Tax Type
Retail Sales and Use Tax
Description
Government transactions; Computer contractor
Topic
Taxability of Persons and Transactions
Date Issued
05-23-1994
May 23, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear**************
This will reply to your letter of December 17, 1993, in which you request a ruling on behalf of your client, *********(the "Taxpayer"), on the application of the sales and use tax to certain contractual arrangements with the federal government.
FACTS
The Taxpayer has entered into a cost-plus-award-fee contract with the********** the contracting office for******** an agency of the United States government (the "agency"). The contract requires the Taxpayer to supply "on-site systems life cycle technical support services" and to acquire components, spare parts, and small equipment for the agency's communications systems, including local area computer networks (LANs) .
The contract calls for the Taxpayer to provide daily on-site services at five of the agency's facilities. The Taxpayer will provide on-site customer support, general network support, troubleshooting, problem resolution services, and major system component replacement.
Many of the systems, components and spare parts to be installed pursuant to the contract will be furnished to the Taxpayer by the contract also requires that the Taxpayer purchase components and spare parts to be installed or furnished in connection with the provision of upgrades and maintenance services under the contract. In addition, the Taxpayer is required to purchase certain hardware, software and communications equipment identified in the contract at the request of*****************.
The contract also requires that the Taxpayer maintain and manage an inventory of microcomputer hardware and software, systems, components, peripherals, and spare parts to be installed or furnished in connection with the performance of the contract. The Taxpayer has leased and staffed a warehouse for this purpose. The Taxpayer estimates that approximately 50% of the inventory items will be furnished by **** the remaining 50% will be purchased by the Taxpayer for provision to******** in performance of the contract. All property maintained in the inventory is purchased for the benefit and use of**********.
RULING
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.
A review of the contract at issue reveals that the true object is the provision of services by the Taxpayer to the federal agency. The objective of the contract, as stated in the Statement of Work on page C-1, is to "establish a contract for on-site systems life cycle support services encompassing integration, engineering, testing, installation, on-site technical support assistance, maintenance and operational support of ... communications system hardware and software; and acquisition of miscellaneous ... communications systems support materials."
Based on the information provided, the agency had an operational LAN structure in place at the time the contract was executed. Under the contract, the agency is seeking to implement an "open systems environment" to enable organizations using different systems to exchange information with the agency's system. The "Requirements" section of the contract states that the Taxpayer "shall provide primary services and support via a on-site Central Support Facility" at the agency, including on-site customer support, general network support, troubleshooting and problem resolution services. These services are provided to support an existing system and prevent the disruption of current operations; they are not an integral part of the sale of a system (tangible personal property) to the federal agency.
You contend the Taxpayer's situation is very similar to that addressed in P.D. 91-32 (3/13/91) and P.D. 88-159 (6/23/88). However, the Taxpayer's situation is clearly distinguishable. In each of the public documents cited above, the contractor was required to develop, deliver and install an automated system; various services were provided which were an integral part of the sale of the system to the federal government. The contracts at issue were clearly for the sale of tangible personal property. In the Taxpayer's situation, the federal agency had LANs and "information systems architecture" in place at the time the contract was executed. The Taxpayer is not developing and delivering an automated system, but rather is facilitating "interoperability of systems" by performing support and maintenance services. Equipment or spare parts delivered by the Taxpayer are in furtherance of the services provided and are not the primary objective of the contract.
Virginia Regulation (VR) 630-10-45.E. (copy enclosed) provides 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. Accordingly, the Taxpayer is the user and consumer of all items purchased in providing its services 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.
This position is consistent with the ruling in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd 569 F.2nd 881 (4th Cir. 1978), in which the court held 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
The exemption under Va. Code §58.1-609.1(4) for sales of tangible personal property for the use or consumption by governmental entities is also not available to the Taxpayer. VR 630-10-27(J) makes clear that this exemption is available only 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." The contract at issue does not designate the Taxpayer as the purchasing agent for the U.S. Government. In fact, the government is obligated to reimburse the Taxpayer for the cost of procurement. The government's credit is not bound directly to vendors for the payment on purchases made by the Taxpayer under the contract.
If you have additional questions, please contact the department.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7869F
Rulings of the Tax Commissioner