Tax Type
Retail Sales and Use Tax
Description
Government transactions; Contract for purchase of tangible personal property
Topic
Taxability of Persons and Transactions
Date Issued
11-09-1995
November 9, 1995
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 for*********** (the "Taxpayer") for the period January 1991 through August 1993.
FACTS
The Taxpayer entered into a contract with an agency of the federal government. Pursuant to this contract, the Taxpayer is required to provide (i) engineering and technical support related to certain types of hardware and its integration into systems for test purposes; (ii) repairs for the continued operation of government-owned electro-optical sensor systems; and (iii) labor and materials to support certain tasks, including the design and integration of various systems and subsystems.
The Taxpayer maintains that the contract represents a contract for the provision of tangible personal property; however, the auditor deemed the contract a services contract and accordingly held the Taxpayer as the user and consumer of all tangible personal property used in connection with the contract.
DETERMINATION
In determining the tax status of government contracts, the department considers the entire contract, including any addenda, task directives, or work orders 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 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. While the Taxpayer is contractually required to perform various services, it is evident that the purpose of the contract is for the repair of government owned electro-optical sensor systems and the design and fabrication of various systems and subsystems. Accordingly, tangible personal property purchased by the Taxpayer, the title to which passed to the federal government is exempt from the tax and will be removed from the assessment.
However, as noted in P.D. 88-159, the Taxpayer is the taxable user and consumer of all supplies and equipment used in connection with the contract for which the title does not pass to the federal government (i.e., supplies used in the design of the various systems). Thus, those items will remain in the assessment.
Accordingly, the assessment will be revised as provided herein and a revised Notice of Assessment will be mailed to the Taxpayer upon completion thereof.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8705H
Rulings of the Tax Commissioner