Tax Type
Retail Sales and Use Tax
Description
Government contractor; Contractor vs. retailer
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-07-1999
April 7, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **************
This will reply to your letter in which you, on behalf of you client, (the "Taxpayer'), seek correction of the retail sales and use tax audit assessment for the period of December 1993 through September 1997. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a large software engineering firm that contracts primarily with federal government entities. The Taxpayer entered into a contract with a federal agency (the "Agency') to provide a data telecommunications network system (the "Network'). The contract is for the lease, installation, maintenance, and training of the Network. The Network will provide communications capabilities for all of the Agency's offices located throughout the country. The contract has a stated term of five years, which may be extended up to five additional one-year terms at the option of the Agency. The terms of the contract also require that Taxpayer provide user training and 24-hour-per-day user help, coordinate with local telephone exchange carriers and other contractors, and remove all old equipment from the Agency's previous communications network. Substantially all of the equipment provided under the terms of the contract was installed outside the Commonwealth of Virginia.
The auditor held the contract between the Taxpayer and the Agency to be a government service contract. Accordingly, the auditor assessed tax on all tangible personal property purchased by the Taxpayer for use in the performance of its contractual obligations. The Taxpayer believes that the contract is for the provision of tangible personal property. The Taxpayer maintains that all tangible personal property may be purchased by the Taxpayer tax exempt for resale purposes and resold to the Agency exempt of the tax pursuant to the governmental exemption. In the alternative, the Taxpayer is requesting the audit be amended to remove Network equipment which has been used exclusively in out-of-state jurisdictions that would not have imposed a sales tax had the equipment been purchased in such jurisdiction.
DETERMINATION
The department has traditionally held that in considering the application of the tax to 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. 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 those services, even though title to some or all of the property may pass to the government.
Conversely, if the true object of the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia § 58.1-609.1(4).
A review of the information provided with your letter reveals that the true object of the contract in question is for the sale of tangible personal property. The Agency is contracting for a complete telecommunications system on a nationwide level, including the installation of equipment, maintenance on the system, and training. (See P.D. 98-34 [2/23/98] enclosed). Accordingly, tangible personal property title to which passes to the Agency may be purchased tax exempt and will be removed from the audit.
I would like to point out, however, that tangible personal property which is used and consumed by the Taxpayer in fulfilling its contractual obligation and does not convey to the Agency, is taxable to the Taxpayer. According to the auditor, the majority of the tangible personal property held taxable in the audit was property that was carried on the Taxpayer's fixed asset schedule and depreciated for income tax purposes. Such equipment is not for resale to the Agency and remains taxable.
The audit will be returned to the ***** District Office for revisions in accordance with the determination in this letter. Once the revisions are completed, a revised bill will be issued. Payment should be made within 30 days of the date of the bill to avoid the accrual of additional interest. If you should have any questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
anny M. Payne
Tax Commissioner
OTP/13547K
Rulings of the Tax Commissioner