Tax Type
Retail Sales and Use Tax
Description
Basic Ordering Agreement
Topic
Accounting Periods and Methods
Basis of Tax
Payment and Refund
Property Subject to Tax
Date Issued
04-01-2002
April 1, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter concerning a sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 1997 through January 1999. Specifically, you ask the department to reconsider a prior determination issued to the Taxpayer on June 19, 2000, regarding the ***** project (hereinafter, the "Agreement"). I apologize for the delay in the department's response.
FACTS
The Agreement is issued by the federal government as a Basic Ordering Agreement ("BOA"), a multiyear agreement between the Taxpayer and an agency of the federal government. The BOA facilitates the government's procurement of property and services, primarily associated with computer systems. You indicate that the contested property was purchased by the Taxpayer under delivery orders that call for the provision of tangible personal property to the government. Accordingly, you conclude that the contested property may be purchased by the Taxpayer exempt of the tax for resale to the federal government.
In my prior determination, I indicated that the audit staff reviewed the Agreement's Statement of Work and described it as a contract for the provision of services. I further indicated that traditionally, if the true object of a contract is for the provision of services, the contractor's purchases of tangible personal property are taxable, regardless that an individual delivery order may call for the provision of tangible personal property. This is because a delivery order is not a separate contract.
You ask that the department review this decision in light of additional information regarding the nature of BOA's, as follows:
Basic Ordering Agreements
BOA's are addressed in Federal Acquisition Regulation ("FAR") section 16.703. That document indicates:
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- A basic ordering agreement is a written instrument of understanding, negotiated between an agency ... and a contractor, that contains (1) terms and clauses applying to future contracts (orders) between the parties during its term, (2) a description, as specific as practicable, of supplies or services to be provided, and (3) methods for pricing, issuing, and delivering future orders under the basic ordering agreement. A basic ordering agreement is not a contract.
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- A basic ordering agreement may be used to expedite contracting for uncertain requirements for supplies or services when specific items, quantities, and prices are not known at the time the agreement is executed, but a substantial number of requirements for the type of supplies or services covered by the agreement are anticipated to be purchased from the contractor ....
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- A basic ordering agreement shall not state or imply any agreement by the Government to place future contracts or orders with the contractor or to be used in any manner to restrict competition.
FAR section 16.703 further provides that the delivery order issued under a BOA becomes the binding contract between the government and the contractor. As noted above, the BOA is not a contract. Rather, the contractual obligation is established when the government places a delivery order with the contractor. Further, although the BOA itself is not competitively bid, other contractors may have BOA's with the government regarding similar products and services as set out in the instant BOA.
You indicate that price negotiations for specific property and services occur after the Taxpayer receives a Request for Proposal from the government for a specific delivery order. Each Request for Proposal is accompanied with its own Statement of Work that very specifically sets out the work that is being performed on that particular delivery order. You note that it is only after successful price negotiations on a specific delivery order that a bilateral contract is executed between the government and the Taxpayer.
DETERMINATION
The application of the tax to government contracts, set out in Title 23 of the Virginia Administrative Code ("VAC") 10-210-693, is based on whether the contract is for the sale of tangible personal property or for the provision of exempt services. If a particular contract involves both the provision of a service and the transfer of tangible personal property, the department relies on the true object test set out in 23 VAC 10-210-4040 to determine whether the contract constitutes a sale of tangible personal property or the provision of an exempt service.
If the true object of the 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, or the contractor may be fully and directly reimbursed by the government, or both. Conversely, if the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax for resale. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia § 58.1-609.1(4).
The BOA in this case provides little evidence of the government's true object. In fact, it appears that the government does not know at the time the BOA is executed what specific property or services, if any, it will need or request from the Taxpayer under individual delivery orders. Further, and as noted above, a BOA is not a contract, and it does not create any contractual obligation between the government and the contractor. The contractual obligation is established when the government and the contractor agree to a delivery order.
Accordingly, the application of the sales and use tax in this case will be based on individual delivery orders and not on the underlying BOA. If the true object of the delivery order issued pursuant to the BOA is for the provision of services, the Taxpayer will be deemed to be the taxable user or consumer of all tangible personal property used in performing its services.
However, if the true object of the delivery order issued pursuant to the BOA is for the sale of property to the federal government, the Taxpayer may purchase that property exempt of the tax for resale. Of course, the resale exemption assumes that title to the property passes to the government and the Taxpayer makes no taxable use of the property. Further, the provision of services that are incidental to the sale of property to the client agency does not negate the resale exemption. In this regard, see the attached Public Document 88-159 (6/23/88), which addresses, among other incidental services, training activities.
The auditor who has the necessary security clearance has reviewed the two BOA delivery orders at issue during the audit period. He reports that the true object of Delivery Order 1 is for the provision of services. Purchases made pursuant to this delivery order will remain in the assessment. However, the true object of Delivery Order 2 is for the sale of property to the federal government. Accordingly, property purchased pursuant to this delivery order may be purchased exempt of the tax for resale and will be removed from the assessment (provided that title to the property passes to the government and that the Taxpayer makes no taxable use of the property).
Finally, the determination set out in this response is based on the specific facts of this case. This determination has no application to any other government contracts.
The audit will be returned to the audit staff to be revised based on this determination. Because the assessment has been paid in full, a refund will be issued to the Taxpayer. The refund will be comprised of tax and interest on the contested Delivery Order 2 purchases, plus interest owed by the department.
If you have any questions concerning this letter, you may contact ***** the department's Office of Policy and Administration, Appeals and Rulings, via e-mail at *****@tax.state.va.us or at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/33709I
Rulings of the Tax Commissioner