99-107 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Deficiency assessments, aircraft sales and use tax assessed on an aircraft

Topic

Collection of Delinquent Tax

Date Issued

05-07-1999

May 7, 1999

Re: § 58.1-1821 Application: Sales and Use Tax

Dear**************

This is in response to your letter in which you protest the retail sales and use tax assessed on purchases made by ***** (Taxpayer A) in connection with a federal government contract. You also protest the aircraft sales and use tax assessed on an aircraft purchased by (Taxpayer B). I apologize for the delay in responding to your appeal.

FACTS

Taxpayer A was audited for the period July 1993 through December 1995 and assessed retail sales and use tax on untaxed purchases of tangible personal property made in connection with a federal government contract. Taxpayer A takes exception to the assessment and maintains that the federal government is exempt from tax and Taxpayer A should not be held liable for the tax.
Taxpayer B was audited for the period August 1993 through April 1997 and assessed aircraft sales and use tax on an aircraft. Taxpayer B takes exception to the assessment and maintains that the aircraft is not taxable since it was purchased in Delaware.

DETERMINATION

It is my understanding that these audits have been under review by the department's senior audit staff. I appreciate your patience while the department re-examines the facts and issues and makes any necessary adjustments. I feel it appropriate now to facilitate this process by offering some tax policy guidance on the two issues presented in your letter. Copies of all referenced sources are enclosed.

Issue #1

Code of Virginia § 58.1-603 imposes the retail sales and use tax on the retail sale of tangible personal property within Virginia. Code of Virginia § 58.1-602 defines the term "retail sale' to mean "a sale to any person for any purpose other than resale in the form of tangible personal property....'

- It is the longstanding policy of the department that any person who contracts to furnish services is the taxable user or consumer of all tangible personal property purchased for use in providing its services. Accordingly, the sale of tangible personal property to a service provider is a "retail sale' made to such person. In such instances, the resale exemption is not applicable. See Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(E).

The fact that the federal government takes title to tangible personal property does not necessarily mean the purchase of such items is exempt of the tax. In United States v. Forst, 442 F.Supp. 920 (W.D.Va 1977), affd 569 F.2d 881 (4th Cir. 1978), the court held that the resale exemption was inapplicable to a government contractor which was the final consumer/purchaser of the items. Although 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.

Furthermore, when a transaction involves both the rendering of services and the provision of tangible personal property, 23 VAC 10-210-4040(D) requires the application of the "true object test' to determine whether the transaction constitutes an exempt service or a retail sale. If the object of the transaction is to secure services and the tangible personal property is incidental to those services, the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which the services produce, then the transaction would constitute the retail sale of tangible personal property.

According to the Statement of Work (SOW) for the contract at issue, Taxpayer A was engaged to provide specialized engineering support for the integration, transition and implementation of certain communications and telecommunications systems for the federal government. The SOW defines the transition process as involving replacement of existing transmission media and communications circuits and the addition of new communications channels to facilitate modernization. The SOW states that engineering support shall include "the planning, engineering, scheduling, coordinating and execution of transmission equipment changeovers and associated customer premise equipment.'

The SOW also describes several technical, engineering and management support requirements which clearly involve the provision of services.

Although the SOW does not specifically state that Taxpayer A is required to furnish communications circuits, it is my understanding that the audit does include purchases of cable, connectors and wire which may have been purchased in connection with the contract. Assuming this is the case, the department has consistently held the installation of cabling or electrical wiring in walls or ceilings or as any other improvement to realty as a service with respect to real estate. As such, persons who purchase cable, wire or other items to install in realty are service contractors and, therefore, considered the taxable consumers of these items. See 23 VAC 10-210-410(A) and Code of Virginia § 58.1-610.

Based on a review of the information presented, I must conclude that the true object of the contract is for the provision of professional and real property services to the federal government. As such, the resale exemption is not available for any purchases of tangible personal property made under the contract. Rather, Taxpayer A is considered the taxable user or consumer of all of the tangible personal property which it purchased in the performance of the contract.

It is my understanding that the audit has been revised to remove certain purchases of materials identified as used entirely outside Virginia, i.e., items which were never brought into Virginia. Unless you can establish within the next 60 days a basis to further revise this audit, the revised assessment is considered proper, due and payable.

Issue #2

This issue concerns an aircraft purchased in Delaware. I would note that Code of Virginia § 58.1-1502 imposes the 2% aircraft sales and use tax on the sales price of an aircraft not sold in Virginia but required to be licensed for use in Virginia. The licensing requirement is set out by Code of Virginia § 5.1-5 and administered by the Department of Aviation. When an aircraft is used in Virginia and meets the minimum requirements for licensing in Virginia, it is subject to the aircraft sales and use tax.

It is my understanding that you believe that the aircraft at issue was assessed in a prior audit. To assist the auditor in his investigation of this matter, please furnish him with documentation which clearly substantiates your claim. If the auditor is unable to verify your claim, the audit of Taxpayer B cannot be revised.

Conclusion

At this time, there is no basis to further revise the audits of Taxpayer A or Taxpayer B. The issues presented are factual in nature and should be resolved at the audit level. Accordingly, if you have new information which could clearly establish a basis for revision of either audit, please furnish such information to ***** at the department's ***** District Office, *****, within 60 days of the date of this letter. His phone number is *****

If no new information is forthcoming within the allotted time, the Taxpayers should remit payment of the outstanding audit liabilities by July 9. 1999 to avoid further interest charges.

If you have any questions about this response, please contact ***** tax policy staff at *****

Sincerely,

Danny M. Payne
Tax Commissioner
OTP/13892R

Rulings of the Tax Commissioner