Tax Type
Retail Sales and Use Tax
Description
Federal Contractor; Maintenance contract
Topic
Taxability of Persons and Transactions
Date Issued
07-20-1994
July 20, 1994
Re: Request for Ruling: Retail Sales and use Tax
Dear***********
This will reply to your letters of April 15, 1994 and June 22, 1994 in which you request a ruling on the application of the sales and use tax to certain contractual arrangements between **************(the "Taxpayer") and the federal government.
FACTS
The Taxpayer was recently awarded a prime contract with a branch of the federal government to provide life cycle support for electronic digital switch systems throughout the United States. The Taxpayer receives delivery orders under the prime contract and subcontracts the work to various contractors. All parts and technical support are provided by subcontractors. All parts are drop shipped by the subcontractors directly to various U.S. Government facilities, and all services are performed by the subcontractors at their own facility or at the U.S. government facility. The Taxpayer's responsibility is for the overall management of the contract.
You ask several questions regarding the contract and the sales and use tax consequences.
RULING
Question #1: Does the Taxpayer qualify as a reseller in this situation if it only acts in an administrative capacity?
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) (copy enclosed). If the contract is for the sale of tangible personal property, the contractor or subcontractor 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 or subcontractor is deemed to be the taxable user or consumer of the tangible personal property and must pay the tax on the purchases.
Based on the information provided, it appears that the Taxpayer is engaged in the provision of support and maintenance services and in connection with those services purchases tangible personal property for its own use. In connection with its contracts, the Taxpayer will turn over some of the property to the government. However, such tangible items are not sold to the government; rather, the items are furnished in connection with the Taxpayer's maintenance services. Accordingly, the Taxpayer is deemed to be the ultimate user or consumer of the property it purchases and does not qualify as a reseller under the services contract.
I would note, however, that the Taxpayer would enjoy a resale exemption on any item purchased independent of the contract to perform services that is resold directly to the federal government. In such an instance, the transfer of property to the government would represent a sale at retail since the property would be furnished totally independent of the provision of services.
Question #2: What impact would subcontracting parts to one contractor and labor to another have on the sales/use tax issue and who would be responsible for the taxes?
Because the contract is for maintenance services, any contractor or subcontractor under the contract is deemed to be the user and consumer of the tangible personal property used in fulfilling the contract. Therefore, the subcontractor providing parts under the contract would be treated as a user and consumer and is required to pay the tax on parts at the time of purchase or remit use tax directly to the department on parts used in the performance of the service contract. The Taxpayer is not required to pay the tax to the subcontractor for the parts furnished under the contract.
The subcontractor providing labor would not be required to collect tax on its charges. However, the subcontractor would be required to pay tax on materials purchased for use in providing labor and services under the subcontract.
Question #3: The Taxpayer plans to utilize third party subcontractors to fulfill this contract. However, the Taxpayer may subcontract to a sister company. Does the relationship of the prime contractor to the subcontractor have an effect on the sales/use tax issue?
The relationship between the prime contractor and the subcontractor has no effect on the sales/use tax issue presented in Question #2, assuming the two deal at arm's length. However, if the subcontractor is designated as the purchaser of tangible personal property under the contract but the Taxpayer's credit is bound, then both the subcontractor and the Taxpayer would be liable for the tax.
Question #4: The Taxpayer would like an explanation of what constitutes "first use" regarding tangible personal property that is shipped to or used in Virginia.
Va. Code §58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Emphasis added. This section goes on to define "use tax" as "the tax imposed upon the use, consumption, distribution, and storage as herein defined."
Virginia Regulation (VR) 630-10-51 (copy enclosed) addresses interstate commerce and subsection B of the regulation provides:
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- Transaction taxable in Virginia. The tax applies to the first use in Virginia of tangible personal property purchased elsewhere in a transaction which would have been taxed had the transaction occurred in Virginia, regardless of the fact that such property may have been, or may be used in interstate commerce, ... Any tax due because of first use in Virginia may be subject to credit for like taxes paid elsewhere.
In Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980), the Taxpayer stored its products in a warehouse located in Virginia for resale to wholesalers. Products were shipped directly from the warehouse for delivery to customers. The Taxpayer distributed some products as free samples, which were withdrawn from inventory stored in the Virginia warehouse for distribution by salesmen. Although the property was intended for use outside Virginia, the Virginia Supreme Court held that:
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- If a taxable event occurs in Virginia, subsequent delivery of property outside this State does not immunize the taxable event.
Therefore, if the purchaser exercises any right over, consumes, or stores the property which is not merchandise for resale, it will be subject to the use tax if the tax has not been collected by the seller.
If you have any other questions regarding this matter, please contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7977F
Rulings of the Tax Commissioner