92-229 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

"True object" of contract; Sale vs. service; Government contractor; Laboratory/test facilities

Topic

Exemptions

Property Subject to Tax

Date Issued

11-09-1992

November 9 1992

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

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

This will reply to your correspondence in which you seek correction of a retail sales and use tax assessment for *****************(the "Taxpayer").

FACTS

The Taxpayer entered into service contracts with the Federal Government to provide services which would include operating and maintaining a test facility, operating a laboratory, testing models, conducting special studies, etc. An audit for the period October 1986 through September 1989 produced an assessment for the Taxpayer's failure to remit use tax on items purchased in the fulfillment of its contracts.

The Taxpayer protests the assessment of tax on materials purchased under the contracts which were used in the fabrication of specific contract deliverables to the Federal Government. The Taxpayer contends that the deliverables constitute retail sales of tangible personal property to the Federal Government and are thus exempt.

Additionally, the Taxpayer contends the contracts actually represent several contracts bundled together under one larger contract to save the costs of soliciting, awarding, and administering several contracts. The Taxpayer asserts that Technical Work Requests ("TWRs") were issued and that the products and services required by the separate TWRs are only vaguely related to each other and that one may not be a "medium" for the other. Furthermore, the Taxpayer contends that the differentiation between service and manufacturing type contracts should be determined at the TWR level, and not at the overall contract level.

DETERMINATION

To differentiate between service and manufacturing type contracts, the "true object" of the entire agreement is scrutinized. If the true object sought by the buyer is the services per se, the exemption is available; however, if the true object of the buyer is to obtain the property produced by the service, the exemption is not available. (WTAR Radio-TV Corp. v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977).)

In the instant case, based upon a review of the contracts in question, the true object of these contracts is the provision of services by the Taxpayer to the Federal Government. Virginia Regulation (VR) 630-10-45 states that:

- 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.

The Taxpayer asserts that TWRs should be treated as severable contracts, and not as part of the entire contracts under which they are issued. However, an analysis of the clear wording of the Taxpayer's contracts renders this argument invalid. Both contracts in question specifically state that "the exact nature and extent of the Contractor's work will be based on a Technical Work Request (TWR)." As the contracts and the TWRs are inextricably linked in this manner, it cannot be argued that the TWRs are separate and distinct from the contracts themselves. This linkage is further demonstrated by the fact that the contracts required the Taxpayer to furnish certain tangible personal property in connection with, but clearly ancillary to, the overall purposes of the contracts which were to render testing and facility management services to the Federal Government

Furthermore, the courts held in United States v. Forst, 442 P. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2nd 881 (4th Cir. 1978), that the resale exemption was inapplicable to a government contractor, which was the final consumer purchaser of the items. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, they were not "resold" to the United States.

Accordingly, I find no basis for correction of the contested assessment. You will shortly receive a revised Notice of Assessment, which should be paid within 30 days to avoid the accrual of additional interest.

Sincerely,

W. H. Forst
Tax Commissioner

OTP/4142D

Rulings of the Tax Commissioner