Tax Type
Retail Sales and Use Tax
Description
Government transactions; Items purchased to perform contract
Topic
Taxability of Persons and Transactions
Date Issued
09-27-1993
September 27, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear********************
This will reply to your letter of May 14, 1993 in which you seek correction of a retail sales and use tax assessment for************* (the "Taxpayer") for the period January 1988 through December 1990.
FACTS
The Taxpayer entered into contracts with agencies of the federal government to provide professional engineering and computer services. Following an audit, the department assessed tax on tangible personal property purchased for use in performing the services required under the federal contracts.
You agree that the tax should apply to most purchases, but claim that the tax should not apply to specific material components identified in the service contract as purchases which are to be made at the direction of the government, shipped to a government facility, inventoried at the government facility, and billed to the government on an item by item basis. You believe the purchases of materials are separate and distinct components of each contract and should be deemed exempt sales to the federal government.
You also raise issues specific to each contract. These issues will be addressed separately.
DETERMINATION
One of the requirements under the contracts is that the contractor manage supplies, including the maintenance of an extensive spare part inventory and procurement of spare parts required to maintain the information retrieval system equipment. You maintain that this specific line item for spare parts is not incidental to the basic contract, and the costs in question are collected and billed separately from the contract. Consequently, you contend that the purchases should not be subject to use tax.
The application of the use tax to purchases made by a federal contractor and the availability of the applicable exemptions is well established and has been explained in public documents. See P.D. 93-191 (8/27/93) (copy enclosed).
The spare parts provision, which you assert should be exempt from tax, must be considered in light of the overall purpose of the contract; it cannot be viewed as a separate and distinct component of the contract, because the spare parts may be used by the Taxpayer in fulfilling its responsibilities and duties under the contracts to maintain the system equipment.
It is clear from the language of the contracts and the Statement of Work thereunder that the Taxpayer engaged to provide professional engineering and computer services to the U.S. Government. While the Taxpayer was required to furnish certain tangible personal property in connection with the contracts, the overall purpose of the contracts was to render engineering and computer services to the federal government. In accordance with VR 630-10-45.E., the Taxpayer is the user or consumer of all items purchased in providing such service and must either pay the tax to its suppliers at the time of purchase or remit the use tax directly to the department based on the cost of such items.
The Taxpayer was making purchases on behalf of the government, and on government instructions, on an "as required" basis. 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, in accordance with VR 630-1045 E.
Furthermore, there is no evidence that the Taxpayer was designated the purchasing agent for the U.S. Government; the contracts provided make no reference to such a relationship. In addition, the costs incurred by the Taxpayer were billed separately to the government, which reimbursed the Taxpayer. Because the government' 9 credit was not bound directly to vendors for the payment on purchases made by the Taxpayer under the contract, the exemption provided under Va. Code §58.1-609.1(4) (formerly Va. Code §58.1-608(A)(1)(e) is not available. The fact that the items purchased were specifically identified does not alter the taxability of the purchases.
Accordingly, the Taxpayer is subject to the use tax on materials, including the inventory of spare parts, it consumed in the performance of its contracts with the government.
Other Issues
Exhibit A: Documentation ha been provided to substantiate your claim that sales tax was paid on the two purchases. Therefore, these two items will be removed from the audit.
Exhibit B: Because payment was not made and the sales transaction was not completed, the purchase will be removed from the audit.
Exhibit C: Based on the information provided, the invoices were for repair services only. Therefore they will be removed from the audit.
Exhibit D: It appears that the situs of sale, the shipment, customer pickup, possession, and use of the property all occurred outside Virginia. Accordingly, the purchases were not subject to Virginia sales or use tax, in accordance with VR 630-10-51. Therefore, based on the documentation supplied, the invoices noted in Exhibit D will be removed from the audit.
Exhibit E: The Taxpayer contends that the computer software licenses and the computer software itself are customized and, therefore, are exempt from the tax under Va. Code §58.1-609.5(7) (formerly Va. Code §58.1-608(A)(5)(g)).
The invoices for the computer software purchases show a total of 40 deliverables to the Taxpayer. Based on the documentation reviewed, it appears that the vendor sold 13 copies of graphics software and 27 copies of printer software to the Taxpayer. These purchases are deemed taxable (prewritten software) unless evidence is provided to prove the software was custom. No such evidence has been provided; therefore, based on the information available, the auditor correctly determined the purchases to be taxable.
If the Taxpayer can provide evidence that the software was custom, or evidence that the prewritten program was customized, in which case separate labor charges are exempt, the audit will be adjusted accordingly.
Exhibit F: All invoices indicate the shipping point destination as Virginia. While the Taxpayer claims that only one item was shipped to Virginia and the remainder were shipped to various service centers located throughout the United States, there is insufficient information to allow an adjustment at this time.
If the Taxpayer can provide a certified statement from its vendor verifying the shipping destination (Virginia) shown on the vendor's invoices is incorrect and that the products were, in fact, delivered directly to service centers located throughout the United States, then an appropriate adjustment to the audit will be made. If such documentation is not received, the information on which the assessment was originally based will be presumed to be the best available.
Exhibit G: An examination of the contract reveals that the work statement calls for "Integrated Logistic Support Management." The requirement to furnish an auxiliary power unit (APU) was only one portion of the contract. The overall purpose of the contract was for the provision of services to the government. As previously mentioned, under VR 630-10-45.E., the Taxpayer is the user or consumer of all items purchased in providing services. The separate task under the contract of furnishing an APU cannot be segregated from the rest of the contract. Because the APU was furnished in conjunction with the Taxpayer's duties under the services contract, the purchase is taxable and the resale exemption is not available.
Exhibit H: You maintain that the monthly software maintenance agreements purchased in conjunction with one of the federal contracts are not taxable because they are for services only.
Under VR 630-10-62.1.B., maintenance contracts which provide only the furnishing of repair labor are contracts for the provision of a service only and charges for such contracts are not subject to the tax; maintenance contracts for parts only or for parts and labor are taxable. The information provided indicates that the software maintenance contracts in question were for labor only and that no tangible personal property was to be supplied. Therefore, the software maintenance contracts purchased by the Taxpayer are not subject to tax and the audit will be adjusted accordingly.
Exhibit I: The Taxpayer maintains that a separate mainframe system contract was for the resale of equipment to the federal government. The auditor held the equipment as taxable as being part of the contract requiring the rendition of engineering and computer services to the government.
Based upon a review of the contracts and other documentation provided by the Taxpayer, I must conclude that the purchase of the mainframe system was pursuant to a separate contract for the provision of tangible personal property. The Taxpayer did not obtain the contract by virtue of its services contract with the government, but rather was required to undergo a separate solicitation and bidding process to obtain the mainframe system contract. Furthermore, the purchase of the system was not required under the services contract. There was no requirement that the contractor under the services contract procure the replacement system.
Based on the above, the purchase of the mainframe system was made under a separate contract for the resale of equipment to the federal government. As such, the purchase qualifies for the resale exemption, and the invoices will be removed from the audit.
Exhibit J: You contend that an invoice for a subscription to periodicals on market research should be removed from the audit as exempt publications. The auditor taxed these items as reference materials.
Under Virginia law, any publication issued regularly at average intervals not exceeding three months are exempt from sales tax. Under VR 630-10-73, the term "publication" means any written compilation of information available to the general public. In this case, there is no evidence that the publications in question are available to the general public. If the Taxpayer can provide documentation that the publication is available to the general public, the invoice will be removed from the audit.
It should be noted that there appears to be a duplication error in the audit papers, i.e., the amount on the invoice is shown twice. The duplicate invoice will be removed from the audit.
Exhibit K: While the Taxpayer states that these items were never shipped to or brought into Virginia, there has been no evidence presented to substantiate this claim. Because the Taxpayer has not met its burden of proof, no adjustment will be made. If the Taxpayer can substantiate its claim, the purchases will be removed from the audit.
Accordingly, based on the information presented by the Taxpayer, the audit will be revised to remove those items mentioned in Exhibits A, B, C, D, H and I. In addition, if the Taxpayer can provide the requested information for Exhibits E, F, J and K, the audit will be revised accordingly. Please send the requested information to the department's Office of Compliance, Audit Review Unit, P.O. 615, Richmond, Virginia 23205-0615. If you have not supplied the necessary information within 30 days, or shown good cause for extending the period to supply this information, the information on which the assessment was originally based will be presumed to be the best available. The assessment will then be revised in accordance with the adjustments noted above and will be immediately due and payable, and collection action will resume.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/7003F
Rulings of the Tax Commissioner