Tax Type
Retail Sales and Use Tax
Description
Government transactions; Purchases used to provide services to local governments.
Topic
Taxability of Persons and Transactions
Date Issued
10-14-1997
October 14, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This is in response to your letter of March 31, 1997, in which you provided comments and additional information relative to my March 20, 1997 response to an application for correction of sales and use tax assessed to********(the "Taxpayer"), as the result of an audit. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer has contracted to administer employee flexible benefit plans (the plans) established by public school and city 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.
The Taxpayer provides claims processing, check mailing and other administrative services to the Employers. Although the Taxpayer is not a fiduciary with respect to the bank accounts maintained by the various benefit plans it administers, it is designated as an agent with authorization to draw checks on the accounts. Because it is authorized to draw checks on the accounts, the Taxpayer is added to each benefit plan's criminal loss insurance policy via an endorsement which provides coverage for loss to the same degree that coverage would be afforded if the Taxpayer and its employees were employees of the plan. 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. The source of the cash used to purchase the printed media was forfeited funds and accrued interest in the plan accounts. The funds maintained in the plan accounts are contributed by the employers and are not considered funds of the employees under federal rules.
DETERMINATION
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. Regulations have been issued to clarify that purchases via an authorized purchasing agent on behalf of an exempt governmental entity are also exempt. Title 23 of the Virginia Administrative Code (VAC) 10-210-690 provides that "sales ... are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds."
The regulation cited above follows the ruling in United States v. Forst 442 F. Supp. 920 (W.D. Va.1977), aff'd., 569 F.2d 811 (4th Cir.1978). In reaching its decision, the Supreme Court first found that the legal incidence of the sales and use tax falls upon the purchaser. The Forst court went on to find that the "purchaser" in a sales transaction was the individual or entity that orders and pays for the goods if the sale is for cash or the individual or entity that is legally obligated to pay for the goods if the sale is on credit. Thus, the Court concluded that the contractor in Forst, that was buying goods on credit, was exempt only to the extent that it had been conferred with the authority to bind the credit of the federal government. The contractor was expressly not authorized, per its contract with the government, to act as a purchasing agent and thus was unable to shift the role of purchaser from itself to the federal government.
The regulations referenced above require a taxpayer to be accorded the authority of a government authorized purchasing agent tendering official purchase orders before it can be deemed exempt from the imposition of the sales tax. The Taxpayer's limited authorization to draw checks on one or more of the plan accounts in order to administer the funds for the benefit of the school employees does not equate to the general authority to act as purchasing agent for the employers that own the accounts and to bind the credit of these employers. My review of the materials submitted to date does not reveal any evidence that any such general purchasing authority has been conferred on the Taxpayer. The insurance policy endorsement which nominally refers to the Taxpayer as an "agent" was not issued by the employer and cannot be relied upon to create the purchasing authority which is necessary to shift the role of purchaser in the disputed transactions to the public schools who owned the benefit plans.
While there is no substantive evidence that the Taxpayer was an authorized purchasing agent of the public schools there is strong evidence that the Taxpayer was the "purchaser" upon which the incidence of tax falls. All of the disputed printing invoices reference only the Taxpayer as the party placing the order and the purchaser. There is no indication on these invoices that the public school is purchaser or that the school bears any responsibility at all for the cost of the printing. The purchase transaction and the accompanying documentation clearly establish that it was a sale to one party, the Taxpayer. An authorized agent purchase, wherein the credit of the public schools could be bound and thus made legally liable for the purchase cannot be implied from the facts surrounding the transaction. Thus, the printed media transactions must be considered taxable purchases of the Taxpayer rather than agency purchases on behalf of a principal.
Based on the foregoing, the department finds no basis to reverse its prior ruling on this matter. If you have any questions regarding this letter, please contact ***** in my Office of Tax Policy at******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12397D
Rulings of the Tax Commissioner