Tax Type
Retail Sales and Use Tax
Description
Government transactions; Contractor's purchases on behalf of government
Topic
Taxability of Persons and Transactions
Date Issued
10-10-1996
October 10, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment on behalf of ******** (the "Taxpayer") for the period January 1992 through October 1994.
FACTS
The taxpayer entered into contracts with the U.S. Government to develop and execute various modernization and alteration programs. An audit produced an assessment for various untaxed purchases made pursuant to the contract. The Taxpayer maintains that these items were purchased for resale to the federal government and, therefore, not subject to the tax.
DETERMINATION
The department has previously ruled that in considering the tax treatment of 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 or task orders, as one transaction which is either taxable or exempt. The "true object" of the transactions as 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.
As explained in Public Documents (P.D.) 88-159 (6/23/88) and 95-155 (5/23/94), 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. Conversely, if a contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent res ale of that property to the government is exempt from the tax under Code of Virginia § 58.1-609.1 (4).
Based on the information provided, I find that the true object of the contract at issue is for the sale of tangible personal property. While the Taxpayer is contractually required to perform various services, the overall purpose of the contract is for the design, fabrication and installation of prototype modernizations, including sound silencing systems, elevator safety upgrades, boiler upgrades, turbine upgrades, and computer systems. Accordingly, tangible personal property purchased by the Taxpayer, title to which passed to the federal government is exempt from the tax and will be removed from the assessment.
As noted in P.D. 88-159, the Taxpayer is the taxable user and consumer of all supplies and equipment used in connection with the contract for which title does not pass to the federal government (e.g., supplies used in the design or installation of the various modernization systems). Thus, those items will remain in the assessment. It is my understanding that the auditor previously identified those items which qualified for the research and development exemption and did not include them in the assessment.
Accordingly, the assessment will be revised as provided herein and a revised Notice of Assessment will be mailed to the Taxpayer. If you have any questions regarding this matter, you may contact *************of the Office of Tax Policy at**********.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10222F
Rulings of the Tax Commissioner