Tax Type
Retail Sales and Use Tax
Description
Government transactions
Topic
Taxability of Persons and Transactions
Date Issued
04-11-1995
April 11, 1995
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**************
This will reply to your letter in which you seek correction of a sales and use tax assessment to your company, *************** (the "Taxpayer"), for the period July 1992 through January 1994.
FACTS
The Taxpayer, a high technology services company that provides systems engineering and software services to the federal government, was audited and held liable for the tax on purchases of tangible personal property in connection with a government contract. The Taxpayer contests the assessment as you maintain that the tangible personal property was resold to the federal government and accordingly should have been nontaxable. The auditor, on the other hand, maintains that the contract was for the provision of services and thus all tangible personal property purchased in connection with such was subject to the 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. See P.D. 89-206 (7128189), copy enclosed. 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, notwithstanding the fact that title to some or all of the property may pass to the government. See P.D. 88-159 (6122188), attached to P.D.89-206.
A review of the contract at issue reveals that while it does involve the provision of various services by the Taxpayer, it is indeed a contract for the sale of tangible personal property - an integrated computer system. Although the Taxpayer is obligated to provide various technical services, such as systems engineering, systems verification, training, etc., the goal of the contract is to provide the federal government with a tangible computer system consisting of hardware, software, and related equipment. Accordingly, the tangible personal property that ultimately passed to the federal government may have been purchased exempt from the tax under a resale exemption certificate and will be removed from the assessment.
Furthermore, equipment purchased for resale to the government, but used by the Taxpayer in the actual development of the computer system or in the training of federal employees will also be removed from the assessment, provided the title to such passed to the federal government.
However, equipment used in the development of the system which did not qualify for exemption under the research and development exemption and the title to which did not pass to the federal government, as verified by an auditor, will remain in the assessment. Furthermore, materials and supplies used and consumed by the Taxpayer in designing the computer system or in the management of its systems development contract which were picked up by the auditor will remain in the assessment.
Accordingly, the assessment will be revised as provided herein. An auditor will be contacting the Taxpayer shortly to review the documentation necessary to make the revisions. At that time, any information the Taxpayer has which illustrates that the certain equipment qualifies for the research and development exemption should be provided. Once the assessment is revised, a refund (with applicable interest) will be sent to the Taxpayer.
The department is committed to providing a high level of service to its customers and attempts to treat everyone with the professionalism and competence they deserve. I regret you feel you were not treated appropriately and can assure you that was not the intent of the audit staff.
If you have any questions about this matter, please contact**************in my Office of Tax Policy at*******************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8017H
Rulings of the Tax Commissioner