Tax Type
Retail Sales and Use Tax
Description
Government transactions; Installing a computerized network management center
Topic
Taxability of Persons and Transactions
Date Issued
05-18-1995
May 18, 1995
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear********************
This is in response to your letters of October 24, 1994 and March 7, 1995 in which you seek correction of a sales and use tax assessment issued to****************(the Taxpayer) for the period May 1990 through November 1993.
FACTS
The Taxpayer entered into a multi-site network management contract with an agency of the federal government. Pursuant to this contract, the Taxpayer is required to: (i) plan and engineer an orderly transition to a network management center, with an option for a second center; and (ii) design, install, integrate and maintain the equipment necessary for day-to-day operations of the centers. In addition, the Taxpayer is required to provide on-site operation during the 24 month contract period and to provide formal training which will allow government personnel the knowledge needed to operate the network equipment and all support systems.
The Taxpayer maintains that the contract calls for the sale of tangible personal property to the government. Accordingly, you claim that property purchased and leased in connection with this contract is not subject to the tax since it was in turn resold to the government.
DETERMINATION
The department has traditionally held that in considering the application of the tax to government contracts, it must be determined whether the true object of the contract is for the sale of tangible personal property or for the provision of services. As explained in Public Document 88-159 (6122188), 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 these services, even though title to some or all of the property may pass to the government.
Conversely, if the true object of the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia §58.1-609.1(4).
I find that the true object of the contract in the instant case is for the sale of tangible personal property, i.e., the equipment necessary for the operation of a network management center and related support systems. It is clear that the Taxpayer, in providing this property, is also contractually required to perform a number of various services; however, it is evident that the purpose of the contract is for computer hardware, software and related equipment which will ultimately be operated by government personnel. Accordingly, tangible personal property purchased or leased by the Taxpayer, and title to which passed to the federal government, are exempt from the tax and will be removed from the assessment.
However, as further noted in noted in P.D. 88-159, the tax applies to property purchased in connection with this contract and title to which does not pass to the government. Therefore, the Taxpayer is the taxable user or consumer of all supplies used, for example, in the design, implementation and integration of the network management centers as well as supplies used in accordance with the contract's training provisions.
Based on the above, the audit will be revised in accordance with this determination. If you have any further questions, please contact****************my Office of Tax Policy at***************
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8603I
Rulings of the Tax Commissioner