Tax Type
Retail Sales and Use Tax
Description
Nonprofit organizations, private schools and churches; School bus service
Topic
Taxability of Persons and Transactions
Date Issued
04-29-1997
April 29, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in response to your firm's letter in which you seek correction of a sales and use tax assessment issued to ********(the "Taxpayer") for the period July 1993 through June 1996.
FACTS
The Taxpayer provides passenger transportation and related services to its customers. It appears that in some instances services are provided through wholly-owned subsidiaries that hold certificates of convenience and necessity issued by the State Corporation Commission.
At issue in this case is the assessment related to untaxed purchases primarily of motor vehicle repair and replacement parts and similar items. The Taxpayer contests the assessment associated with those purchases made for the following three activities: (1) a contract with the City of Portsmouth ("Locality A") to maintain and repair school buses and other property owned by the locality; (2) a contract with the City of Hopewell ("Locality B") to provide school bus transportation and related services; and (3) contracts to provide school bus transportation and related services for a number of nonprofit private schools.
Each of these activities will be addressed separately below.
DETERMINATION
Contract with Locality A
Pursuant to a contract with Locality A, a political subdivision of the Commonwealth, the Taxpayer provides management services, supervision, labor, tools, parts, materials, and supplies to "maintain and repair as needed all school buses, operations support vehicles, auxiliary and lawn care equipment." Under the terms of this contract, the Taxpayer must provide (1) a comprehensive preventive maintenance program; (2) repair services; (3) a safety inspection program for school buses in accordance with state and federal regulations; and (4) garage services at facilities owned by the locality.
The department has traditionally held 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. 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).
While the contract with Locality A calls for the provision of some services, l find that the true object of this contract is for parts and labor maintenance as envisioned in 23 VAC 10-210-910. Such contracts are deemed to be sales of tangible personal property. Accordingly, the contested contract with Locality A is for the sale of tangible personal property to the government. As noted above, such sales to the government are exempt. Further, the regulation indicates that persons providing maintenance pursuant to parts and labor maintenance contracts may purchase repair or replacement parts exempt of the tax for resale.
Accordingly, those items which are resold to Locality A will be removed from the assessment. The tax, however, will apply to those items such as tools, machinery or other equipment used by the Taxpayer to provide its repair and maintenance activities and title to which does not pass to the locality.
Contract With Locality B
The Taxpayer's contract with Locality B raises two issues: The first concerns a government contract issue as discussed above; the second concerns the sales and use tax exemptions available to common carriers as set out in Code of Virginia § 58.1-609.3(3).
Government contract issue: The Taxpayer contracted with Locality B, a political subdivision of the Commonwealth, to provide full-service bus service for the locality's public school system. The Taxpayer's primary responsibilities include the provision of: (1) round-trip bus transportation for approximately 2,500 public school students for the entire school year; (2) about 35 contractor-owned school buses; (3) qualified school bus drivers (who remain employees of the contractor); and (4) school bus maintenance, including maintenance of three buses owned by the locality.
In this instance, l find the true object of the contract between the Taxpayer and Locality B is for the provision of services. As a contractor providing services to the government, the Taxpayer is liable for the tax on its purchases of tangible personal property used to provide those services. As discussed above, the government exemption is not applicable in this case.
Furthermore, it does not appear that title to most of the contested items passes to the locality. This is because most of the buses used to provide the services are owned by the Taxpayer. Nevertheless, even if title to the property passed to the locality, the Taxpayer, acting as a service contractor, would still incur tax liability. 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 service 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 government for the cost thereof, the property was not resold to the government.
Common carrier issue: Code of Virginia § 58.1-609.3(3) provides an exemption from the tax for:
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- Tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railway, for use or consumption by such common carrier directly in the rendition of its public service. (Emphasis added)
Further, 23 VAC 10-210-370 indicates that the carrier "must be authorized to operate under a certificate of convenience and necessity issued by the State Corporation Commission or the Interstate Commerce Commission in order to qualify for this exemption." In this regard, l have enclosed Public Documents 86-201 (10/17/86) and 92-28 (4/20/92) issued by the Tax Commissioner which address the application of the tax to motor vehicle carriers. As noted therein, the department has historically distinguished between services provided by motor vehicle carriers under their common carrier authority and services provided outside that authority (e.g., contract carriage). Tangible personal property used in the former activity is exempt from the tax; property used in the latter activity is taxable.
Prior to January 1996, motor vehicle carriers were governed under Title 56, Chapter 12 of the Code of Virginia. Pursuant to § 56-278, no motor vehicle common carrier or restricted carrier may engage in intrastate operation without first obtaining a certificate of convenience and necessity. It appears, however, that an exclusion from this mandate is provided to school buses under § 56-274. That statute exempts from the provisions of Chapter 12 "vehicles employed solely in transporting school children and teachers." A similar exclusion is set out in § 56-338.51 which addresses special or charter party passenger transportation.
The statutes set out in Chapter 12 were repealed effective January 1, 1996. At that time, regulation of motor vehicle carriage was transferred from the State Corporation Commission to the Department of Motor Vehicles under Title 46.2, Subtitle V of the Code of Virginia. The same exclusions regarding school buses, however, have been incorporated into the new statutes. See Code of Virginia §§ 46.2-2000.1 and 46.2-2301.
Based on the exclusions applicable to school buses, it does not appear that the transportation services provided by the Taxpayer to Locality B are services which require a certificate of convenience and necessity. Accordingly, those services are not eligible for the sales and use tax exemption set out in Code of Virginia § 58.1-609.3(3). This is because the exemption is applicable only to certificated activities. The nontaxed purchases associated with this contract are therefore found to be correctly assessed.
Contracts with Nonprofit Private Schools
The Taxpayer has entered into contracts with several nonprofit private elementary and secondary schools to provide school bus transportation. It appears that these contracts are substantially similar to each other in terms of their statements of work.
Pursuant to these contracts, the Taxpayer is required to provide: (1) home-to-school route service and special trip services; (2) school buses which meet federal and state safety requirements; (3) trained and qualified school bus drivers; and (4) maintenance of the buses used to provide transportation services.
Code of Virginia § 58.1-609.4(2) provides an exemption from the tax for tangible personal property purchased for use or consumption by nonprofit schools. In the instant case, however, l find that the contested purchases are for the Taxpayer's own use or consumption in providing transportation services. In effect, l find that the true object of the contracts between the Taxpayer and the nonprofit private schools is for the provision of services.
Further, and for the same reasons discussed under the contract with Locality B, it does not appear that the transportation provided to the nonprofit private schools is provided under a certificate of convenience and necessity. Accordingly, the nontaxed purchases associated with these contracts are correctly assessed.
Summary
Based on this determination, the assessment will be revised to remove the tax, penalty, and interest assessed with the Locality A issue. The assessment associated with the Locality B issue and the nonprofit private school contracts is deemed to be correct.
A revised assessment will be issued with interest accrued to date. No additional interest will accrue provided the assessment is paid within 30 days. Finally, l agree to suspend collection activity on the revised assessment for a period of 60 days to allow the Taxpayer an opportunity to provide additional information surrounding the common carrier issues discussed above. Interest will continue to accrue during this period of suspended collection.
Please contact ***** in my Office of Tax Policy at **** if you have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/117971
Rulings of the Tax Commissioner