Tax Type
Retail Sales and Use Tax
Description
Government transactions; Computer service contract
Topic
Taxability of Persons and Transactions
Date Issued
12-22-1995
December 22, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear******************:
This will reply to your letters in which you seek correction of a retail sales and use tax assessment for **********************(the "Taxpayer").
FACTS
The Taxpayer entered into contracts with various agencies of the federal government to provide computer-related work. An audit was conducted for the period from July 1991 through June 1994 and resulted in the assessment of tax for tangible personal property purchased under services contracts. The Taxpayer maintains that the items purchased were resold to the federal government and, therefore, should be exempt of the tax.
DETERMINATION
Service vs. sale - true object of the contract
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. 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.
Based on a review of the audit report and the information provided with your letters, the true object of the contracts at issue is the provision of services by the Taxpayer to the federal agencies. The Statement of Work provided requires that the Taxpayer evaluate and compare network management platforms, recommend and install a platform and integrate LAN devices with the platform. The contract does not require the Taxpayer to furnish the network hardware, but rather the labor to accomplish the upgrade of the computer systems. Because the primary objective of the contract is services, the Taxpayer is deemed to be the taxable user or consumer of the tangible personal property purchased in providing the services.
Materials used outside Virginia
The Taxpayer contends that certain items included in the audit were actually purchased outside Virginia, delivered to other states, and were never used in Virginia. The Taxpayer believes the Commonwealth has no authority to impose use tax on these items and the assessment should be reduced by the amount of tax attributable to these materials.
Code of Virginia § 58.1-609.10(4) exempts from the sales and use tax the "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth." Interpreting this statute, Virginia Regulation (VR) 630-10-51 provides that "[a] sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia."
The Taxpayer is allowed 45 days to substantiate its position by providing documentation that the items at issue were (1) purchased outside Virginia, (2) delivered to the Taxpayer outside the state, and (3) not for use in Virginia. Please submit the requested information to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23282-1880. If the documentation is not received within 45 days, the assessment will be deemed correct and an updated bill will be issued.
If you have any questions regarding this matter, you may contact ***********************at*****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8855F
Rulings of the Tax Commissioner