Tax Type
Retail Sales and Use Tax
Description
Government contractor; Purchases and leases
Topic
Collection of Delinquent Tax
Date Issued
06-24-1994
June 24, 1994
Re: §58.1-1821 Application- Retail Sales & Use Tax
Dear*************
This will reply to your letter seeking correction of a sales and use tax assessment to your company (the "Taxpayer") for the period December 1988 through November 1991.
FACTS
The Taxpayer, a government contractor, was audited and held liable for the tax on purchases and leases of certain equipment used in connection with a government contract. The Taxpayer maintains that the purchases and leases of the equipment were for resale to the federal government and thus exempt from the tax. To support your position you cite specific delivery orders which directed the Taxpayer to purchase the equipment, and in conjunction therewith, perform some incidental services.
The Taxpayer further maintains that the equipment at issue was used directly in research and development in the experimental sense and thus entitled to exemption from the tax under Va. Code §58.1-609.3(5). You maintain that the intended result of the contract was the development of new uses for the Air Cushion Vehicle and a floating landing platform for seafaring air cushion vehicles - the Air Cushion Vehicle Landing Platform (ACVLAP) - which did not exist prior to this contract.
The equipment held taxable in the audit was used to assemble the platform. The platform was then used in a series of trial runs over a week's time with various craft to: (i) determine if the craft were capable of negotiating the platform ramp safely, (ii) determine the minimum and maximum speed of approach and exit for each craft, (iii) examine the behavior of the craft with various loads, and (iv) demonstrate the ability to load the craft from the adjacent discharge facility.
The auditor maintains that the equipment was used in providing services to the federal government and accordingly was taxable.
DETERMINATION
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. In making such a determination, the department considers the entire contract, including any addenda, task directives, or work orders issued with or separate from the original contract, as one transaction, which is either taxable or exempt. The amount of tangible personal property transferred relative to the overall value of the contract has no bearing on the tax status of the contract. Instead, the "true object" test described in Virginia Regulation (VR) 630-10-97.1 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service.
A review of the information provided regarding the Taxpayer's contract with the federal government reveals that the true object was 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-5, was to "perform various services to support, on a readily available basis" a particular office with a federal department. The contract required "systems analysis, management support, concept definition, design and engineering, test and evaluation planning and support, and experimental equipment fabrication services."
As explained in P.D. 88-159 (6/22/88), copy enclosed, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or all of the property may pass to the government. If a contract is for the sale of tangible personal property to the government, the contractor may purchase such tangible personal property exempt from the tax under a resale exemption certificate. The subsequent sale of the property is exempt from the tax under Va. Code § 58.1-609.1(4).
However, Va. Code §58.1-609.3(5) provides a sales tax exemption for "[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added.) VR 630-10-92 which interprets Va. Code §58.1-609.3(5) defines "basic research" as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field." "Research and development" by regulation must have as it ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or (iii) the development of new uses for existing products.
By way of contrast, however, the regulation provides that research does not include testing or inspection of materials or products for quality control or environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical, or similar projects.
Based on the information provided, we have determined that purchases of tangible personal property for use in the development of the Air Cushion Vehicle Landing Platform, and including the flotation devices and pontoon rentals for use in the actual testing of the platform, may be exempt from tax under Va. Code §58.1-609.3(5). We also find that the video system which monitors wave impacts, sea conditions, and ship operations, during the trial program of the ACVLAP on the ship may qualify for the exemption. The exemption is applicable, however, only to the extent that the above cited tangible personal property is used and exclusively in the research activities. If the property is used both in exempt and taxable activities, it is taxable.
Furthermore, the exemption does not apply to items purchased for use by the Taxpayer in activities which occur either before or after the actual research process. An activity which occurs before the research process would include investigations of techniques and procedures to facilitate the design of various systems. Activities which occur after the research process would include the preparation of engineering drawings, functional descriptions, or instructional manuals.
Accordingly, upon documentation that the property was used directly and exclusively in the research activities, the assessment will be revised. Such documentation should be provided to the department's ******** Virginia District Office within 30 days. In the event that the requested documentation is not provided or does not reveal that the property was used in an exempt manner, the department will have no justification for revising the assessment and thus will require payment of the assessment balance of****************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6762H
Rulings of the Tax Commissioner