Tax Type
Retail Sales and Use Tax
Description
Government transactions; Service contract purchases
Topic
Taxability of Persons and Transactions
Date Issued
06-26-1995
June 26, 1995
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****************
This will reply to your letter of May 16, 1995, in which you request an exemption from the sales and use tax for ********** (the "Taxpayer"), for purchases made pursuant to a federal government contract.
FACTS
The Taxpayer has entered into a fixed price subcontract with an agency of the federal government to manage and operate a dining and mess facility. The Taxpayer prepares and serves meals to military personnel and others; these customers generally pay a charge for the meals. The food itself is supplied and paid for by the government. The government will also provide the dining facility, kitchen equipment, furniture, and certain supplies such as dinnerware, eating utensils, etc. Under the terms of the subcontract, the Taxpayer is required to provide tangible personal property such as uniforms, name tags, janitorial supplies, kitchen supplies, hand tools and certain equipment for use by its personnel in the performance of the contract.
RULING
The department has previously ruled that in considering the tax treatment of a federal government contract, it must first 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. The Taxpayer's contract states under Section C-1, Scope of Work, that "The Contractor shall provide all resources necessary to perform Full Food Service (FFS), Mess Attendant (MA), Management and Food Production (M&FP) ...." Thus, the true object of the contract is the provision of services by the Taxpayer to the federal government.
The application of the tax to government contractors is set out in Virginia Regulation (VR) 630-10-45(E) (copy enclosed) which indicates that contractors who perform services for the federal government are deemed to be the users and consumers of property purchased in connection with providing those services and must pay the tax on the purchases. The tax applies to such purchases even when title to the property passes to the government. This issue has been addressed in a number of prior determinations which are enclosed as Public Documents 95-39 (3/15/95) and 94-231 (7/29/94).
I have also enclosed a copy of P.D. 95-127 (5/19/95) which discusses the application of the tax in a situation similar to the Taxpayer's. The contractor in this case was required to provide a starting inventory of tableware under the terms of a subcontract to manage a cafeteria at a federal government installation. The department ruled that the purchase of tableware used by the contractor in the performance of its food management services was taxable.
Based on the department's well established policy with respect to government contractors, there is no general exemption from the tax on purchases of tangible personal property made by the Taxpayer for use in the performance of its services under the terms of the contract. If Virginia sales tax is not charged by the Taxpayer's suppliers, the Taxpayer should remit the complementary use tax directly to the department.
The only exception to this rule would be for goods that are resold to paying customers; such goods can be purchased exempt from the tax. Virginia Tax Bulletin 92-10 and VR 630-10-64 (copies enclosed) explain the application of the resale exemption to food service providers. In this particular case, as food is purchased by the government, the exemption would likely apply only to disposable items furnished to customers with their meals, eg., paper napkins, paper plates, paper cups, carryout trays, plastic silverware, etc. Again, however, it must be noted that the exemption applies only to the extent that these items are furnished to paying customers. The exemption will not apply when these items are furnished to nonpaying customers, i.e., military personnel who receive meals at government expense.
The Taxpayer may make exempt purchases of the items described above by issuing a Virginia Resale Exemption Certificate (Form ST-10, copy enclosed) to its suppliers. Virginia use tax should be reported and paid on the cost price of items that are purchased exempt of the tax and subsequently furnished to nonpaying customers by filing a Virginia Consumer's Use Tax Return (Form ST-7) with the department. Meal payments collected by the Taxpayer would not be subject to Virginia sales tax because the dining facility is organized, operated and controlled under Department of Defense regulations as explained in VR 630-10-45(A). Contract payments received from the federal government would not be subject to the sales and use tax as they are for exempt services.
A registration application (Form R-1) and instructions are enclosed and should be completed and returned to the department if you wish to establish a consumer's use tax account with the department. Copies of Form ST-7 and instructions are also enclosed for computing and reporting any use tax liability you might incur. You may contact************** if you have any questions concerning this letter.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/9740S
Rulings of the Tax Commissioner