Rulings of the Tax Commissioner

February 23, 1998

Dear********:

This is in response to your letter of February 3, 1998, on behalf of ***** (the "Taxpayer'). At issue in this case is the application of the tax to an anticipated contract between the Taxpayer and the federal government.

FACTS

The Taxpayer has submitted a proposal in response to the federal government's Request for Proposal. The RFP is for the acquisition of a telecommunications infrastructure to serve a major military facility. The facility is under renovation, and the government desires that the telecommunications infrastructure be acquired in conjunction with that renovation.

The Taxpayer would be responsible for providing an Information Management and Telecommunications Backbone System and Infrastructure that will: (1) provide government users with common telecommunications services; (2) support the distribution of classified and unclassified voice, video, and data communications to identifiable users; (3) integrate with the telecommunications systems currently in place; and (4) be flexible and adaptable to accommodate future telecommunications technologies.

In meeting these requirements, the Taxpayer's primary responsibilities would be to: (1) provide management oversight for the design, development and implementation effort; (2) design, develop, and implement the telecommunications infrastructure; (3) engineer, furnish, and install telecommunications equipment; (4) provide the labor, materials, and equipment to support implementation of the telecommunications infrastructure; and (5) develop a training plan insofar that outside assistance shall not be required to assist government personnel in the operation and maintenance of the telecommunications infrastructure.

The materials and equipment identified in the RFP to be furnished to the government by the Taxpayer is comprised of passive and active telecommunications equipment. Passive equipment is defined as telecommunications media such as copper, fiber optic and coaxial cable, connectors and equipment racks. Active equipment includes switching equipment, routers, telecommunications bridges, and the software which supports this equipment. You indicate that the materials content of the contract would account for about *****, 40% of which would be for cabling.

At issue in this case is the application of the tax to the Taxpayer's purchases of tangible personal property pursuant to this anticipated contract.

RULING

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 a contract is for the provision of services, the contractor 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 to the government is exempt under Code of Virginia Sec. 58.1-609.1(4).

My analysis of the RFP in this case reveals that the true object is for the sale of tangible personal property. The government is contracting for a completed telecommunications infrastructure comprised of passive and active telecommunications equipment. The services provided in connection with this project, including the design and development of the infrastructure, the installation of equipment, and the provision of training, are an integral part of the sale of the telecommunications infrastructure. Accordingly, tangible personal property title to which passes to the federal government may be purchased exempt of the tax for resale. Such items would include equipment racks and those hardware and software items described in the RFP as active telecommunications equipment.

As a precaution, however, the resale exemption will not apply to the following purchases of tangible personal property: (1) cabling and cabling connectors for installation into real property; (2) tangible personal property used by the Taxpayer in designing the telecommunications infrastructure or property used by the Taxpayer in managing the performance of the contract; and (3) tangible personal property title to which does not pass to the government (excepting items that may be exempt under the research and development exemption set out in Code of Virginia Sec. 58.1-609.3(5) or some other specific statutory exemption).

I trust that this information is helpful. If you have any questions about this letter, ***** please call ***** in the department's Office of Tax Policy at *****.