Tax Type
Retail Sales and Use Tax
Description
Exempt purchases made for resale to the federal government.
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
10-17-1996
October 17, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to***** (the "Taxpayer") for the period October 1992 through March 1995. I note that the entire assessment has been paid.
FACTS
The protested issues in this case are all related to the Taxpayer's activity as a contractor with agencies of the federal government. The Taxpayer was held liable for a number of untaxed purchases made in connection with specific contracts. In each instance, the Taxpayer maintains that the protested transactions are exempt purchases made for resale to the federal government.
DETERMINATION
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 or task orders, as one transaction which is either taxable or exempt. The amount of tangible personal property transferred relative to the overall value of the contract has no bearing on the tax status of the contract. Instead, the "true object" of the transaction as described in Virginia Regulation 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 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 resale of that property to the government is exempt from the tax under Code of Virginia § 58.1-609.1(4) which provides an exemption for sales of tangible personal property to the Commonwealth and the federal government.
Contract 4790: The Work Statement for this contract indicates that the Taxpayer is required to develop and maintain an integrated system of technology--related information. This system is further defined in the contract to be all software, hardware, and data and information contained within the system. In connection with this requirement, the Taxpayer purchased a prewritten, commercially available database software program from an unrelated third-party. It appears that this software program was modified by the Taxpayer and licensed for use by the government agency.
A review of the Work Statement reveals that the true object of Contract 4790 is the provision of tangible personal property to be used by the government agency to support its management responsibilities. Because the true object of the contract is the sale of tangible personal property, such tangible personal property transferred to the government agency, including the disputed software, is not subject to the tax.
Contract 4730 and Other Copying Contracts: The remaining protested purchases are made in connection with a number of contracts which you refer to as "copying contracts." As I understand it, the Taxpayer is provided government documents which it organizes for efficient location and copying. The Taxpayer then contracts with third party vendors for multiple copies of those documents. The copies may be paper photocopies of the government documents or CD-ROM disks (in which the paper documents are converted to CD-ROM by third party vendors). The copies are subsequently delivered to the government. The Taxpayer maintains that its purchases of the multiple copies represent the purchase of tangible personal property for resale to the government. In addition to the CD-ROM disks and the paper photocopies, the Taxpayer also contests purchases of office supplies (e.g., paper and binders which are incorporated into the delivered photocopies.
The Work Statement for Contract 4730 calls for the Taxpayer to provide technical, engineering, legal and administrative support services in connection with the analysis of a claims review process. The Taxpayer is also required to develop a method for evaluating certain claims, including document search and collation, a review of those documents, and an analysis of the information obtained from these document reviews.
Based on this Work Statement, I must conclude that the true object of the contract is for the provision of services. As you indicate, the Taxpayer is required to provide copies of technical data to the government, but the copies appear to be in support of the overall services which the contract requires. Because this contract is for the provision of services, the Taxpayer is deemed to be the user and consumer of CD-ROM disks, photocopies, and all other tangible personal property used to satisfy its contractual obligations.
Further, I do not feel that the contested purchases in this case are analogous to those discussed in Public Documents 88-173 and 90-96 to which you refer. Those cases deal with taxpayers that provide both nontaxable services (word processing) and taxable sales of tangible personal property (multiple copies of created documents). The department determined that these service providers could purchase under resale exemption (1) the printing of multiple copies, and (2) component parts of those multiple copies (e.g., paper, ink, etc.). In the instant case, however, the Taxpayer is not purchasing CD-ROM disks, photocopies, and supplies for resale. As discussed above, the Taxpayer is purchasing those items for its own use or consumption in providing services.
Accordingly, it appears that the contested purchases made in relation to Contract 4730 and the other "copying contracts" were properly assessed. Nevertheless, I will certainly review any additional documents and information you may wish to submit regarding this issue.
Penalty: The Taxpayer maintains that two categories of taxable purchases should be excluded from the compliance ratio calculations: (1) items similar to previous contract purchases which were held as nontaxable in prior audits, and (2) the "copying contract" purchases which you indicate were not present in previous audits. You further indicate that by removing these categories, the Taxpayer's compliance would exceed the 85 percent necessary for avoiding penalty charges on a third generation audit.
I find grounds in this case to remove the penalty associated with the "copying contracts" purchases. These items appear to be significantly different from items identified in prior audits and thus represent a new audit issue. I also agree to remove the other category of purchases from the compliance ratio calculation.
Accordingly, I have asked the audit staff to recalculate the Taxpayer's compliance ratio incorporating these revisions. Of course, the exempt purchase associated with Contract 4790 will also be excluded from the calculation. If the revised compliance ratio meets or exceeds 85 percent, the entire penalty charge will be removed from the assessment. Even if the compliance ratio does not meet the required 85 percent, penalty charges on the contested items will be waived.
Summary: The audit will immediately be returned to the auditors to be revised according to this determination. Because the assessment has been fully paid, these revisions will result in a refund which will be issued to the Taxpayer as soon as possible.
Please contact******in my Office of Tax Policy at*************** if you have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10976I
Rulings of the Tax Commissioner