Tax Type
Retail Sales and Use Tax
Description
Computer maintenance contract; Sales vs. service
Topic
Taxability of Persons and Transactions
Date Issued
04-05-1996
April 5, 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 sales and use tax assessed to ***** (the "Taxpayer") for the period September 1992 through June 1994.
FACTS
The Taxpayer entered into a contract with the federal government to provide hardware maintenance services for personal computers and associated local area computer network (LAN) equipment. The contract requires that the Taxpayer provide on--site preventive and general maintenance, on-call and per-call troubleshooting, and problem solving services to sixteen federal offices.
The contract also requires that the Taxpayer maintain and manage an inventory of major system component replacement equipment and spare parts to be installed or furnished in connection with the performance of the contract. Under the terms of the contract, the Taxpayer is responsible for storage of the inventory.
The auditor assessed tax on purchases provided by the Taxpayer in the performance of its contract with a federal agency. The Taxpayer protests and asserts that the tax is attributable to exempt sales 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 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. However, if the contract is for the provision of services and in connection with such 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 its purchases. 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" 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.
Based on a review of the available information, the true object of the contract was to upgrade and maintain an existing system. While the terms of the contract required the Taxpayer to provide certain hardware equipment and spare components, such items were provided in addition to the primary objective of the contract - the maintenance services.
VR 630-10-45 § 4.1, copy enclosed, provides that a contractor engaged in the provision of services is deemed to be the consumer of all tangible personal property used in performing such services, even though title to the property provided may pass to the government. Therefore, the Taxpayer, in this case, is the user and consumer of all items purchased in providing the contracted services and must either pay the tax to its suppliers at the time of purchase or remit the use tax directly to the department based on the cost of such items.
This position is consistent with the ruling in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd 569 F.2nd 881 (4th Cir.1978), in which the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer 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.
Further, the exemption under Code of Virginia § 58.1-609.1(4) for sales of tangible personal property for the use or consumption by governmental entities does not apply to the Taxpayer. VR 630-10-27(J), copy enclosed, makes clear 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 entity." The contract at issue does not appear to contain any such provision; therefore, the federal agency's credit is not bound directly to vendors for the payment of purchases made by the Taxpayer under the terms of the contract. I have enclosed additional copies of departmental rulings which further illustrate the application of sales tax to federal contractors.
Accordingly, the assessment is upheld and the Taxpayer will receive an updated bill including interest accrued through the date of the letter of protest. If you have additional questions, please contact ***** in the Office of Tax Policy at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8648J
Rulings of the Tax Commissioner