such exhibits as well as other nontaxed purchases of equipment and supplies used in managing the center.
Taxpayer contests that portion of the assessment related to the exhibits, stating that such purchases were made in its capacity as an "agent" of the Government, and are therefore exempt of the tax under §58.1-608(18) of the Virginia Code. In support of this contention, taxpayer states that all of the exhibits were manufactured according to Government specifications and for direct delivery and installation to a Government facility. In addition, taxpayer states that it had no authority to determine which exhibits would be used and had no use for such exhibits apart from their use in the center.
Taxpayer also contests that portion of the assessment relating to a separate contract with the U.S. Government for providing photo evaluation services. According to taxpayer, certain charges identified as aerial photography actually represented charges for the nontaxable services of a private pilot for the taking of the photographs by one of taxpayer's own employees. In addition, taxpayer contests the imposition of the tax on its out-of-state purchase and development of certain film for analysis by taxpayer at a U.S. Government facility located in Virginia.
DETERMINATION
§58.1-608(18) of the Virginia Code provides an exemption from the sales tax for "[t]angible personal property for use or consumption by ... the United States." §630-10-27(J) of the Virginia Retail Sales and Use Tax Regulations explains however, that this exemption is only available when "the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity." (emphasis added)
In addition, §630-10-45(E) of the Regulations provides that,
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- [p]ersons who contract with the federal government, the State or its political subdivisions to perform a service and in conjunction therewith furnish some tangible personal property are deemed to be the consumers of all such property and are not entitled to exemption on the grounds that a governmental entity is a party to the contract. This is true even though title to the property provided may pass to the government and/or the contractor may be fully and directly reimbursed by the government. The same principle applies to persons who enter into contracts with a governmental entity to perform real property construction or repair.
- [p]ersons who contract with the federal government, the State or its political subdivisions to perform a service and in conjunction therewith furnish some tangible personal property are deemed to be the consumers of all such property and are not entitled to exemption on the grounds that a governmental entity is a party to the contract. This is true even though title to the property provided may pass to the government and/or the contractor may be fully and directly reimbursed by the government. The same principle applies to persons who enter into contracts with a governmental entity to perform real property construction or repair.
Furthermore, while taxpayer was making purchases on behalf of the Government, and on Government instructions, this fact does not distinguish it from virtually every other contractor with the Government, the overwhelming majority of which must pay the tax on all their purchases of tangible personal property for use in their projects with the Government.
It should be noted further that the department's position in this case is supported by federal caselaw. In the case of U.S. v. New Mexico, et. al., 455 U.S. 720, 102 S. Ct. 1371 (1982), the Supreme Court upheld the validity of New Mexico's gross receipts and compensating use taxes as applied to purchases made by cost-plus U.S. Government contractors engaged in the management of federally owned facilities in New Mexico. While the Government conceded that the "legal incidence" of the New Mexico taxes fell on the contractors, it contended that such contractors were mere "procurement agents" of the Government for purposes of making all such purchases.
The Court rejected the Government's argument that all of such purchases were made by the contractors in their capacity as "procurement agents" since the contractors made all such purchases in their own names, the vendors were not informed that the Government was the only party with an independent interest in the purchases, and the contractors did not have to obtain advance Government approval for each such purchase. It is worth noting further that the Court made this determination notwithstanding the fact that title to all property purchased by the contractors passed directly to the Government, that the Government bore the risk of loss for the property so purchased, and that the Government had complete control over the disposition of all property purchased under the contracts.
The Court concluded that no agency relationship existed between the contractors and the Government since the contractors acted independently of the Government in their day-to-day operations and procurement decisions, and since the identity of interests between the Government and the contractors was far from complete. In the Court's own words, "a finding of constitutional tax immunity requires something more than the invocation of traditional agency notions: to resist the State's taxing power, a private taxpayer must actually stand in the Government's shoes."
Based on an examination of the contracts between taxpayer and the Government and between taxpayer and its suppliers in this case, I find no basis for concluding that taxpayer was a mere procurement agent of the Government in making purchases on behalf of the Government for use in running the center. Rather, at all times relevant to the audit in this case, taxpayer remained a distinct corporate entity pursuing private, commercial ends for profit.
I am also unpersuaded that the letter from the Government to taxpayer, authorizing it to "act for the Government... in making certain purchases exempt of state or other taxes for which the Government is not liable," made taxpayer an "agent" of the Government." This letter was not a part of the agreement between the parties, and appears to be a standard authorization frequently issued by the Government to its contractors in an effort to minimize contract procurement expenses.
In the New Mexico case cited above, the Court refused to find that an agency relationship was created where the parties modified their agreement to state that each contractor, "...acts as an agent [of the Government] ... for certain purposes." The Court stated that "an immunity of constitutional stature [could] not rest on such [a] technical consideration, for that approach [would] allow any government functionary to draw the constitutional line by changing a few words in a contract."
Although not specifically raised as an issue by taxpayer in its application for correction, we have also examined a sample of taxpayer's invoices to determine if it may have been entitled to a resale exemption in making its purchases of certain items on behalf of the Government. Pursuant to this examination, it was determined that taxpayer's transactions could not be deemed sales for resale since taxpayer reported such purchases to the Government in a lump sum certifying generally that, "all payments were for appropriate purposes and in accordance with the agreements set forth in the contract," with no attempt to segregate or itemize any of the purchases for which reimbursement was sought.
In response to taxpayer's remaining grounds of contest, I find basis for adjusting the assessment to remove those items identified as pilot's services and aircraft rentals which represent nontaxable services. However, I find no basis for adjusting that portion of the assessment concerning the use tax on film purchased out of state for subsequent analysis by taxpayer in Virginia. §630-10-109(A) of the Regulations provides that "the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased." This regulation section establishes that the use tax is a moment of transaction tax, i.e., tax liability is incurred at the moment of first use in Virginia. Therefore, when taxpayer took possession of such processed film in Virginia, it made a taxable use of it, notwithstanding the fact that such film was purchased and developed by taxpayer outside the state.
However, if taxpayer can show that it paid sales tax to another state at the time of making such film purchases, I will consider granting a credit, not to exceed the amount of the Virginia tax due, to the extent of such other state tax paid. Taxpayer should send such documentation to the department's Technical Services Section, Office Services Division, at P. O . Box 6-L, Richmond, Virginia 23282, within sixty (60) days of the date of this letter.
Based on the foregoing, the audit will be adjusted to remove the pilot's charges identified above. In addition, I find basis for the abatement of all penalties assessed on the contested portion of the audit assessment. However, I find no basis for adjustment of any other portion of the assessment in this case. Accordingly, the department will issue a revised assessment to taxpayer under separate cover, consistent with this determination.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner