Tax Type
Retail Sales and Use Tax
Description
Federal contract for computer installation and support
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
08-26-1994
August 26, 1994
Re: Request for Ruling: Retail Sales & Use Tax
Dear**************
This will reply to your letter of April 11, 1994 in which you seek a ruling on behalf of********* (the "Taxpayer") on the appropriate tax treatment of a government contract.
FACTS
The Taxpayer was awarded a contract by the United States government which requires it to provide general purpose super-minicomputer systems to support a wide range of federal government users. The contract also requires a variety of support services, including hardware maintenance, software support, training, engineering support, equipment relocation, communication installation, pre-installation site surveys, and the performance of monitoring/tuning services.
You seek a ruling on the tax status of: (i) sales of hardware, software, and other tangible personal property to the government under the contract; (ii) hardware, software and other tangible personal property purchased by the Taxpayer for delivery to the government; (iii) the Taxpayer's activities in integrating and assembling hardware, software and other components into the computer system; (iv) the use at the Taxpayer's training center of hardware, etc., that is eventually delivered to the government; (v) maintenance services under the contract; and (vi) charges for maintenance services, whether provided by the Taxpayer directly or through a subcontractor.
DETERMINATION
I will address the above related issues collectively and unrelated issues individually.
Tax status of equipment provided under the contract
The department: has previously ruled that in determining the tax status 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. 88-159 (6/23/88) and P.D. 93-45 (3/4/93), copies 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 acquisition of computers. Although the Taxpayer is obligated to provide various services, such as the software support, training, engineering support, equipment relocation, etc., the goal of the contract is to provide the federal government with super-minicomputer systems. Accordingly, the tangible personal property that is resold to the government may be purchased exempt of the tax. However, tangible personal property purchased for use by the Taxpayer in providing the various services to the federal government are taxable.
Training activities
Equipment purchased for resale to the government, but used by the Taxpayer in the training of federal employees is exempt as the training of employees is an integral part of the sale of the systems to the federal government. However, materials and supplies for use in the operation of the training facility and other items used and consumed by the Taxpayer in providing the training are taxable.
Maintenance contracts
The Taxpayer has two types of maintenance arrangements with its government customers - under one, the customer pays one lump sum for all its maintenance needs; under the other, the customer pays for each service call. The charges to the customers include all labor, parts, materials and supplies, travel and other incidental expenses. In each case, the Taxpayer pays its subcontractor an hourly rate for service calls, which rate includes the cost of both labor and materials.
Virginia Regulation (VR) 630-10-62.1 provides that maintenance contracts, the terms of which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property, the total charge for which is taxable. However, in the instant case, sales of such contracts to the federal government are exempt from the tax under Va. Code § 58.1-609.1(4). The payments to the subcontractors for the service calls are exempt from the tax under the resale exemption.
For your information, legislation exempting from the sales and use tax one-half of the total charge for maintenance contracts when such contracts provide for both repair or replacement parts and repair labor beginning January 1, 1996 (SB 28) was passed by the 1994 General Assembly. The department will be required to revise its regulations to reflect this change.
Manufacturing issue
With respect to the manufacturing issue, you maintain that the configuration of the computer systems qualifies for exemption from the tax as industrial manufacturing. The Taxpayer takes new materials, consisting of various types of software, computer shells, memory boards, drives, etc., and transforms them into working computer systems.
In the instant case, the Taxpayer is not acting as an industrial manufacturer, but rather is assembling the various component parts of the computers - it, for example, may install memory expansion boards, internal modems or CD-ROM readers and drives, and the necessary software to support the system and customer needs. The department ruled in P.D. 93-45 that a contractor engaged in systems development and the sale of such system to the federal government was subject to the tax on equipment used in the development of the system which did not qualify for exemption under the research and development exemption. From the information provided, it does not appear that the specific equipment listed in your letter qualifies for exemption under the research and development exemption.
While you cite P.D. 86-77 (4/23/86) as supporting the Taxpayer's qualification for the manufacturing exemption, that determination is inapplicable to the instant case as it relates specifically to equipment used in the manufacture/production of computer software.
The Taxpayer in the instant case does not produce computer software, but merely installs the necessary software to support the system. Accordingly, the equipment used in the assembly of the super-minicomputers is taxable.
I trust the foregoing has addressed all of your questions, but should you have any further questions, please let me know.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7857H
Rulings of the Tax Commissioner