Tax Type
Retail Sales and Use Tax
Description
Government environmental contractor; sale of tangible personal property
Topic
Exemptions
Property Subject to Tax
Date Issued
08-24-2004
August 24, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter of January 6, 2003, requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period January 1997 through September 2002. I apologize for the delay in this response.
FACTS
The Taxpayer is a government environmental contractor. As a result of the audit, the Taxpayer was assessed use tax on supplies and other tangible personal property used or consumed in its operations, including drums purchased by the Taxpayer.
The Taxpayer contests the tax applied to the drums. In this regard, the Taxpayer contends that it is performing a government contract "that has two separate requirements: (1) operating and maintaining Hazardous Waste Accumulation Facilities and (2) selling containers to the government as and when requisitioned by the Government." According to the Taxpayer, the contested drums were not consumed by the Taxpayer or required as part of its service contract with the government. The Taxpayer also claims that it never took possession of the drums. Rather, the drums were purchased by the Taxpayer and delivered to the government for use by them to deposit waste at different locations on a military installation.
DETERMINATION
True object test
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. As set out in Title 23 of the Virginia Administrative Code ("VAC") 10-210-693, 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 these 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 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 Va. Code § 58.1-609.1(4).
I find that the true object of the contract in the instant case is for the provision of services to the federal government. The objective of the contract, as stated in Paragraph I (A) of page C-1 of the Statement of Work ("SOW"), is for the Taxpayer to "assist in operating and maintaining the two installations' Hazardous Waste Accumulation Facilities (HWAFs) in cooperation with other government personnel." The SOW further defines those operations to "include . . . picking up, delivering, labeling, receiving, processing, packaging, consolidating containers, storing, shipping [various hazardous and non-hazardous wastes] at various locations on [military installations]. This includes related equipment, supplies, and materials required for handling the above materials." Clearly, the contract is for waste management and removal services.
Furthermore, the procurement requirements set out under Paragraph V(A) of the SOW are not independent of the contract. Rather, those requirements are an integral part of the service contract. In fact, this connection is further demonstrated by the vendor's invoice [#46353] showing that it billed the Taxpayer, not the government, and the Taxpayer's subsequent invoice [#99-440.003C] to the government for drums, services and other costs billed under the service contract. In this regard, the government's reimbursement to the Taxpayer for the purchase of drums is expressly authorized by the contract provision cited above.
The exemption under Va. Code § 58.1-609.1(4) for sales of tangible personal property for the use or consumption by governmental entities is also not available to the Taxpayer. As provided by 23 VAC 10-210-410(J), this exemption is available only when the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental agency. The contract at issue does not designate the Taxpayer as the purchasing agent for the U. S. government but obligates the government to reimburse the Taxpayer for the cost of procurement. Accordingly, the government's credit was not bound directly to the vendor for the payment of the contested drums purchased by the Taxpayer under the contract.
Accordingly, based on the service contract provisions of 23 VAC 10-210-693 cited above, the Taxpayer is the user and consumer of all items purchased in providing its services under the contract at issue. As such, it must either pay the tax to its suppliers at the time of purchase or remit the use tax directly to the Department based on the cost price of such items.
This position is consistent with the ruling in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff’d, 569 F.2nd 881 (4th Cir. 1978), in which the court held that the resale exemption was inapplicable to a government contractor who was the final consumer purchaser of the items. Even though 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.
Moreover, when equipment is purchased pursuant to funds dedicated to an existing service contract, the tax applies to the purchase of that equipment by a contractor although it may be unrelated to the service and never used by the contractor in the performance of the service contract. This is the long-standing policy of the Department as set out in Public Document 89-154 (04/28/89).
CONCLUSION
Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter.
The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and
Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/44310R
Rulings of the Tax Commissioner