91-247 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Property Sold for Use or Consumption by the United States; Contractor for Nuclear Physics Research

Topic

Taxability of Persons and Transactions

Date Issued

10-08-1991

October 8, 1991

Re: §58.1-1821 Application: Sales and Use Tax

Dear***************

This will reply to your letter seeking correction of sales and use tax assessments for the****************** (the "Taxpayer").

FACTS

The Taxpayer is engaged as a service contractor for the U.S. Government to conduct nuclear physics research and development and to design, construct, manage, operate and maintain a federally funded research and development center. An audit of the Taxpayer for the period October 1, 1984 through March, 1990 produced assessments for its failure to remit the sales and use tax on various purchases of equipment and supplies used in rendering its services. Tangible personal property used directly in research and development was not included in the department's audit.

The Taxpayer contests the assessments, contending that for purposes of procurement, it is in effect an agent of the U.S. Government; and that further, it is the credit of the U.S. Government which is bound by the Taxpayer's procurements. In support of its position, the Taxpayer references certain procurement provisions contained in its contract with the Government -- for example, the Government reserves the right at any time to require that the Taxpayer submit for approval any or all procurements under the contract. In addition, the Taxpayer provides that payments to its vendors are made from advances of Government funds and has submitted a sample copy of a purchase order form showing the method required by contract to resolve claims by subcontractors and reflecting that Government contracting officers may assist in resolving such disputes.

DETERMINATION

Va. Code §58.1-608(e) provides an exemption from the sales tax for "[t]angible personal property for use or consumption by... the United States." Virginia Regulation (VR) 630-10-27(J) 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)

VR 630-10-45(E) explains the application of the sales and use tax to service contractors and provides that:

- [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.

In addition, in determining the application of the tax to purchases by service contractors, the department is bound by the federal court's decision in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F. 2nd 881 (4th Cir. 1978). In that case, the federal courts found a federal contractor to be the taxable user and consumer of tangible personal property purchased for use in carrying out its contractual obligations. A key element in that case was the resolution of the question of whose credit was bound in purchasing tangible personal property for use by a person pursuant to a government contract. The courts found that the credit of the United States was not bound by the contractor's purchasing agreements with various vendors so as to render the transactions sales to the government. In addition, even though title to the purchased items passed to the government, the courts rejected the contractor's argument that the transactions were exempt sales for resale. Therefore, generally, when a contractor purchases property and remains liable to the seller, the contractor similarly remains liable for the sales and use tax regardless of whether title to the property ultimately passes to the government.

Accordingly, in those instances where the Taxpayer purchased items to be used in performing its government contract, the tax would apply unless the government's credit was actually bound in the purchase. I see no evidence in the contractual documentation submitted by the Taxpayer to support an inference that the government agency's credit was bound or that the Taxpayer had been officially designated as the purchasing agent for the governmental entity. While the Taxpayer was making purchases on behalf of the Government, and on Government instructions, this fact does not distinguish it from other service contractors 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. In addition, although the Taxpayer has shown a close contractual relationship with the Government in the operation of the research and development center, it has not shown such a total loss of independence and autonomy from the Government as would support the granting of an exemption. See U.S. v. New Mexico, et. al., 455 V.S. 720, 102 5. Ct. 1371 (1983). Notwithstanding the fact that the Taxpayer was subject to numerous Government imposed general requirements in operating the center, it was given substantial leeway and discretion in the performance of the details necessary to fulfill its contractual obligations.

The use of an advanced funding arrangement and the involvement of government contracting officials in the resolution of disputes in this instance are not sufficient grounds for exemption from the tax. While the Taxpayer's purchase order forms indicate that Government contracting officers may assist in resolving disputes, the forms do not bind the credit of the United States. Moreover, the New Mexico case cited above also involved Government contracts under which contractors procured materials and paid for goods with Government funds under an advanced funding arrangement and disputes could be resolved by a Government contracting official. Nonetheless, in that case the United States Supreme Court concluded that no agency relationship existed between the contractors and the Government and upheld the imposition of state use tax upon property Purchased by such contractors.

Based on all of the foregoing and a careful examination of the information submitted by the Taxpayer, I find that the transactions in question were correctly held taxable in the audit. While I do not find basis to waive any of the assessed tax, based on the circumstances of this case and the authority provided to the Tax Commissioner under Va. Code §58.1-105, I find basis to waive the additional interest which has accrued since the date of assessment. The interest portion of the original assessment remains due and payable.

Sincerely,

W. H. Forst
Tax Commissioner

TPD/4455L

Rulings of the Tax Commissioner