Tax Type
Retail Sales and Use Tax
Description
Government transactions; Acoustical engineering services
Topic
Taxability of Persons and Transactions
Date Issued
08-30-1994
August 30, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter seeking correction of a sales and use tax assessment to your company, ****************** (the "Taxpayer"), for the period October 1989 through September 1992.
FACTS
The Taxpayer, a contractor providing specific acoustical engineering services and products to the federal government, was audited and held liable for the tax on various purchases made in connection with its contractual obligations.
You contest the tax assessed on tangible personal property purchased in connection with two government contracts, one classified which you maintain was a resale type contract ("Contract 1532"), and the other for which you maintain that the separate task directives clearly indicate the resale nature of the contract ("Contract 1517"). Furthermore, you seek a ruling on the validity of the waiver of statute of limitations used. You assert that the auditor made alterations to which you did not agree to the original waiver. In addition, you point out that the auditor held taxable an item for which the sales tax was not billed but was remitted by the Taxpayer to the seller. Finally, you seek waiver of all penalty and interest assessed.
DETERMINATION
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. In making such a determination, the department considers the entire contract, including any addenda, task directives, or work orders issued with or separate from the original contract, as one transaction, which is either taxable or exempt. The amount of tangible personal property transferred relative to the overall value of the contract has no bearing on the tax status of the contract. Instead, the "true object" test described in Virginia Regulation (VR) 630-10-97.1 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service.
As explained in P.D. 88-159 (6/22/88), copy enclosed, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or all of the property may pass to the government. If a contract is for the sale of tangible personal property to the government, the contractor may purchase such tangible personal property exempt from the tax under a resale exemption certificate. The subsequent sale of the property is exempt from the tax under Va. Code §58.1-609.1(4).
From a review of the information provided regarding Contract 1532, the department finds that the "true object" was in fact the tangible personal property provided. Accordingly, the assessment will be revised to remove those items that were resold to the federal government in connection with this contract. However, from the information provided regarding Contract 1517, it appears that the "true object" was the provision of services by the Taxpayer to the federal agency. While some of the task directives were specifically for the provision of tangible personal property, as explained above the tax status of a contract is based on the nature of the entire contract and not the individual task directives.
However, Va. Code §58.1-609.3(5) provides a sales tax exemption for "[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added.) VR 630-10-92 which interprets Va. Code §58.1-609.3(5) defines "basic research" as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field." "Research and development" by regulation must have as it ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or (iii) the development of new uses for existing products.
By way of contrast, however, the regulation provides that research does not include testing or inspection of materials or products for quality control or environmental analysis, testing of samples for chemical or other content, operations research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research in connection with literary, historical, or similar projects.
It is our understanding that any items which the auditor believed qualified for the research and development exemption were removed from the assessment. However, if there are additional items which you believe qualify for the research and development exemption, the department will consider removing such items from the assessment provided sufficient documentation is provided. Such documentation should be provided to the department's ******** Virginia District Office.
Based upon the information provided, the department will agree to remove from the assessment the tax which you assert the Taxpayer added to its bill and remitted to one of the its suppliers. However, in the future the Taxpayer should exercise caution in taking such action to ensure that the supplier is a registered dealer in Virginia. Generally, if a supplier is registered for collection of the Virginia tax, it will include the tax on its invoice. If a supplier is not registered for collection of the tax, the Taxpayer should remit use tax on taxable purchases to the department.
In addition, you question the validity of the audit given the statute of limitations. You maintain that the auditor altered the waiver and that you did not approve of it. It is our understanding that at the time the waiver was presented to the Taxpayer for signature, a typographical error was discovered. This error would have resulted in the statute being extended to 1/15/92 when the date was already 11/6/92. Had the waiver not been corrected, it would have served no useful purpose. Thus, as we understand it the auditor changed the extension date on the waiver to 1/15/93 with the apparent knowledge of the Taxpayer and that both parties operated under the assumption that is was a valid waiver. Additionally, another waiver was signed on 1/12/93 by you which specifically stated that the period for assessing the taxes had "previously been extended to January 15, 1993."
Finally, you seek waiver of penalty and interest assessed due to the "invalidity of the waiver, and the conduct of the field auditor." As explained above, the department does not concede that the waiver was invalid. However, I regret that you may have experienced some problems with the department's auditor. The department is committed to providing a high level of service to its customers and attempts to treat everyone with the professionalism
and competence they deserve. I regret you feel you were not treated appropriately and can assure you that was not the intent of the audit staff.
The department will agree to waive the penalty assessed as it does not appear that government contract sales/services were an issue with the first audit assessment. However, in future audits, the Taxpayer will be expected to have higher compliance ratios. The use tax compliance ratio for this audit was zero percent. With respect to your request for waiver of interest, as VR 630-10-80 explains, the "application of interest to all audit deficiencies is mandatory." Accordingly, the department cannot waive the audit interest.
The assessment will be revised as set forth herein. Any additional documentation regarding the qualification for the research and development exemption by tangible personal property purchased in connection with Contract 1517 should be provided to the department's ******* Virginia District Office within 45 days. In the event that documentation is not provided or does not reveal that the property was used in an exempt manner, the department will have no choice but to hold such property taxable. A revised Notice of Assessment will then be mailed to the Taxpayer.
If you have any questions about this matter, please let me know.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7795H
Rulings of the Tax Commissioner