Tax Type
Retail Sales and Use Tax
Description
Government contractor; Computer software development; Service vs sale
Topic
Exemptions
Property Subject to Tax
Date Issued
12-14-1995
December 14, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************:
This will reply to your letter in which you seek correction of retail sales and use tax assessments for*************************(the "Taxpayer").
FACTS
The Taxpayer provides computer software development services and computer repair services. An audit was conducted for the period from February 1986 through January 1989 and resulted in the assessment of tax, penalty and interest.
Following the audit period, several other assessments were issued. Four assessments were generated in January 1990 for returns filed with the department that did not include full payment of the tax due. From March 1990 through November 1992, 32 additional assessments were issued. In June 1994, the Taxpayer received a consolidated statement indicating the total amount due as a result of these assessments. It is the Taxpayer's position that it does not owe the amount shown on the consolidated statement because all the equipment and services provided were through contracts with the federal government and not subject to tax.
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. In making such a determination, the department considers the entire contract, including any addenda, task directives, or work orders issued with or separate from the original contract, as one transaction, which is either taxable or exempt. 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.
If a 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. 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.
The fact that the federal government takes title to tangible personal property does not necessarily mean the purchase of such items is exempt of the tax. In United States v. Forst, 442 F. Supp. 920 (W.D.Va 1977), aff'd 569 F.2d 881 (4th Cir. 1978), the court held that the resale exemption was inapplicable to a government contractor which was the final consumer/purchaser of the items. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, they were not "resold" to the United States.
Audit Assessments for February 1986 - January 1989
Based on a review of the audit report and the information provided in the Taxpayer's letter, the tax assessed for the period February 1986 through January 1989 is correct. The audit report includes sales to private companies only, and no certificates of exemption were on file; therefore, the auditor correctly treated the sales as taxable. The purchases included in the audit were primarily for office equipment and supplies used by the Taxpayer. The Taxpayer's representative concurred with the results at the time the audit was completed, and no information has been presented to substantiate the Taxpayer's position that the tax does not apply. Accordingly, the assessment is correct.
Remaining Assessments
To support its position that the assessments for other periods are erroneous, the Taxpayer has provided a "Material and Inspection Receiving Report" issued by the federal government and the Taxpayer's purchase order. These documents are not sufficient to allow the department to determine if the contracts at issue are for tangible personal property or the provision of services. The contracts you characterize as "repair contracts" could be for tangible personal property or for the provision of services, depending on the scope and nature of the work provided by the Taxpayer. Absent copies of the contracts, the department cannot determine the true object.
The Taxpayer is allowed 60 days to substantiate its position by providing copies of the contracts at issue. The contracts will be reviewed by the department to determine if revisions to the assessments are appropriate. If the contracts are not received within 60 days, the assessments will be presumed to be correct and collection action will resume.
Conclusion
The assessment for the period February 1986 through January 1989 is correct. Please remit a check in the amount of********* tax, *************penalty, and interest accrued through December 12,1994, the date of your protest letter). In addition, please submit copies of the requested contracts and other documentation relating to the remaining assessments within 60 days. The check and documentation should be sent to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23282-1880.
If you have any questions regarding this matter, you may contact********** at***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8919F
Rulings of the Tax Commissioner