Tax Type
Retail Sales and Use Tax
Description
Government transactions; Officially designated purchasing agent
Topic
Taxability of Persons and Transactions
Date Issued
05-02-1995
May 2, 1995
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**************
This will reply to Your letter in which you contest a sales and use tax assessment to your company, **************(the "Taxpayer"), for the period January 1989 through September 1992.
FACTS
The Taxpayer, a government contractor, contests the assessment with respect to materials purchased in connection with two contracts with the federal government. You maintain that the purchases are exempt from the tax as the Taxpayer was the official purchasing agent of the government agency. The auditor held the Taxpayer liable for the tax as the user and consumer of tangible personal property purchased in connection with a services contract, notwithstanding the Taxpayer's agency relationship representations.
DETERMINATION
Subdivision 4 of Code of Virginia §58.1-609.1 provides an exemption from the sales and use tax for "[t]angible personal property purchased for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States." Virginia Regulation (VR) 630-10-27(J) makes clear that this exemption is available only when "the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity. In addition, VR 630-10-45(E) provides:
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- Persons who contract with the federal government ... to perform a service and in conjunction therewith furnish some tangible personal property are deemed to be the consumers of all such property and are not entitled to the exemption on the grounds that a governmental entity is a party to the contract. This is true even though title to the property provided may pass to the government and/or the contractor may be fully and directly reimbursed by the government.
The application of the tax to purchases made by a federal contractor was addressed in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978). In that case, the federal court found a federal contractor to be the taxable user and consumer of tangible personal property purchased for use in carrying out its contractual obligations. A key element in that case was the resolution of the question of whose credit was bound in purchasing tangible personal property for use by a person pursuant to a government contract. The court found that the credit of the United States was not bound by the contractor's purchasing agreements with various vendors so as to render the transactions sales to the government. Furthermore, even though title to the purchased items passed to the government, the court rejected the contractor's argument that the transactions were exempt sales for resale.
The documentation presented by the Taxpayer stipulates in specific contract language that the Taxpayer is the purchasing agent of the U.S. government under the contract. In addition, by letter the Government authorized the Taxpayer to "act for the Government" in making various purchases (through sources generally available only to Government agencies). The letter further provided for the issuance of tax exemption certificates in lieu of the payment of state or other taxes for which the Government is not liable on property purchased under such authorization. It stated that the "order is placed on behalf of the ... (government agency), in furtherance of United States Government Contract Number...Title to property purchased hereunder shall vest in the United States Government."
Thus, we agree that an agency relationship exists between the Taxpayer and the government agency. Furthermore, it is the department's understanding that purchases made under the contract are paid for with funds advanced to the Taxpayer by the agency specifically for use in making stock purchases for the sole use of the agency. This payment arrangement was specifically designed to preclude the use of Taxpayer funds to make acquisitions on behalf of the agency.
Accordingly, I find that the Taxpayer was entitled to the governmental exemption on purchases made in connection with the contract on behalf of the agency with agency funds, and the title to which passed directly to the agency for its own use. The assessment will be revised to remove such items from the assessment. However, tangible personal property purchased by the Taxpayer for its own use in contract administration and the title to which did not pass to the agency will remain in the assessment.
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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Rulings of the Tax Commissioner