Tax Type
Retail Sales and Use Tax
Description
Federal Cost Reimbursement Contract
Topic
Taxability of Persons and Transactions
Date Issued
07-29-1994
July 29, 1994
Re: Request for Ruling: Retail Sales & Use Tax
Dear***********
This will reply to your letter of June 15, 1994 in which you seek a ruling on the tax status of purchases made by **********(the "Taxpayer") in connection with a contract with the federal government.
FACTS
The Taxpayer has entered into a cost reimbursement contract with the federal government. The contract requires that the Taxpayer "furnish all personnel, facilities, services, equipment and materials necessary for performance" of certain services as described in the Statement of Work. Performance of the contract requires that the Taxpayer procure various supplies, equipment and services (i.e., construction services, miscellaneous maintenance services, short term equipment rentals) to support the maintenance work force. All property purchased by the Taxpayer becomes the property of the government upon receipt. The cost of all items purchased is reimbursed by the government.
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 for the provision of services. See P.D. 89-206 (7/28/89), copy enclosed. 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 government. The objective of the contract, as stated in the Statement of Work, is to "furnish all personnel, facilities, services, equipment and materials necessary for performance" of certain services. 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 88L (4th Cir. 1978), in which the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer 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 regarding this matter, please contact me.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8164H
Rulings of the Tax Commissioner