Tax Type
Retail Sales and Use Tax
Description
True object of government contract; Sale vs. service.
Topic
Exemptions
Property Subject to Tax
Date Issued
12-16-1997
December 16, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in reply to your letters in which you seek correction of a retail sales and use tax assessment on behalf of ******** (the "Taxpayer"). I apologize for the delay in responding to your letters.
FACTS
The Taxpayer entered into a contract to perform engineering and technical services for the federal government. A sales and use tax audit for the period October 1990 through October 1994 resulted in an assessment for various untaxed purchases.
The Taxpayer disputes the assessment maintaining the equipment at issue was purchased solely in the performance of the contract and for no other reason. The equipment belongs to the federal government and is provided to the Taxpayer for use in performance of its contracts. The Taxpayer requests abatement of the entire assessment, maintaining that the assessment is an unconstitutional discriminatory tax.
DETERMINATION
The department has previously ruled that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the provision of services to the government or for the sale of tangible personal property. If a contract is for the sale of tangible personal property, the contractor may purchase items under resale certificates of exemption and then resell those items to the government exclusive of the tax. However 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 property and must pay the tax on the purchases.
Based on a review of the Statements of Work of the contracts included in the audit, it appears that the true object of the Taxpayer's contracts with the federal government is the provision of services. The Statements of Work provided require the contractor to: (1) conduct technical investigations and provide engineering and technical support "in order to investigate, evaluate, and recommend solutions" relating to particular tasks; and (2) perform engineering investigations and technical studies. In fact, in your letter to the auditor following the conclusion of the audit, you concede the contracts are service contracts.
Title 23 of the Virginia Administrative Code (VAC) 10-210-693 provides that a contractor engaged in the provision of services is deemed to be the final consumer of all tangible personal property used in performing such services, even through title to the property provided may pass to the government. Therefore, the Taxpayer in this case is the user and consumer of all items purchased in providing the contracted services and must either pay the tax to its suppliers at the time of purchase or remit use tax directly to the department based on the cost price of such items. In this case, the Taxpayer paid no tax on its purchases made pursuant to the contracts at issue. Accordingly, the assessment is correct.
The Taxpayer also asserts the assessment is an unconstitutional discriminatory tax and is identical to the situation addressed in United States v. City of Manassas, 830 F.2d 530 (4th Cir. 1987), aff’d 485 U.S.1017 (1989). In that case, the court ruled that a state may not provide a tax benefit to contractors under contract to state government that is not available to federal contractors. In the Taxpayer's situation, a contractor providing the same services to a state agency would be subject to tax on its purchases, just as the Taxpayer is responsible for paying tax on its purchases under the services contract with the federal government. Therefore, l do not agree that the assessment constitutes discriminatory taxation against those who deal with the United States under the standards established in the City of Manassas case.
The Taxpayer's situation is similar to the one addressed in the ruling in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd 569 F.2d 881 (4th Cir. 1978), in which the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer of the items. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, they were not "resold" to the United States.
Further, the exemption under Code of Virginia § 58.1-609.1(4) for sales of tangible personal property for use or consumption by government entities does not apply to the Taxpayer. Under 23 VAC 10-210-410(J), the exemption is available only when "the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity." From the information provided, there is no indication that the contracts at issue contained such a provision; therefore, the federal government's credit is not bound directly to vendors for the payment of purchases made by the Taxpayer under the terms of the contract.
Based on the above, the assessment is correct as issued. The Taxpayer will receive an updated bill with interest accrued through the date of the letter of protest. If you have any questions regarding this matter, you may contact *****of the department's Office of Tax Policy at ****** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13159F
Rulings of the Tax Commissioner