Tax Type
Retail Sales and Use Tax
Description
Government contractor; Sales vs. service; Corporate officer liability
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-29-1994
April 29, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter of September 2, 1993 in which you seek correction of a retail sales and use tax assessment on behalf of your client, *********** (the "Taxpayer").
FACTS
The Taxpayer entered into two separate contracts with the federal government. The first contract required the Taxpayer to design, develop, test, install, operate and evaluate a computerized supply system. The second contract required the Taxpayer to design, install and implement a computer aided training program. An audit for the period January 1, 1988 through September 30, 1990 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, contending that the contracts are for the delivery of tangible personal property. Therefore, purchases of computer equipment and other items qualify for the resale exemption.
You also protest the conversion of the assessment to the former chairman of the Taxpayer, pursuant to Va. Code §58.1-1813.
DETERMINATION
Service vs. Sale: The department has previously ruled that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the sale of tangible personal property or whether the contract is for the provision of services to the government. See P.D. 88-159 (6/23/88) and P.D. 89-206 (7/28/89). If the contract is for the sale of tangible personal property, the contractor 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 and in connection with those services tangible personal property is provided, the contractor is deemed to be the taxable user or consumer of the tangible personal property and must pay the tax on the purchases.
You contend the Taxpayer's situation is very similar to that addressed in P.D. 88-159 (6/23/88), in which the department ruled that the contract at issue was for the sale of tangible personal property. In that case, the contractor was required to design, develop, procure, test, install, and provide training for an automated data retrieval system. It was held that each of these activities was an integral part of the sale of the system to the federal government; as such, the property did not lose its 'for resale status."
The Taxpayer's situation is clearly distinguishable. Section B of the Statement of Work requires the contractor to design, develop, test, install and operate the computerized system. In addition, the contractor is required to provide supervision and management services. Subsection 9.0 provides that the contractor shall maintain an operations office at each site during the course of the contract and perform all necessary functions to keep the computerized system up and running. These requirements are not integral parts of the sale of the computerized system, but instead are services provided to the federal government. These activities constitute a taxable use of the property and nullify the resale exemption.
You assert that the sole question is whether the Taxpayer purchased the property with the purpose of reselling it, and whether it in fact did resell it. However, the fact that property is resold or title is transferred is not the sole determining factor. Under Virginia Regulation (VR) 630-10-45.E., 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 must pay the use tax on materials consumed in the performance of its contracts with the government. This is true even though title to the purchased items passes to the government.
A review of the Statement of Work for the second contract indicates that it is not for the sale of tangible personal property. The Taxpayer was to design and develop custom software for a computer-based program to train military and civilian personnel on the use of a specific computer system. In addition, the Taxpayer was required to provide access to and maintenance of the government's database. The self-instructional materials required to be furnished under the contract are incidental to the services provided by the Taxpayer.
Accordingly, the auditor properly assessed the Taxpayer as the user or consumer of the items purchased in providing its services under the two contracts.
Converted Assessment: Upon failure to collect the deficiency from the Taxpayer, which ceased operations, the department converted the assessment to the Taxpayer's former chairman ("your client"), under Va. Code §58.1-1813. You challenge the validity of the converted assessment, claiming the failure to pay the tax was not willful.
Va. Code §58.1-1813 states that "[a]ny corporate officer who willfully fails to pay, collect, or truthfully account for and pay over any state tax... or willfully attempt in any manner to evade or defeat any such tax or the payment thereof... shall be liable for a penalty of the amount of the tax evaded, or not paid, collected or account for and paid over..." The statute defines the term "corporate officer" as an officer of a corporation who is under a duty to perform on behalf of the corporation the act in respect of which the violation occurs and who had knowledge of the failure and the authority to prevent it.
While you argue that your client did not willfully fail to pay or remit the Taxpayer's use tax liability, the facts indicate otherwise. In order for a failure to pay tax to be deemed willful, all that needs to be shown is that the corporate officer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the corporation. The auditor's workpapers indicate that the corporate officers of the Taxpayer, including your client, were informed of the potential use tax liability during the audit; they were advised of the progress of the audit and the increasing tax liability. The audit was closed in March 1991; the Taxpayer became insolvent and ceased operations on or about May 30, 1991. Despite knowledge of this potential liability, the corporate officers (including your client) used the assets of the Taxpayer to pay its obligations when the Taxpayer ceased operations. Therefore, I find that the failure to pay the use tax was willful, and the assessments were properly converted to your client.
Accordingly, the assessment is correct as made. Your client will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7327F
Rulings of the Tax Commissioner