Tax Type
Retail Sales and Use Tax
Description
Government transactions; Computer repair and replacement parts
Topic
Taxability of Persons and Transactions
Date Issued
12-12-1995
December 12, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************:
This is in response to your recent letter in which you seek correction of a sales and use tax assessment issued to************* (the "Taxpayer") for the period May 1989 through April 1995. I note that the uncontested portion of the assessment has been paid.
FACTS
The Taxpayer operates primarily in the area of research and development. In addition, the Taxpayer contracts with federal and state government agencies to provide maintenance of computer equipment and peripherals. The only items at issue in your protest are repair and replacement parts purchased by the Taxpayer to provide maintenance under these government contracts.
DETERMINATION
The department has previously ruled that in considering the tax treatment of government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. In making such a determination, the department considers the entire contract, including any addenda or task 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" of the transaction as 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 Public Documents 88-159 (6/23/88) and 94-155 (5/23/94), 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 its services, even though title to some or all of the property may pass to the government. Conversely, if a 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 resale of that property to the government is exempt from the tax under Code of Virginia § 58.1-609.1(4) which provides an exemption for sales of tangible personal property to the Commonwealth and the federal government.
I have reviewed representative contracts which pertain to the Taxpayer's contested purchases and find that these contracts are solely for parts and labor maintenance. Pursuant to Virginia Regulation (VR) 630-10-62.1(D), maintenance contracts which call for the provision of parts and labor are deemed to be sales of tangible Personal property. Accordingly, the contested contracts in the instant case are for the sale of tangible personal property to the government. As noted above, such sales are exempt. VR 630-10-62.1 further indicates that persons providing maintenance pursuant to parts and labor maintenance contracts may purchase repair or replacement parts under the resale exemption. Accordingly, the Taxpayer's purchases in this case are also exempt and will be removed from the assessment.
Also, I have enclosed a copy of Virginia Tax Bulletin 95-8 which addresses a change in the law regarding the sale of parts and labor maintenance contracts. Effective January 1, 1996, an exemption from the sales and use tax will apply to one-half of the total charge for maintenance contracts which call for the provision of both parts and labor. This change does not affect sales of such contracts to government agencies (since these sales remain totally exempt). However, the law change does affect sales of these contracts to nonexempt entities.
Pursuant to this determination, the contested portion of the assessment will be abated in full. If you have any questions regarding this letter please contact ******** in my Office of Tax Policy at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/103391
Rulings of the Tax Commissioner