Tax Type
Retail Sales and Use Tax
Description
Government transactions; Property management agreement with the government
Topic
Taxability of Persons and Transactions
Date Issued
06-28-1994
June 28, 1994
Re: §58.1-1821 Appeal: Retail Sales & Use Tax
Dear***********
This will reply to your letter in which you seek correction of a sales and use tax assessment to the "Taxpayer," for the period March 1989 through December 1991.
FACTS
The Taxpayer entered into a property management agreement with the "government agency," to lease, manage and operate certain apartments owned by the agency. It contests the above assessment on the grounds that the Taxpayer was acting as an agent of the government agency and thus was correct in purchasing exempt from the tax, tangible personal property used in fulfilling its contractual obligations.
DETERMINATION
It is my understanding that this assessment did not include any purchases made by the Taxpayer in connection with the contract with the government agency. The contract with the government agency was not signed until August 27, 1991, and according to the audit report, only 8 purchases were included in the audit which fell in the same period as the contract. However, none of these purchases were made in connection with the contract with the government agency. Accordingly, I find no basis to refund to the Taxpayer the tax, interest and penalty previously paid.
With regard to the proper tax treatment of purchases by the Taxpayer, you should note that subdivision 4 of Va. Code 58.1-609.1(A)(1)(e) provides an exemption from the tax for tangible personal property purchased for use or consumption by the United
States. Virginia Regulation (VR) 630-10-45 clarifies that the exemption is applicable only if the "purchases are pursuant to required official purchase orders to be paid for out of public funds." Thus, only purchases of tangible personal property by the government agency itself using public funds and pursuant to official government purchase orders are exempt from the tax. However, purchases made on behalf of a government agency are exempt from the tax if the purchaser is actually the agent for the government agency and the purchase is made with public funds. See P.D. 93-21 (2/5/93); see also P.D. 93-20 (2/5/93).
In addition to the existence of an agency agreement, in order for the agent to be entitled to claim the benefit of the governmental exemption, purchase agreements with sellers must bind the credit of the government. U.S. v. Forst 442 F. Supp. 920 (W.D. Va., 1977), aff'd, 569 F.2d 811 (4th Cir., 1978). This requires an investigation beyond the language of the agency agreement to determine whether the course of business has been in accordance with the expressed terms of such agreement.
In Forst, the Court looked to the contractor's purchase orders, which were solely in the name of the contractor, and determined that the credit of the government was not bound. Therefore, the contractor was not entitled to claim the benefit of the governmental exemption despite the fact that the contractor never had legal title to the items purchased and that is was reimbursed by the government for the cost of the purchases.
In the instant case, the Taxpayer has been designated as the "agent" of the government agency since it is authorized by the agreement to negotiate and execute on behalf of the government agency all leases, and to contract "on behalf of" the government agency for expenses relating to the proper maintenance, repair and alteration of the property and "in the name of" the government agency for water, gas, electric, and other services necessary for the operation and maintenance of the property. Furthermore, it is the department's understanding that purchases made under the contract are paid for by the Taxpayer using company checks drawn on the escrow account set up for the receipt of rental proceeds and the payment of expenses incurred under the contract. The account is in the government agency's name, and any funds remaining in the account after payment of all expenses and the Taxpayer's management fee are disbursed to the government agency.
Finally, the government agency has authorized the Taxpayer to use the exemption certificate for use by governmental entities to make purchases exempt from the tax, Form ST-12. Based upon the above,
I find that the government agency's credit is bound directly since it appears that vendors look to the government agency for payment of obligations resulting from purchases made by the Taxpayer and that federal funds are used.
Accordingly, I find that the Taxpayer may make purchases in connection with its agreement with the government agency exempt from the tax.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6620H
Rulings of the Tax Commissioner