Tax Type
Retail Sales and Use Tax
Description
Government transactions; Procurement of uninterruptible power systems
Topic
Taxability of Persons and Transactions
Date Issued
06-21-1996
June 21, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear*****************
This is in reply to your letter of June 3, 1996, in which you request a ruling on the application of the retail sales and use tax to a contractual arrangement between your client (the "Taxpayer") and the United States Government.
FACTS
The Taxpayer, a registered Virginia retailer, is a manufacturer of uninterruptible power systems (UPS). In the event of a loss or reduction in power, the UPS provide continuous electrical power to critical equipment or machinery. UPS consist of tangible personal property manufactured by the Taxpayer as well as property purchased from various suppliers.
Recently, the Taxpayer entered into a contract with the federal government to design, manufacture and install the systems at existing facilities under lease by the government. The systems are capable of being moved to different locations. The government will remit payment for the systems directly to the Taxpayer.
You believe the contract is for the sale of tangible personal property to the government, which should be exempt under Code of Virginia § 58.1-609.1(4). Furthermore, tangible personal property and services purchased by the Taxpayer for resale to the government should not be subject to the tax, provided certificates of resale are presented to suppliers. You request that the department confirm your position.
RULING
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.
Based on a review of the Statement of Work, it appears that the true object of the Taxpayer's contract with the federal government is the provision of tangible personal property. While the Taxpayer is contractually obligated to perform various services, it is evident the purpose of the contract is the procurement of uninterruptible power systems. Accordingly, tangible personal property, the title to which passes to the federal government, may be purchased exempt of the tax by the Taxpayer.
It should be noted that the Taxpayer is the taxable user and consumer of all supplies and equipment used in connection with the contract for which the title does not pass to the federal government, unless another exemption is available (e.g., items used directly in industrial manufacturing, Code of Virginia § 58.1-609.3(2)). Furthermore, the Taxpayer must pay the tax on taxable services it uses and consumes in connection with its performance under the contract.
Tangible vs. real property
While it appears from the information provided that the contract at issue is for the provision of tangible personal property to the government, it is not clear how the systems will be installed, i.e., if they are incorporated into real property. If the systems are incorporated into real property, the contract would be for real property construction and the tax would apply to purchases of tangible personal property based on VR 630-1 0-27(J).
VR 630-1 0-27(J) provides that purchases of tangible personal property by contractors in connection with real property construction contracts with the government are sales to such contractors for their own use or consumption. Contractors are subject to tax on such transactions. The tax applies regardless of whether title to the property passes directly to the government upon purchase by the contractor or if the contractor is reimbursed directly by the government for the cost of the property. Only in instances where the credit of the governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for the governmental entity will the purchases be deemed exempt from the tax.
While you state the systems are capable of being moved to different locations, the determination of whether an article used in connection with realty is to be considered real or personal property is based on three tests: (1) annexation of the property to realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected in appropriated, and (3) the intention of the parties. See Transcontinental Gas Pipe Line Corporation v. Prince William County. 210 Va. 550 (1970). The intention of the party making the annexation is the paramount and controlling consideration. Danville Holding Corp. v. Clement, 178 Va. 223 (1941).
If you have questions regarding this ruling, you may contact*********at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11295F
Rulings of the Tax Commissioner