Tax Type
Retail Sales and Use Tax
Description
Retail Sales and Use Tax Treatment of Government Contractors
Topic
New Procedure(s)
Date Issued
07-07-2006
TAX BULLETIN 06-4
Virginia Department of Taxation
July 7, 2006
IMPORTANT INFORMATION REGARDING
Retail Sales and Use Tax Treatment of
Government Contractors
Effective July 1, 2006, the Department of Taxation (TAX) changed its current interpretation of the “true object” test under the Retail Sales and Use Tax as it applies to contractors doing business with the federal, state and local governments. This policy change is the result of budget language included in the Budget Bill (House Bill 5002, Chapter 3, 2006 Acts, Special Session 1).
Current Policy With Respect to Government Contractors
Generally under the Virginia Retail Sales and Use Tax Act, tangible personal property purchased by contractors for use and consumption in fulfilling contracts with the federal, state or local government is subject to tax to the contractor at the time of purchase. This applies regardless of whether title to such property passes directly to the government entity upon purchase by the contractor or the contractor is reimbursed directly by the government entity for the cost of such property. The only exception to this treatment is if the credit of the government entity is bound directly and the contractor has been designated as the official purchasing agent of the government entity.
In cases where a contract involves the conveyance of tangible personal property, TAX uses the “true object” test to determine the tax application to the purchases made in fulfillment of the contract. Currently, TAX applies the “true object” test to the overall purpose of the contract, without regard to the individual “work orders” or “statements of work”. If the overall objective of the contract is determined to be for the provision of services, the contractor must pay the tax on all tangible personal property purchased by the contractor in fulfilling the contract. If the overall “true object” of the contract is the conveyance of tangible personal property to the government entity, the contractor may purchase the tangible personal property exempt of the tax for resale and subsequently sell the property to the government entity without collecting tax on the sale because sales to government entities are exempt.
Change in Policy Effective July 1, 2006
Effective July 1, 2006, TAX will change its policy and no longer make the taxability determination regarding the “true object” of the transaction between the government entity and its contractor based upon the underlying contract. For “task orders,” “work orders,” or “statements of work” entered into on and after July 1, 2006, the tax application to government contracts will be based on the application of the “true object” test to each separate “work order,” “statement of work,” or “task order,” as opposed to applying the “true object” test to the underlying contract between the government entity and the contractor. This change in the application of the “true object” test from the overall underlying contract, to separate “work orders,” “statements of work,” or “task orders,” will not relieve government contractors from the sales and use tax liability with respect to real estate construction contracts with government entities.
Due to this change in policy, Virginia Regulation 23 VAC 10-210-693 will not be applicable to “task orders,” “work orders,” or “statements of work” entered into on and after July 1, 2006. Instead, TAX will make the taxability determination as if the underlying contract was a qualifying ID/IQ (Indefinite Delivery/Indefinite Quantity) contract. Because under a qualifying ID/IQ contract it is impossible to determine the “true object” of the contract, TAX has determined that under a qualifying ID/IQ contract the “true object” analysis is to be applied at the “task order” level. Under this change in policy, if the “true object” of the “task order,” “work order,” or “statement of work” is for the provision of services, the contractor must pay tax on all tangible personal property purchased in fulfilling the contract. If the “true object” of the “task order,” “work order,” or “statement of work “ is the conveyance of tangible personal property to the government entity, the contractor may purchase the tangible personal property exempt of the tax for resale and subsequently sell the property to the government entity without collecting tax on the sale because sales to government entities are exempt. TAX’s policy with respect to the application of the “true object” test to ID/IQ contracts may be found in Public Document (PD) 01-6 (1/4/2001), PD 04-53 (8/18/2004), PD 05-16 (2/9/2005), and PD 05-93 (6/10/2005). The documents are available on-line in the Tax Policy Library section of TAX’s website, located a www.policylibrary.tax.virginia.gov.
TAX has been charged with promulgating regulations, with the assistance of the government contracting industry, to implement this change in policy. Such regulations will provide examples to illustrate when a government contractor makes a taxable use of an item in fulfilling a governmental contract, as well as when interim use of an item by a government contractor is incidental to a resale to the government entity. Emergency regulations implementing this change in policy will be issued on or before June 30, 2007.
If you have any questions regarding this Tax Bulletin, please contact TAX at: (804) 367-8037.
Rulings of the Tax Commissioner