Tax Type
Retail Sales and Use Tax
Description
Government Transactions; Service contracts
Topic
Taxability of Persons and Transactions
Date Issued
04-04-1997
April 4, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in response to your letter of December 6, 1996, in which you seek correction of a sales and use tax assessment issued to *********** (the "Taxpayer") for the period January 1991 through July 1995. I note that payment has been made on the uncontested portion of the assessment.
FACTS
The Taxpayer is a government contractor providing property and services relating to information technology and automated data systems. At issue in this case are purchases of tangible personal property which were assessed by the department pursuant to a service contract between the Taxpayer and an agency of the federal government. The Taxpayer protests that portion of the assessment which is associated with three groups of purchases. These transactions will be addressed separately below.
DETERMINATION
Before addressing the specific transactions in this case, I will set out the department's policy as it relates to government contractors in general.
Government Contract Purchases
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 23 VAC 10-210-4040 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 contractual 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, the contractor may purchase such property exempt from the tax for resale. The subsequent sale of the property to the government is exempt under Code of Virginia § 58.1-609.1(4).
Further, the department has consistently considered an entire contract, including any purchase orders, delivery orders or task directives issued with or separate from the original contract, as one transaction which is either taxable (for the provision of services) or exempt (for the procurement and sale of property). For example, a task order might be issued which calls for the delivery of computer hardware. If the true object of the underlying contract is for the provision of services, the contractor's purchase of the computer hardware is taxable. This is because the task order is not itself a separate contract. See the enclosed Public Documents 89-154 (4/28/89), 93-196 (9/23/93), and 95-16 (1/27/95).
Delivery of Property to Government Facilities
Code of Virginia § 58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." (Emphasis added)
This issue was addressed in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977). aff'd, 569 F.2d 881 (4th Cir. 1978). The court held that items used in the performance of a contract were taxable. Furthermore, the court held that the resale exemption was inapplicable to a government contractor. Even though the contractor never had legal title to the property and was reimbursed by the United States for the cost thereof, the property was not resold to the United States.
Based on the above, a government service contractor makes a taxable use of tangible personal property which is delivered to Virginia regardless that the property is delivered directly to the government and regardless that the property may ultimately be deployed at a federal facility outside of Virginia. The assessment of the use tax on such property is therefore applicable.
Contested Issues
In the instant case, the Taxpayer's liability stems predominantly from untaxed purchases made pursuant to a service contract with the Department of Defense. While the Taxpayer does not dispute the application of the tax to many of the assessed purchases, the following transactions are contested:
(1) DECStation and Thesaurus Software: The Taxpayer has shown that these items were delivered by the vendor to a location outside Virginia. As such, the Virginia tax does not apply, and this transaction will be removed from the assessment.
(2) Document Conversion System: Pursuant to its service contract with the Department of Defense, the Taxpayer subcontracted the development of a document conversion system to a Maryland subcontractor. The Taxpayer provided the technical design for this conversion system, and the subcontractor provided the technical labor, computer hardware, and computer software associated with development of the system. The initial development of the system was conducted by the subcontractor at its Virginia facility, but was completed at its Maryland location. Training was provided to government personnel at the Maryland location, and the government accepted the conversion system in Maryland. The system was subsequently shipped to a government facility in Pennsylvania.
I have reviewed the documents provided with your correspondence and agree that the Taxpayer's purchase of the document conversion system is not a taxable transaction in Virginia. Rather, this item was accepted by the government outside of Virginia and subsequently delivered to a government facility outside of Virginia. Accordingly, this item will be removed from the assessment.
(3) Purchases for the Government's Warrenton Facility: As noted above, the service contract at issue in this case is under the authority of the Department of Defense. The Statement of Work calls for planning, designing, installing, and maintaining automated data systems in connection with a specific government activity. Most of the property provided under this contract is for eventual delivery to government locations primarily in Alabama, Louisiana, Mississippi, and Pennsylvania.
The Taxpayer indicates that it was contacted by the Department of Defense a few months after the contract was executed and asked to procure computer hardware and software for delivery to a government facility in Warrenton, Virginia. According to the Taxpayer, this facility was having problems with its suppliers of computer equipment and asked the Taxpayer to quickly order the equipment. Purchase orders were issued, and the equipment was ordered by the Taxpayer from vendors for direct delivery to the Warrenton facility. As such, the Taxpayer maintains that these purchases were separate from its obligations under the service contract and were not for the facilities covered by the service contract.
Public Document 94-159 (5/20/94) addresses a situation in which tangible personal
property is purchased by a contractor under a modification to a government service contract. The property was not purchased to perform services required by the contract. Nevertheless, the department determined that the contractor's purchases were not exempt for resale because the property was purchased under authority of a service contract. Furthermore, and as noted above, the department looks to the true object of the underlying contract, including any contract modifications, in determining the application of the tax.
Conversely, Public Documents 93-203 (9/27/93) and 94-226 (7/20/94) address tangible personal property which is purchased by government contractors independent of contracts issued to provide services. Those determinations indicate that such purchases may be exempt for resale provided that the property is furnished totally independent of the provision of services.
Before issuing a determination on this issue, the Taxpayer will need to provide documentation which clearly shows that the contested purchases were made outside of the authority of its service contract. Verification that the funds for the Warrenton purchases were independent from the funding authorized by the contract will be accepted as such documentation. It may also be possible for the Taxpayer to provide documents from the Department of Defense showing that the original contractors for the Warrenton property were operating under a procurement contract that was separate and distinct from the Taxpayer's service contract.
Summary: Based on this determination, the assessment will be revised to remove the contested transactions addressed in sections (1 ) and (2) above. I will continue to suspend collection activity on the remaining balance for the next 90 days in anticipation of receiving the documents relating to the Warrenton purchases. Please remit this additional information to **** in my Office of Tax Policy at Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may call***************at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11959I
Rulings of the Tax Commissioner