Tax Type
Retail Sales and Use Tax
Description
Government transactions; Contractor's purchase of telecommunications system
Topic
Taxability of Persons and Transactions
Date Issued
02-24-1995
February 24, 1995
Re: Ruling Request: Retail Sales and Use Tax
Dear*************
This will follow up with a meeting between you, representatives of the**********(the "Taxpayer"), and members of my Office of Tax Policy staff in October regarding the tax status of purchases made in connection with the Taxpayer's contract with the federal government for the installation of a telecommunications system.
FACTS
The Taxpayer, a government contractor, entered into a contract for the installation of a telecommunications systems at a defense installation in Virginia. You assert that the contract is for the provision of tangible personal property and the only services provided in connection with the contract were installation and maintenance services. It is my understanding that the system has already been purchased and installed by the Taxpayer.
You seek a ruling on the tax status of purchases of tangible personal property made in connection with the contract.
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 to the government. See P.D. 88-159 (6/23/88) and P.D. 89-206 (7/28/89). 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 and consumer of the tangible personal property and must pay the tax on the purchases.
My analysis of the contract reveals that while it does involve the provision of various services by the Taxpayer, it is indeed a contract for the sale of tangible personal property -- a complete telecommunications system. Although the Taxpayer is obligated to provide various services, such as the design of the overall system, installation and maintenance, and systems oversight, the goal of the contract is to provide the federal government with a tangible telecommunications system. All services provided are an integral part of the sale of the system. Accordingly, the tangible personal property that ultimately passed to the federal government was appropriately purchased exempt from the tax under a resale exemption certificate.
However, equipment used in the development of the system which does not qualify for exemption under the research and development exemption and the title to which did not pass to the federal government, is taxable. Furthermore, materials and supplies used by the Taxpayer in designing the system or in the management of its systems development contract are taxable. Cabling purchased for installation into real property in connection with the contract is also taxable to the Taxpayer. [See P.D. 90-210 (1 1/28/90)]
It is my understanding that at the meeting two other contracts were briefly discussed. However, without actually reviewing the contracts and/or statements of work relating thereto, I am unable to render decisions regarding the tax status of such. If you would like a ruling on these contracts, please forward copies of the contracts and/or their statements of work: to*********in my Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8591H
Rulings of the Tax Commissioner