Tax Type
Retail Sales and Use Tax
Description
Government transactions; Agency relationship not proven
Topic
Taxability of Persons and Transactions
Date Issued
06-27-1996
June 27, 1996
Re: § 58.1-1821 Application: Sales and Use Tax
Dear*****************
This will reply to your letter of January 23, 1996 in which you seek correction of a sales and use tax assessment to ****************** (the "Taxpayer"), for the period January 1992 through December 1994.
FACTS
The Taxpayer entered into a contract with a federal government agency (the "government agency") to provide facilities management and operation of a computer center. The department's audit assessed tax on tangible personal property purchased for use in performing the services required under the federal contract.
The Taxpayer disputes the assessment maintaining that tangible personal property was purchased for resale to the government agency under a supplies contract. The Taxpayer also relies on a November 22, 1995 letter from the contracting officer of the government agency, which states that the Taxpayer was required " to provide procurement services to establish the...facility and to provide additive or replacement procurement support...." The letter goes on to provide that the Taxpayer " was authorized to act as a purchasing agent on behalf of [government agency]...." The Taxpayer requests a correction of the assessment.
DETERMINATION
True Object of Contract
The department has traditionally held 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. The "true object" test described in Virginia Regulation (VR) 630-10-97.1 is used to determine the course of the department's action. [See P.D.'s 94-197 (6/24/94), and 92-229 (11/9/92), copies enclosed]
As explained in P.D.88-159 (6/22/88), copy enclosed, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to some or all of the property may pass to the government. If a contract is for the sale of tangible personal property to the government, the contractor may purchase such tangible personal property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the federal government is exempt from the tax under Code of Virginia § 58.1--609.1(4).
A review of the contract at issue reveals that the true object is the provision of services by the Taxpayer to the government agency. The objective of the contract, as stated in the Statement of Work on page C-1, is "for technical and administrative support required to manage and operate automation facilities as defined in Appendix A. During the term of this contract, however, the contractor may be required to acquire additional or replacement equipment, software, and facilities to augment or replace existing automation facilities."
The Statement of Work further defines the contractor's facilities management activities as including computer equipment operations, several operations involving the processing of information, general day-to-day operational support functions, the conversion of such data, and the procurement of goods and services necessary for facility support. The authority to procure goods to support facility management does not transform a service contract into a contract for the sale of tangible personal property. Accordingly, I find that the contract is for the provision of services, and the Taxpayer is liable for tax on all purchases related to the contract.
Purchasing Agent for Government Agency
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." VR 630-10-27(J) provides 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 agency.
There is no evidence within the contract that the Taxpayer was officially designated as the purchasing agent for the governmental agency. The contract provided to the auditor made no reference to such a relationship. Also, I am not persuaded that the letter from the government agency contracting officer, to the Taxpayer, granting authority to "act as a purchasing agent on behalf of the [government agency]" made the Taxpayer an "agent" of the government. The official contract originally awarded to the contractor makes no reference or does not intimate that the contractor is to be considered an agent of the federal government. In fact, the contract specifically provides that the contractor is to provide procurement services, and is responsible for the acquisition of all property identified for purchase .
The obligation of the government funds to a specific account at a mutually agreeable Virginia banking facility was for the purpose of reimbursement of costs expended by the Taxpayer in its purchase of the equipment. Such an obligation of funds does not imply that such funds bind the government's credit, nor infer agency relationship. [See P.D.'s 94-155 (05/23/94), and 91-247 (10/08/91), copies enclosed]
The application of 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 the purchase of 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 purchase agreements with its 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.
Accordingly, the assessment is correct as issued and remains due. You will shortly receive and updated assessment inclusive of interest accrued to date. Payment should be made within 30 days to avoid the accrual of additional interest. If you have any questions regarding this matter, you may contact**** of the department's Office of Tax Policy at******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10840Q
Rulings of the Tax Commissioner