Tax Type
Retail Sales and Use Tax
Description
Government transactions; Service contract
Topic
Taxability of Persons and Transactions
Date Issued
06-18-1996
June 18, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter in which you seek correction of a sales and use tax assessment to your client ******** (the Taxpayer) for the period February 1992 through June 1994.
FACTS
The Taxpayer entered into a cost-plus-fixed-fee contract with an agency of the federal government. Pursuant to the multi-site contract, the Taxpayer is required to provide: (i) materials and labor required under the terms of the contract; (ii) engineering and technical services; and (iii) management support and system engineering which includes design, training, enhancements, and maintenance for the various multi-site systems programs.
The Taxpayer contests the tax assessed on tangible personal property purchased in connection with the government contract and contends that the contract provides for both the provision of services and for the sale of goods to the government. You contend that the performance of services and the purchase of tangible personal property in connection with the contract are separate and distinct transactions and should be viewed separately. Accordingly, you claim that property purchased in connection with the contract is not subject to the tax since it was resold to the government. The auditor deemed the contract a services contract and held the Taxpayer as the user and consumer of all tangible personal property used in connection with the contract.
DETERMINATION
The department has previously ruled that in considering the application of the tax to government contracts, it must be determined whether the contract is for the sale of tangible personal or whether the contract is for the provision of services to the government. See P.D. 88-159 (6/23/88) and P.D. 89-206 (7/28/89), copies enclosed. As explained in P.D. 88-159, if the contract is for the sale of tangible personal property, the contractor may purchase items under resale certificates of exemption and then resell such items to the government exempt of the tax under Code of Virginia § 58.1--609.1(4), copy enclosed. 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. 89-154 (4/28/89), copy enclosed. 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.
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 881 (4th Cir.1978), copy enclosed. In that case, the court held that items used in the performance of a contract were taxable. 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.
In numerous public documents, the department has considered an entire contract, including task directives or work/delivery orders issues with or separate from the original contract, as one contract, which is either taxable or exempt. See P.D.'s 95--16 (1/27/95), 92-229 (11/9/92), copies enclosed. In this case, a review of the Statement of Work indicates the Taxpayer is required to perform a number of services, i.e., engineering services, presentation, training, etc. needed for the implementation of an ongoing multi-site systems program. It is clear that the Taxpayer was contracted to provide professional engineering and technical services to the government. While the Taxpayer may be required to furnish tangible personal property in connection with the contract, the overall purpose of the contract is the provision of services. Tangible personal property which the Taxpayer purchases to satisfy its contractual requirements is taxable.
There is no evidence in this case that the Taxpayer was designated the purchasing agent of the government nor is there evidence that the government's credit was bound when such purchases were made. See the enclosed P.D. 93-203 (9/27/93), a case that is instructive with respect to the instant case as the contractor was required to perform certain services and to purchase various items in connection with the contract. In that case, the taxpayer maintained that the purchases of the materials were separate and distinct components of each contract and should be deemed exempt sales to the federal government. The department ruled that the overall purpose of the contract was for the provision of services, and the taxpayer was required to pay the tax to its suppliers at the time of purchase or remit use tax directly to the department. Furthermore, while the taxpayer in that case was making purchases in connection with the requirements of the contract and reimbursed by the government for such purchases, the government's credit was not bound directly to the vendors for the payment on purchases by the taxpayer under the contract.
Based on the above, the assessment is correct. Accordingly, as the assessment has been paid in full, I find no basis for a refund.
If you have any further questions regarding this determination, please contact***** at the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9801T
Rulings of the Tax Commissioner