Tax Type
Retail Sales and Use Tax
Description
Government transactions; Task integration
Topic
Taxability of Persons and Transactions
Date Issued
04-30-1997
April 30, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letter in which your seek reconsideration of the department's October 4, 1996, determination for the audit appeal of your client, ***********(the Taxpayer) for the period January 1988 through May 1991, and November 1991 through July 1994.
FACTS
The Taxpayer is a government contractor providing technical support and operating communication centers for governmental agencies. The contested purchases were made in connection with three contracts issued by the federal government. The department reviewed the three contracts covering three years, of which the last two years basically restated the initial contract. In a previous appeal, the department determined that the overall purpose of the contracts was for the provision of services and the Taxpayer was appropriately held taxable on its purchases in connection with such contracts.
The Taxpayer continues to protest the assessments and maintains that the department's methodology of applying the "true object" test to the government contracts at issue is overly broad and arbitrarily taxes transactions intended for resale to the government. The Taxpayer asserts that separate work statements issued in connection with the contracts should be viewed separately. Accordingly, the Taxpayer maintains that the contracts provide for both the provision of services and for the sale of tangible personal property to the government.
DETERMINATION
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 Title 23 of the Virginia Administrative Code (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 the contract is for the provision of services, the contract 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 is exempt from the tax 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).
The department's position on this issue has been consistent and made publicly available to all taxpayers as evidenced by the enclosed public documents. The department's policy has also been upheld in the federal courts in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd. 569 F2d 811 (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.
As a provider of a service, the Taxpayer is the user or consumer of all tangible personal property purchased in connection with these contracts. As each contract is for the provision of services, l can find no basis for adjusting the assessment.
The Taxpayer will receive revised assessments, with interest accrued to date. The assessments should be paid within 30 days to avoid the accrual of additional interest. If you have any questions regarding this letter, please contact*********** at********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11987T
Rulings of the Tax Commissioner