Tax Type
Retail Sales and Use Tax
Description
Government contract; "True object" of contract; Exemption certificates
Topic
Exemptions
Property Subject to Tax
Date Issued
10-30-1998
October 30, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in response to your letter requesting correction of the sales tax audit assessment issued to ***** (the "Taxpayer').
FACTS
The Taxpayer sells computer hardware. As a result of an audit for the period October 1995 through May 1997, the Taxpayer was assessed sales tax on an untaxed sale of computer hardware to a customer who performs work as a government contractor (the "Purchaser'). The Taxpayer has paid the assessment in full.
The Taxpayer takes exception to the assessment of sales tax and maintains that the Purchaser may purchase tangible personal property exempt of the tax for resale to the federal government. Although no exemption certificate was obtained at the time of sale, the Taxpayer submits a Purchaser-furnished Statement of Work and other documentation related to the Purchaser's contract with a federal agency.
DETERMINATION
Certificates of exemption
Title 23 of the Virginia Administrative Code 10-210-280 sets out the established policies relating to certificates of exemption. Subsection A of this regulation provides that:
The above cited regulation interprets Virginia law, specifically Code of Virginia Sec. 58.1-623 which mandates the use of exemption certificates to claim an exemption from the retail sales and use tax. When a dealer does not charge sales tax on a retail sale and fails to obtain a certificate of exemption from its customer as certification that an exemption applies, Code of Virginia Sec. 58.1-625 mandates that the dealer will be held directly liable for the payment of the sales tax.
In this case, the Purchaser claims that it was purchasing tangible personal property for resale to the federal government. However, the Taxpayer failed to obtain a resale certificate of exemption, Form ST-10, from the Purchaser and further failed to collect the sales tax when no exemption certificate was offered.
On audits, any exemption certificate or other documentation obtained from a customer in an attempt to establish an exemption on prior purchases by customers is subject to close scrutiny by the department. In such instances, the department is under no obligation to accept the exemption certificate or other documentation to establish an exemption when obtained well after the sale occurs. Without obtaining an exemption certificate at the time of sale, the burden of proof that an exemption applies is solely upon the seller. Accordingly, as a precaution, it is imperative that the Taxpayer abide by the laws and regulations applicable to the giving and receiving of exemption certificates in order to avoid a similar situation in the future.
Government Contract
It has been the department's longstanding policy that in considering the tax treatment of federal government contracts, it must be determined whether the true object of the contract is for the sale of tangible personal property or for the provision of services to the government. If the contract is for the sale of tangible personal property, the contractor may purchase articles for sole use by the government under resale certificates of exemption and then resell those articles 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 tangible personal property and must pay the tax on the purchases.
For the sale at issue, the Purchaser is procuring personal computers under its contract with an agency of the federal government. However, the documentation provided for this procurement does not clearly establish whether the purchased property is for use by the Purchaser or the government.
A review of the contract's SOW reveals that its scope is broadly stated to include all areas of information systems throughout their life-cycles. It shows that the Purchaser is required to provide information support services and maintenance services and to acquire computer hardware and software. Broadly stated, services to be provided by the Purchaser include system engineering, system integration and design, equipment analysis and design, hardware and software testing and evaluation support, maintenance of telecommunication and computer systems, end-user support and training, and computer and system security. In addition, the SOW specifically requires the Purchaser to deliver and install a turnkey system by acquiring the appropriate hardware based upon a thorough analysis of mission requirements.
Based on the overall terms of the SOW, I find basis for concluding that the true object of the contract is for the sale of tangible personal property. Accordingly, tangible personal property title to which passes to the federal government may be purchased exempt of the tax for resale. Such items include computer hardware and software and repair or replacement parts acquired by the Purchaser for resale to the federal agency.
However, the resale exemption does not apply to tangible personal property acquired by the Purchaser for use in the performance of the contract, regardless of whether title to the property passes directly to the government. These items include personal computers, supplies, tools or other equipment purchased and used by the Purchaser in the performance of its services under the contract, such as property used to test equipment or systems applications, isolate or identify equipment failures, and design or evaluate computer systems. The resale exemption also does not apply to sales made to the Purchaser of cabling, cabling connectors, and other articles of tangible personal property which upon installation become part of the realty.
Although the sales invoice shows shipment of the property to the Purchaser at the federal agency site, we cannot conclude from the documentation furnished that the contested sale of personal computers was for the government's sole use. For example, the date of sale precedes the date shown on the government order forms presented. To ensure that an exemption applies to the sale at issue, the Taxpayer must establish exclusive use of this property by the government. Accordingly, if the Taxpayer can furnish such conclusive information, the sale will be removed from the department's audit. An auditor will contact you soon to arrange for the receipt or review of the requested information.
If the requested information is furnished and found sufficient to revise the audit, the department will refund the tax and interest assessed in this case and also pay interest on the refunded amount in accordance with Code of Virginia Sec. 58.1-1833.
If you have questions for my audit staff, please contact ***** (Audit Supervisor at the department's ***** District Office) at *****. If you have questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13498R
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in response to your letter requesting correction of the sales tax audit assessment issued to ***** (the "Taxpayer').
FACTS
The Taxpayer sells computer hardware. As a result of an audit for the period October 1995 through May 1997, the Taxpayer was assessed sales tax on an untaxed sale of computer hardware to a customer who performs work as a government contractor (the "Purchaser'). The Taxpayer has paid the assessment in full.
The Taxpayer takes exception to the assessment of sales tax and maintains that the Purchaser may purchase tangible personal property exempt of the tax for resale to the federal government. Although no exemption certificate was obtained at the time of sale, the Taxpayer submits a Purchaser-furnished Statement of Work and other documentation related to the Purchaser's contract with a federal agency.
DETERMINATION
Certificates of exemption
Title 23 of the Virginia Administrative Code 10-210-280 sets out the established policies relating to certificates of exemption. Subsection A of this regulation provides that:
-
- All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid or inconsistent on its face is never acceptable, either before or after notice.
The above cited regulation interprets Virginia law, specifically Code of Virginia Sec. 58.1-623 which mandates the use of exemption certificates to claim an exemption from the retail sales and use tax. When a dealer does not charge sales tax on a retail sale and fails to obtain a certificate of exemption from its customer as certification that an exemption applies, Code of Virginia Sec. 58.1-625 mandates that the dealer will be held directly liable for the payment of the sales tax.
In this case, the Purchaser claims that it was purchasing tangible personal property for resale to the federal government. However, the Taxpayer failed to obtain a resale certificate of exemption, Form ST-10, from the Purchaser and further failed to collect the sales tax when no exemption certificate was offered.
On audits, any exemption certificate or other documentation obtained from a customer in an attempt to establish an exemption on prior purchases by customers is subject to close scrutiny by the department. In such instances, the department is under no obligation to accept the exemption certificate or other documentation to establish an exemption when obtained well after the sale occurs. Without obtaining an exemption certificate at the time of sale, the burden of proof that an exemption applies is solely upon the seller. Accordingly, as a precaution, it is imperative that the Taxpayer abide by the laws and regulations applicable to the giving and receiving of exemption certificates in order to avoid a similar situation in the future.
Government Contract
It has been the department's longstanding policy that in considering the tax treatment of federal government contracts, it must be determined whether the true object of the contract is for the sale of tangible personal property or for the provision of services to the government. If the contract is for the sale of tangible personal property, the contractor may purchase articles for sole use by the government under resale certificates of exemption and then resell those articles 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 tangible personal property and must pay the tax on the purchases.
For the sale at issue, the Purchaser is procuring personal computers under its contract with an agency of the federal government. However, the documentation provided for this procurement does not clearly establish whether the purchased property is for use by the Purchaser or the government.
A review of the contract's SOW reveals that its scope is broadly stated to include all areas of information systems throughout their life-cycles. It shows that the Purchaser is required to provide information support services and maintenance services and to acquire computer hardware and software. Broadly stated, services to be provided by the Purchaser include system engineering, system integration and design, equipment analysis and design, hardware and software testing and evaluation support, maintenance of telecommunication and computer systems, end-user support and training, and computer and system security. In addition, the SOW specifically requires the Purchaser to deliver and install a turnkey system by acquiring the appropriate hardware based upon a thorough analysis of mission requirements.
Based on the overall terms of the SOW, I find basis for concluding that the true object of the contract is for the sale of tangible personal property. Accordingly, tangible personal property title to which passes to the federal government may be purchased exempt of the tax for resale. Such items include computer hardware and software and repair or replacement parts acquired by the Purchaser for resale to the federal agency.
However, the resale exemption does not apply to tangible personal property acquired by the Purchaser for use in the performance of the contract, regardless of whether title to the property passes directly to the government. These items include personal computers, supplies, tools or other equipment purchased and used by the Purchaser in the performance of its services under the contract, such as property used to test equipment or systems applications, isolate or identify equipment failures, and design or evaluate computer systems. The resale exemption also does not apply to sales made to the Purchaser of cabling, cabling connectors, and other articles of tangible personal property which upon installation become part of the realty.
Although the sales invoice shows shipment of the property to the Purchaser at the federal agency site, we cannot conclude from the documentation furnished that the contested sale of personal computers was for the government's sole use. For example, the date of sale precedes the date shown on the government order forms presented. To ensure that an exemption applies to the sale at issue, the Taxpayer must establish exclusive use of this property by the government. Accordingly, if the Taxpayer can furnish such conclusive information, the sale will be removed from the department's audit. An auditor will contact you soon to arrange for the receipt or review of the requested information.
If the requested information is furnished and found sufficient to revise the audit, the department will refund the tax and interest assessed in this case and also pay interest on the refunded amount in accordance with Code of Virginia Sec. 58.1-1833.
If you have questions for my audit staff, please contact ***** (Audit Supervisor at the department's ***** District Office) at *****. If you have questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13498R
Rulings of the Tax Commissioner