Tax Type
Retail Sales and Use Tax
Description
Sales for resale; Purchases of government contractor
Topic
Taxability of Persons and Transactions
Date Issued
06-23-1988
June 23, 1988
Re: Request for Ruling/Sales and Use Tax
Dear**************
This will reply to your letter of June 12, 1987, in which you wish to determine the application of the sales and use tax to a data retrieval system developed by*********** under a contract with the federal government.
FACTS
************** (Taxpayer) has contracted with an agency of the federal government to develop an automated data retrieval system. The taxpayer's contract with the federal government requires it to the design the system; (2) procure, test, and install computer hardware, prewritten computer software, and related equipment; (3) develop custom computer software and make modifications to prewritten computer software; (4) provide systems maintenance services, including the procurement and installation of repair parts; (5) provide training on the use of the system; and (6) provide project management services .
The taxpayer wishes to determine the application of the sales and use tax to tangible personal property purchased or leased in connection with the contract which will in turn be resold or re-leased to the federal government.
RULING
§58.1-608.18 of the Code of Virginia provides an exemption from the sales and use tax for "[t]angible personal property for use or consumption by the ... United States." This exemption does not apply, however, to persons who contract to provide services for the federal government. Virginia Regulation 630-10-45.E provides:
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- Persons who contract with the federal government ... 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.
In reviewing governmental contracts, one must first determine whether the contract is for the sale of tangible personal property or whether the contract is for the provision of some service to the government (such as facilities management or real estate construction services). If the contract is for the sale of tangible personal property, the vendor may purchase articles under resale certificates of exemption and then resell those articles to the government exclusive of the tax. However, if the contract is for the provision of services, the vendor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or all of the property may pass to the government.
My analysis of the instant contract reveals that it is indeed a contract for the sale of tangible personal property, i.e., a computerized data retrieval system. Although the taxpayer is obligated to provide various services, such as the design of the overall system, development of custom computer software, and the training of federal employees on the use of the system, the goal of the contract is to provide the federal agency with a tangible computer system consisting of hardware, software, and related equipment. As such, those articles of tangible personal property that will ultimately pass to the federal government may be purchased or leased by the taxpayer under resale exemption certificates.
Further, the testing and approval of computer and other equipment prior to its transfer to the federal government does not subject the taxpayer to the tax under the provisions of §58.1-623.C or the Code of Virginia (taxable use of property purchased under an exemption certificate). The same is also true with respect to equipment purchased for resale to the government, but used by the taxpayer in the actual development of the governmental data retrieval system or the training of federal employees. Each or these activities is an integral part of the sale of the system to the federal government; as such, the property does not lose its "for resale" status (see opinion of the Attorney General, dated October 30, 1987, copy enclosed).
The tax will generally apply, however, to articles purchased by the taxpayer in connection with its contract but title to which does not pass to the federal government. For instance, the taxpayer would be deemed the taxable user or consumer of supplies used in the design of the computerized data retrieval system or in the management of its systems development contract. One exception to this general rule is the purchase of tangible personal property for use directly and exclusively in basic research or research and development in the experimental or laboratory sense.
As noted in Virginia Regulations 630-10-49.2 and 630-10-92. the research exemption generally applies to activities that result in the development of new products or the development of new uses for existing products. For instance. property used directly and exclusively in the development of custom computer software or the modification of prewritten computer software would qualify for the research exemption as it is used in the creation of new products or new uses for existing products.
I trust that this will answer the questions posed in your letter: however. please feel free to contact the department if any further questions arise in connection with the taxpayer's contract.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner