Tax Type
Retail Sales and Use Tax
Description
Federal government contractor
Topic
Accounting Periods and Methods
Assessment
Date Issued
08-07-2006
August 7, 2006
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ******************:
This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ********** (the "Taxpayer") for the period January 1998 through December 2000.
FACTS
The Taxpayer is a federal government contractor. Contracts for the government involve systems installation and integration, installation and integration of information storage products, consulting and outsourcing. An audit by the Department resulted in the assessment of tax on certain contract purchases. The Taxpayer contends the purchases are not subject to the tax and has submitted documentation in the form of exhibits to support its position.
DETERMINATION
The Department has traditionally held that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. The "true object" test as applied in Title 23 of the Virginia Administrative Code (VAC) 10-210-693 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service.
If it is determined that 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 its contractual services, even though title to some or all of the property may pass to the government. Conversely, if a contract is for the sale of tangible personal property, the contractor may purchase such property exempt from the tax for resale. The subsequent sale of the property to the government is deemed exempt under Va. Code § 58.1-609.1 4.
Exhibit 2
Based on a review of the Statement of Work (SOW) and the referenced public documents, I agree that the contract represents a sale of tangible personal property. Accordingly, the exceptions associated with this contract will be removed from the audit.
Exhibit 3
This exhibit references a classified contract. During the examination process, an auditor with the appropriate government clearance contacted the contract officer for purposes of reviewing the contract at issue. The Department's auditor was not allowed to view the contract because the auditor's clearance was not authorized by the agency holding the contract at issue. The agency's program manager issued a statement describing the process for ordering tangible personal property under the contract. While this statement may accurately depict procedures under the contract, it is not sufficient to allow the Department to determine the true object. Department personnel must review the contract to ascertain the true object. Because the auditor could not review the contract to determine if it was for the sale of tangible personal property or for the provision of services, the auditor held 50% of the contract costs taxable based on the best information available.
Prior rulings issued by the Tax Commissioner indicate that absent an opportunity to review a contract's SOW, the Department has no alternative but to uphold the assessment associated with such contracts. As provided in Public Document (P.D.) 96-102 (5/28/96), I will agree to give the Taxpayer 45 days to arrange with governmental authorities to allow Department personnel with the proper security clearance to review the contract or to provide the Department with the SOW and all supporting documentation. If the Department is not provided access to the contract or sufficient documentation within the allotted time, there will be no adjustment to the assessment with respect to this contract.
The auditor states that while 50% of the contract costs, based on purchase orders issued, were included in the audit exceptions, a duplicate entry that included the actual costs incurred for the contract at 100% of their value was also included. Accordingly, the duplicate entry will be removed from the audit computations.
Exhibit 4
A review of the SOW shows that the true object of this contract is for the sale of tangible personal property; however, the amounts listed as exceptions represent consumables used by the Taxpayer in engineering and development services associated with the contract. Such items are not eligible for the resale exemption. As noted in P.D. 95-291 (11/9/95), the Taxpayer is the taxable user and consumer of all supplies and equipment used in connection with the contract for which the title does not pass to the federal government. Accordingly, the items at issue will remain in the audit.
Exhibit 5
The contract at issue is a multi-agency indefinite delivery, indefinite quantity (ID/IQ) vehicle for two federal agencies and successor agencies. The Taxpayer claims that the contract should be evaluated using the same analysis as applied in P.D. 01-6 (01/04/01), in which the Tax Commissioner determined that the true object test should be applied at the delivery order level for an ID/IQ contract.
As previously stated, the general policy for determining the application of the retail sales and use tax to government contracts is to apply the true object test to the overall contract, rather than to individual task or delivery orders issued under those contracts.
An exception to this general policy is found in P.D. 01-06 and P.D. 04-53 (08/18/04). In both of those instances, it was not possible to determine the true object of the underlying ID/IQ contract because there was little or no evidence of the government's true object. The government was under no obligation to purchase any goods or services from the contractor until a delivery order was executed. Thus, only when the government issued an individual task or delivery order to the contractor did the contractor learn of the government's expectations. Under these circumstances, the true object is appropriately applied to the task or delivery order rather than to the underlying contract. Those circumstances, however, differ from the circumstances in the Taxpayer's case.
In the instant case, the Taxpayer has contracted with the government specifically to provide information resource management (IRM) support services. From a review of Section C of the contract (Description/Specifications/Work Statement), there is no doubt as to what is expected of the Taxpayer. The Taxpayer has been given a broad mandate to perform IRM support services. Unlike the ID/IQ contracts addressed in the public documents cited above, the true object of the Taxpayer's work can be readily determined from the language of the underlying contract at issue.
For example, the description of services and other terms set out in the contract available for review states the following:
· In Section C.4, the "Scope of Contract" states that the solicitation "will result in the award of an [ID/IQ] Fixed-Price Delivery Order contract for IRM support services." [Emphasis added.] This same section further provides that the contract will be "the primary source of supply for IRM support services requirements" for the government agencies named in the contract and other successor agencies.
§ benefit/costs analysis
§ systems design and analysis
§ programming, testing, maintenance
§ hardware/software evaluations
§ equipment configuration studies
§ program and project management
§ technical reviews
§ systems engineering
§ modeling
§ WAN/LAN design
§ risk analysis
§ capacity planning/forecasting
§ computer performance evaluations
§ training
The Work Statement and other sections of the contract sufficiently demonstrate the government's desire to obtain the Taxpayer's expertise in providing services to support and maintain the agencies' automated information systems. Accordingly, I find the true object of the contract is for the Taxpayer to provide IRM support services. Under these circumstances, the Taxpayer is liable for the sales and use tax on all its purchases of tangible personal property under the contract. There is no basis to apply the true object test at the delivery order level for the contract at issue. The tax assessed on the purchases under this contract is correct.
Exhibit 6
The contract in this exhibit is a Task Order Contract, which is a type of ID/IQ contract. The Taxpayer contends that the decision rendered in P.D. 01-6 is also applicable to this contract and that the audit should be adjusted for the items at issue.
A review of the contract reveals that its objective is to provide technical support services and integration to the government. Integration services include functional requirements definition, identification, validation, migration systems selection, prototyping, development, deployment and the operations and maintenance of standard/common migration systems. Other federal agencies may utilize this contract to satisfy requirements for integration support services.
Based on the scope and objectives of the contract at issue, I find that the true object of the contract is for services. Accordingly, the Taxpayer is liable for the sales and use tax on all its purchases of tangible personal property under the contract. There is no basis to apply the true object test at the task order level for the contract at issue. The tax assessed on the purchases under this contract is correct.
Exhibit 7
The Taxpayer contends that the contract at issue is similar to the contract in P.D. 95-291 in that both contracts relate to maintenance and repair activities necessary to keep agency networks running. The contracts include various support functions that do not entail the actual operation of the agency networks. The Taxpayer contends that maintenance and repair activities involve the sale of tangible personal property; therefore, the true object of the contract is for the sale of tangible personal property with support services being ancillary to the sale.
With regard to P.D. 95-291, the contract in that case was for the repair of government-owned equipment and the design of various systems. The back-up information for that document revealed that, for the twelve delivery orders issued for the repair of the equipment and the design of the systems, the majority of the delivery orders were for the delivery of tangible personal property. Based on that information, the Tax Commissioner determined that the true object of the contract was for the sale of tangible personal property.
In the contract at issue it remains unclear if the contract is for tangible personal property or services. Based on the information presented, the contract defines the deliverables as reports, with emphasis placed on the frequency and number of reports. Without additional documentation to prove that the contract is for the sale of tangible personal property, I cannot agree that the true object of the contract is for tangible personal property. I find no basis, therefore, to adjust the assessment for this issue.
Exhibit 8
Based on a review of this contract, I agree that the true object of the contract is for the sale of tangible personal property. Accordingly, the exceptions associated with this contract will be removed from the audit.
Exhibit 9
This exhibit relates to a sales tax return filed by the Taxpayer for November 2001. On the return, the Taxpayer reported and paid the use tax on assets acquired in 1999 and 2000, rather than amend the appropriate returns for those years. The auditor assessed the tax on the assets in the audit and advised the Taxpayer to amend its November 2001 return to exclude these assets. Based on the information presented, I will allow a credit in the audit for the tax paid to the Department on these assets. Applicable late payment penalties and interest, however, will remain in the assessment.
Penalty
This is the Taxpayer's ninth audit. The use tax compliance ratio equals 49% where 85% is required. See Title 23 VAC 10-210-2032 A 3. If the adjustments in this determination result in a revised compliance ratio that equals or exceeds the required threshold, the penalty will be abated. If the adjustments are not sufficient to meet the required use tax compliance ratio, the Taxpayer may exercise the option to compute a separate use tax compliance ratio under the alternative method by including the measure upon which sales tax was paid to its vendors.
It is the Taxpayer's responsibility to compute the alternative method, with documentation available to support the computation. The Taxpayer must compute the ratio based on the same period used by the auditor to compute the compliance ratio. The Department's auditor will review these computations with the Taxpayer.
CONCLUSION
Based on the foregoing, the Department's auditor will contact the Taxpayer to schedule a time to make the adjustments consistent with this determination and to review the contract associated with Exhibit 3. The auditor will also review the alternative compliance computations if the adjustments do not raise the Taxpayer's use tax compliance level to the required threshold. If the Taxpayer is dissatisfied with the revisions, you can request a meeting to discuss the issues.
The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact***** of the Department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.virginia.gov or at *****.
Sincerely,
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- Janie E. Bowen
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AR/49108Q
Rulings of the Tax Commissioner