Tax Type
Retail Sales and Use Tax
Description
Contract to provide computers to federal government
Topic
Exemptions
Property Subject to Tax
Date Issued
07-13-1994
July 13, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter of May 27, 1994 in which you seek correction of a retail sales and use tax assessment on behalf of*****************(the "Taxpayer") and its former chairman, **********(your "client").
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.
In a previous ruling, it was determined that the resale exemption was not available because the contracts with the federal government were for the provision of services. Specifically, the first contract called for the Taxpayer to operate the computerized system, which constituted a taxable use of the property and nullified the resale exemption. It was also determined that the failure to pay the use tax was willful, and the assessments were properly converted to your client. See P.D. 94-140 (4/29/94).
You request reconsideration of the prior ruling and have supplied additional information to support the Taxpayer's position.
DETERMINATION
Based on the additional information provided, it is clear that the requirements under the first contract are similar to those 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. The requirement in the Taxpayer's contract with the federal government that it operate the system relates to testing and system maintenance during the installation and training period. These activities are an integral part of the sale of the computerized system to the federal government. The contract does provide for "hand-off" to the government of all functions after November 1, 1989, when the installation was expected to be complete.
Accordingly, the contract is for the delivery of tangible personal property. Purchases of computer equipment and other items delivered to the federal government qualify for the resale exemption.
The additional information provided indicates that the second contract was also for the provision of tangible personal property. Therefore, items purchased and delivered to the federal government pursuant to that contract qualify for the resale exemption.
Because tangible personal property purchased under the contracts and delivered to the federal government qualify for the resale exemption, the assessment against the Taxpayer is erroneous. Accordingly, the assessment converted to your client, the Taxpayer's former chairman, pursuant to Va. Code §58.1-1813 will be abated.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8178F
Rulings of the Tax Commissioner