Tax Type
Retail Sales and Use Tax
Description
Government transactions; Contractor's purchase on behalf of government.
Topic
Taxability of Persons and Transactions
Date Issued
10-02-1997
October 2, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear********
This is in response to your letter of June 4, 1997 seeking correction of a sales and use tax assessment issued to ****** ("the Taxpayer"), for the period August 1993 to July 1996.
FACTS
The Taxpayer is a federal government contractor providing litigation support services to a federal agency (the "agency"). The Taxpayer purchases tangible personal property in the process of providing these services. Some of the tangible personal property is utilized by the Taxpayer, other items are purchased solely for the agency and drop shipped directly to the agency location. In addition to purchasing equipment, the Taxpayer has also purchased maintenance contracts on the equipment purchased. These contracts provide for parts and labor.
The Taxpayer disputes the portions of the audit assessing tax, interest and penalty on the maintenance contract purchases. According to the Taxpayer, the maintenance contract purchases included in the audit were for items of equipment directly shipped to the agency locations. The Taxpayer asserts that it should not be taxed on the purchase of a maintenance agreement that pertains to equipment that it did not use in the performance of its contract with the agency.
DETERMINATION
Maintenance Agreement Purchases
The department has previously ruled that in considering the application of the tax to government contracts, it must be first 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). If the contract is for the provision of services and in connection with those 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 the purchases, notwithstanding the fact that title to some or all of the property may pass to the government. See P.D. 89-154 (4/28/89), copy enclosed.
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 a service. It is clear that the Taxpayer was contracted to provide litigation support services to the agency. While it may have been required to furnish tangible personal property in connection with the contract, the overall purpose of the contract was the provision of services.
The issue which remains is whether the purchase of the maintenance agreements was in connection with the services contract. As stated above, a government contractor is deemed the taxable consumer of products purchased in connection with a service contract. In numerous public documents, the department has considered an entire contract, including task directives or work/delivery orders issued with or separate from the original contract, as one contract, which is either taxable or exempt with regard to purchases made in connection with it. See P.D.'s 95-16 (1/27/95), 92-229 (11/9/92), copies enclosed. Although some the equipment purchased and drop shipped directly to the agency sites was not used by the taxpayer, the order for the equipment and the accompanying maintenance agreements nonetheless arose out of and are considered a part of the service contract.
The maintenance contracts obtained by the Taxpayer state that the vendor is to provide parts and labor. The department's longstanding policy with respect to maintenance agreements is reflected in 23 VAC 10-210-910. Paragraph D of the states that "[m]aintenance contracts, the terms of which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property. The total charge for such contracts is subject to the tax ..." As discussed above, a government contractor is deemed the taxable user or consumer of tangible personal property when such property is purchased in connection with the performance of a services contract. The auditor properly applied longstanding department policy to determine that the Taxpayer's purchases of the maintenance agreements was a purchase of tangible personal property in which it is deemed the taxable user or consumer. Therefore, there is no basis to revise the tax and interest portion of the assessment.
Penalties
The audit records on this matter indicate that the Taxpayer has been previously audited four times. Your letter indicates that during the course of these previous audits the maintenance agreement purchases were not taxed. Based on this history, it is appropriate to treat the inclusion of the maintenance agreement purchases as a new issue insofar as the taxpayer is concerned. The penalty portion of the assessment will, therefore, be waived.
With the exception of the maintenance contract assessments, I note that the remaining assessments arising out of the audit of the Taxpayer and its related companies have been paid. A bill for the tax and interest portions of the maintenance contract assessments will be issued to you immediately. No additional interest will accrue provided the assessment is paid within 30 days.
If you have any questions regarding this letter, please contact*****, in my Office of Tax Policy at********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12619D
Rulings of the Tax Commissioner