92-194 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Government Transactions; Property Used to Provide Engineering Services

Topic

Taxability of Persons and Transactions

Date Issued

09-29-1992

September 29, 1992

Re: Ruling Request: Retail Sales and Use Tax

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

This is in reply to your letter of March 23, 1992 in which you request a ruling on behalf of **************(the"Taxpayer"), a wholly owned subsidiary of ************** that performs services for ************************(the "Government").

FACTS

The Taxpayer is an engineering design firm which has contracted to provide engineering support services to the Government. It bills the government based on cost reimbursement plus a fee for other services. The engineering services of the Taxpayer include providing structural, architectural, electrical and mechanical design for buildings and designing sophisticated test equipment such as wind tunnels. The Taxpayer will be purchasing computer hardware and software, rocket test equipment, inspection supplies, office supplies, books and publications, as required under its contract. Although purchased by the Taxpayer, such items will be titled in the name of the Government. The Taxpayer seeks a ruling on whether the purchase of such items would be subject to the retail sales and use tax.

Va. Code §58.1-608(A)(1)(e), copy enclosed, provides an exemption from the sales and use tax for:

- Tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.

However, as the exemption applies to contractors performing services for the government, Virginia Regulation (VR) 630-10-27(J), copy enclosed, provides that the exemption applies:

- Only in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax. (Emphasis added.)

In addition, VR 630-10-45(E), copy enclosed, provides that:

- Persons 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 government entity is a party to the contract. This is true even through title to the 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. (Emphasis added.)

While the Taxpayer makes purchases on behalf of the Government and on government instructions, and is subsequently reimbursed for such purchases, this fact does not distinguish it from the government contractors contemplated in the above regulation. Therefore, even if title to the property passes to the Government, unless a designated official purchasing agent, the contractor is liable for the tax on the purchase of tangible personal property used and consumed in the performance of the service contract.

It should be further noted that the courts upheld this position in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 881 (4th Cir. 1978), copy enclosed. 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. Specifically, 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 consider the transactions sales to the government. In addition, even though the contractor never had legal title to such items and was reimbursed by the United States on the cost thereof, they were not considered "resold" to the United States.

Based on the foregoing, in that no evidence has been presented to indicate that the Taxpayer is an official purchasing agent of the Government, the Taxpayer is subject to tax on purchases of tangible personal property used and consumed in conjunction with its service contracts with the Government. Therefore, the Taxpayer is required to pay the tax to its retailer. If its retailer is not registered to collect the tax, the Taxpayer must report and pay the tax directly to the department on a Consumer Use Tax Return, Form ST-7.

If you have further questions, please contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

OTP/607ON

Rulings of the Tax Commissioner