Tax Type
Retail Sales and Use Tax
Description
Government transactions; Integrated communication system
Topic
Taxability of Persons and Transactions
Date Issued
05-31-1995
May 31, 1995
Re: Request for Ruling: Retail Sales and Use Tax
Dear********************
This will reply to your letter of May 1, 1995 in which you request a ruling on the application of the retail sales and use tax to a contractual arrangement with the federal government.
FACTS
The contract requires the contractor to provide total systems integration for the ***********over a seven-year system life. Generally, the contractor will be responsible for planning, furnishing, installing, integrating and maintaining the system, and providing acquisition support and end user technical training and support. The contractor must provide all hardware and software for the system and integrate government-furnished workstations and printers.
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 whether the contract is for the provision of services to the government. See P.D. 88-159 (6123188) and P.D. 89-206 (7128189). 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 if 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 reveals that the true object is the provision of tangible personal property, i.e., a complete, integrated communications system. Although the contractor is obligated to provide various services, such as planning, installing and integrating network and communication components and systems, providing end user training and support, and providing facilities management services, the goal of the contract is to provide the federal government with a tangible computerized communications system. Accordingly, tangible personal property that will ultimately pass to the federal government may be purchased or leased by the contractor under resale exemption certificates.
The tax will generally apply to articles purchased by the contractor in connection with the contract but title to which does not pass to the federal government. For example, the contractor would be deemed the taxable user or consumer of supplies used in the design of the computer system or in the management of the system. Furthermore, cabling purchased for installation into real property in connection with the contract is also taxable to the contractor. See P.D. 90-210 (11/28/90).
One exception to this general rule is the purchase of tangible personal property for use directly and exclusively in basic research or research and development in the experimental or laboratory sense. As noted in Virginia Regulations (VR) 630-10-49.2 and 630-10-92, the research exemption generally applies to activities that result in the development of new products or the development of new uses for existing products. For example, property used directly and exclusively in the development of custom computer software or the modification of prewritten software would qualify for the research exemption as it is used in the creation of new products or new uses for existing products.
If you have any questions regarding this matter, you may contact****************.
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- Sincerely,
Danny M Payne
Tax Commissioner
- Sincerely,
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OTP/9657F
Rulings of the Tax Commissioner