Tax Type
Retail Sales and Use Tax
Description
Government contracts; Sale vs. Service
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
11-20-1995
November 20, 1995
Re: Request for Ruling: Retail Sales and Use Tax
Dear******************:
This will reply to your letter of September 29, 1995, in which you request a ruling on the application of the retail sales and use tax to a contractual arrangement between the federal government and *******(the "Taxpayer").
FACTS
The Taxpayer has entered into a contract with the U.S. Department of Commerce to replace the current automated Trade Policy Information System with a new state-of-the-art system. Under the terms of the contract, the Taxpayer will provide total systems integration and will be responsible for procuring system equipment, hardware, software, and other necessary components. In addition, the Taxpayer is required to perform engineering, applications development, implementation, testing, pilot operation, installation and other services.
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 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 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 automated system. The Statement of Work provides that "[t]he overall objective of this contract is to acquire a turn-key system" to replace the existing system. Although the Taxpayer is required to provide various services, such as planning, designing, programming and training, the goal of the contract is to provide the federal government with a tangible, state-of-the-art computer system. Accordingly, tangible personal property that will ultimately pass to the federal government may be purchased or leased by the Taxpayer under resale exemption certificates.
The tax will generally apply to articles purchased by the Taxpayer in connection with the contract but title to which does not pass to the federal government. For example, the Taxpayer would be deemed the taxable user or consumer of supplies used in the design of the automated system. Furthermore, cabling purchased for installation into real property in connection with the contract is also taxable to the Taxpayer. See P.D. 90-210 (11/28/90).
If you have any questions regarding this matter, you may contact*************at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10322F
Rulings of the Tax Commissioner