Tax Type
Retail Sales and Use Tax
Description
Government transactions; Agency status in use of public or private funds
Topic
Taxability of Persons and Transactions
Date Issued
03-20-1997
March 20, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************************
This is in response to your letter seeking correction of the use tax assessment issued to ***********(the Taxpayer).
FACTS
The Taxpayer has contracted to administer employee flexible benefit plans (the plans) established by public school and city employers (the Employers). An audit for the period September 1990 through May 1996 resulted in an assessment of use tax on untaxed purchases of office supplies, computer software, and other tangible personal property used or consumed in the operation of the Taxpayer's business.
In addition to the claims processing, check mailing and other administrative services which it provides to the Employers, the Taxpayer is required to maintain fiduciary checking accounts with signature authority to draw checks against the accounts when it receives and approves reimbursement requests from the employee participants of the plans. The Taxpayer is authorized by the Employers to make purchases of forms, pamphlets, and other printed materials directly related to the plans. In such instances, the Employers request the Taxpayer use funds from the fiduciary checking accounts.
The Taxpayer takes exception to the tax assessed on purchases of printed materials (claim forms, pamphlets, affidavits, text pages, covers, etc.) paid for with funds drawn from fiduciary checking accounts. The Taxpayer maintains that the funds belong to the government Employers, and the purchases should therefore be tax- exempt.
DETERMINATION
With regard to the proper tax treatment of purchases by the Taxpayer, you should note that Code of Virginia § 58.1-609.1 (4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by the Commonwealth and any subdivision of the Commonwealth, such as public school systems and cities of the Commonwealth.
For purchases by state government and political subdivisions of Virginia, 23 VAC 10-210-690(A), copy enclosed, clarifies that the exemption is applicable only if the "purchases are pursuant to required official purchase orders to be paid for out of public funds." (Emphasis added.) Furthermore, 23 VAC 10-210-4020(A)(3), copy enclosed, addresses purchases by public school systems and clarifies that the exemption applies only if "purchases are made pursuant to official purchase orders to be paid for out of public funds." Both of these regulations set out that the tax applies to purchases not paid for out of public funds.
Thus, only purchases of tangible personal property by the city government or public school agency itself using public funds and pursuant to official government purchase orders are exempt of the tax. Purchases made on behalf of a government agency are exempt from the tax only if the purchaser is actually the agent for the governmental agency and the purchase is made with public funds.
In order for the agent to be entitled to claim the benefit of the governmental exemption, an agency agreement must exist between the Taxpayer and government agency, and purchase agreements between the Taxpayer and sellers must bind the credit of the government only. In United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978), the court ruled that the key factor in determining whether an agency relationship exists in order to determine who is actually making the purchase, is whose credit is bound by the transaction.
For the purchases at issue, the government agencies presented letters to the Taxpayer requesting the Taxpayer to secure printed materials for employees in the plan using funds from the plans to pay for the cost of the printing. Although the Employers are local government agencies of Virginia and are custodians of the funds, l would note that public funds are not contributed to the plans. Rather, government employees have contributed their own funds to the plans. Accordingly, the funds in the fiduciary checking accounts do not consist of public funds and are actually used for personal, not public, purposes.
Furthermore, although the Taxpayer was authorized by the Employers to make the purchases at issue, no evidence has been presented that the Taxpayer was designated as an agent of any of the government agencies which the Taxpayer contracted with. Rather, in each instance, only the credit of the fiduciary checking account was pledged in the purchase transactions. As such, each purchase at issue was paid for with a check in the name of the Taxpayer and the employee fund. As the checking accounts do not consist of public funds and are not in a government agency's name, the credit of a government agency was not bound to the purchases at issue.
Although the funds used to pay printing costs may be earmarked as forfeited funds, such funds were not transferred from the employee fund to the government entity prior to being dispersed for payment of such costs. Accordingly, ownership of the funds dispersed by the Taxpayer to pay for the contested purchases was with the employee fund, not the government entities.
Based on all of the foregoing and the fact that the Taxpayer is ultimately liable for the tax on all tangible personal property purchased pursuant to the provision of its contracted services, the assessment of tax on the printed materials at issue is proper. I find basis, however, to revise the assessment to remove a duplicate entry (invoice number*********in the amount of ********. Upon completion of this adjustment, the Taxpayer will be sent an updated bill for the outstanding liabilities.
If you have any questions about this determination, please contact *************of the department's Office of Tax Policy at**********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11888R
Rulings of the Tax Commissioner