Document Number
10-137
Tax Type
Retail Sales and Use Tax
Description
Required contract provisions, signatures, etc. needed from a governmental entity
Topic
Clarification
Exemptions
Government Contractor
Date Issued
07-12-2010


July 12, 2010




Dear *****:

Thank you for your letter to the Virginia Department of Taxation ("TAX") in which you raised several issues concerning the Retail Sales and Use Tax as it relates to purchases made by ***** ("Contractor'), an electrical contractor located in Virginia, that provides a variety of electrical products and services to governmental and commercial customers. You seek clarification as to the required contract provisions, signatures and documentation needed to show that the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for the governmental entity, as well as the type of government contract to which this exception applies.

RULING


Va. Code § 58.1-609.1(4) provides an exemption from the Retail Sales and Use Tax for tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States. This provision is interpreted in Title 23 of the Virginia Administrative Code ("VAC"), § 10-210-410(J), which provides:
    • Purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their own use or consumption, and contractors are subject to the tax on such transactions. This applies regardless of whether title to such property passes directly to the governmental entity upon purchase by the contractor or if the contractor is reimbursed directly by the governmental entity for the cost of such property. Only in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax.

Additionally, in determining the application of the tax to purchases by contractors, TAX is bound by the federal court's decision in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), affd., 569 F. 2d 811 (4th Cir. 1978), wherein the Court ruled that one must be designated as its client's purchasing agent and authorized to bind the credit of its client in order to take advantage of any exemption that applies to such client.

23VAC 10-210-693(C) governs the application of the Retail Sales and Use Tax to purchases made by government contractors. The regulation provides:
    • The appropriate tax treatment of purchases of tangible personal property by persons who contract with the government or its political subdivisions is based upon whether the transaction is for the sale of tangible personal property or for the provision of an exempt service. If a transaction is for the sale of tangible personal property, a contractor may purchase the tangible personal property exempt of the tax using a resale exemption certificate, Form ST-10. However, if the transaction is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property, provided may pass to the government or the contractor may be fully and directly reimbursed by the government or both.
    • With the foregoing in mind, I will address your specific questions.

(1) Does 23VAC10-210-410(J) mean if both of the criteria are met (i.e., the credit of a governmental entity is bound directly AND the contractor has been officially designated as the purchasing agent for the government), a contractor can purchase tangible personal property exempt from tax using a resale exemption certificate, Form ST-10?

23VAC10-210-410(J) provides an exception to the general rule that purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia, the United States, or any of its political subdivisions are sales to such contractors for, their own use or consumption. If the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity, the purchases will be exempt from the tax. Under this exception, the contractor is making purchases on behalf of the government entity, and is therefore entitled to the same exemption to which the governmental entity is entitled. This is consistent with Public Document ("PD") 03-75, which interprets United States v. Forst, as providing that a "contractor purchasing on behalf of one who holds an exemption is not entitled to the same exemption unless the credit of the exempt entity is bound by the purchasing agreement with the seller." If the credit of the exempt entity is bound by the purchasing agreement with the seller, the contractor will be entitled to the same exemption as the seller. Therefore, the contractor would be entitled to purchase the exempt tangible personal property using a government exemption certificate, Form ST-12. As there is no resale transaction between the contractor and the government when the contractor has been deemed the purchasing agent of the government, the resale exemption is not available.

(2) If the Contractor meets the requirements above, does the exemption allowed under 23VAC10-210-410(J) only apply to real property construction type contracts, or does this exemption apply to any type of contract with the government.

Although 23VAC10-210-410(J) only refers to real property construction contracts, the exemption available to contractors who have been officially designated as purchasing agents for transactions in which the government's credit is bound is not limited to real property construction contracts. By virtue of Va. Code § 58.1-609.1(4), tangible personal property purchased for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States is exempt from the Retail Sales and Use tax. When a contractor purchases tangible personal property for which the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity, such tangible personal property has been purchased for use or consumption by a government entity.

In several PD's, the Tax Commissioner, when determining the taxability of items purchased pursuant to a government contract, notes the possibility that a contractor purchasing tangible personal property in fulfillment of a contract with no real property construction component could be deemed a purchasing agent, provided the requirements set forth in the summary above are met. (See PD 02-114). Below is a listing of various types of contracts, and an explanation as to whether the government exemption would apply if the contractor is officially designated as a purchasing agent by the government entity and the credit of the government entity is bound.
  • • (a) Indefinite Delivery, Indefinite Quantity ("ID/IQ") contracts? Yes. PD 06­137 suggests that if the contractor for an ID/IIQ contract is deemed the purchasing agent, the contractor may purchase the items exempt, using the government exemption certificate, Form ST-12.
    • (b) Service only contracts? Yes. In PD 95-97, purchases by a contractor of tangible personal property pursuant to a contract solely for the provision of services were exempt of the Retail Sales and Use tax, based on the governmental exemption.
    • (c) Material only contracts? Yes. If the contractor for a contract that is solely for the provision of materials is deemed the purchasing agent, and the credit of the governmental entity is bound directly, the contractor may purchase the items exempt, using the government exemption certificate, Form ST-12.
    • (d) Mixed contracts? Yes. PD 97-348 suggests that if the contractor for a contract providing tangible personal property and services is deemed the purchasing agent, and the credit of the government entity is bound directly, the contractor may purchase the items exempt, using the government exemption certificate, Form ST-12.
    • (e) Fixed price contracts? Yes. If the contractor for a fixed price contract is
    deemed the purchasing agent and the credit of the governmental entity is bound
    directly, the contractor may purchase the items exempt, using the government
    exemption certificate, Form ST-12.
    • (f) Cost-reimbursement contracts? As set forth in PDs 93-191, 94-231, 97-83,
    and 06-137, the government exemption would not be available for a cost­
    reimbursement contract, because the government's credit is not bound directly.
    Instead, the government is obligated to reimburse the taxpayer for the cost to
    procure tangible personal property that will be used in fulfillment of the contract.
    • (g,h) Time and material contracts, milestone contracts, fixed price contracts? As set forth in PD 07-139, the government exemption would be available for a contract that includes time and materials, fixed price, or milestones, provided the contractor is deemed the purchasing agent and the credit of the governmental entity is directly bound.

(3) What type of documentation (i.e., specific language stated in the original contract, an amendment/modification to the contract, or Letter of Agreement) and signatures are contractors required to have and retain on file to provide a TAX auditor to show "the credit of the government is bound directly" for purchases a contractor makes for the United States Government.

There is no specific language or terminology required in order for the contractor to be deemed a purchasing agent for the governmental entity. However, the contract or purchasing agreement must include language that its consistent with the contractor acting as the purchasing agent of the governmental entity. PD 98-35 sets forth the minimum requirements a purchasing agreement must include to demonstrate to vendors that the transactions are sales to the government, and not to the contractor. At a minimum, the contract must: 1) contain provisions that bind the credit of the government entity in all purchases made by the contractor or subcontractor; 2) designate the contractor as the purchasing agent on behalf of and in the name of the government entity for all purchases; and 3) indicate that payment of purchases must be made directly by the government entity from public funds. In addition, all purchases must be made by the contractor via exemption certificates and purchase orders which note on their face that the contractor is acting as purchasing agent and has not assumed any liability to the vendor and that the vendor should look to the government for payment of all obligations resulting from purchases by the contractor. The contractor or government entity must also provide to all suppliers or vendors of tangible personal property an exemption certificate, Form ST-12, signed by an authorized government representative. Finally, title to all construction purchases by the contractor must rest solely with the government entity.

(a) Can language indicating that the credit of the governmental entity is bound directly be added later on in a modification or amendment to the contract? If so, is the change effective only from the modification date forward or can language be added to the modification documentation making the change effective as of the original contract date?

Language indicating that the credit of the governmental entity is bound directly can be added subsequently in a modification or amendment to the contract. Provided all the requirements are met to convey that the contractor is a purchasing agent and the credit of the governmental entity is bound, the change would be effective only from the modification date forward. Language can not, be added that would give the change retroactive application from the date of the original contract.

In PD 08-190, the Taxpayer furnished to the Department an agency designation letter that referenced delivery orders awarded against a particular project and signed by a government contracting officer. The letter specifically stated in the past tense that the Taxpayer "had purchased supplies and equipment on behalf of and for the exclusive use of the United States Government." Because the agency's letter was dated well after the audit period, and thus had no application to any of the purchases held in the audit, the Tax Commissioner concluded that no purchasing agency relationship was established.

(b, c) If the change can be made effective since the original contract date, may a contractor file a request with the state for tax refund that may occur as a result of this change? On what form should this tax refund be filed and what is the statute of limitation for filing this refund?

No. Language can not be added that would make the change effective retrospectively from the date of the original contract. As such, the Taxpayer can not file a request with the state for a refund of taxes remitted pursuant to the original language of the contract.

(4) What is needed to show that the credit of the governmental entity is bound?

The contract, purchasing agreement, vendor invoice, or other such document must show that the government, and not the contractor, is directly liable for payment of the tangible personal property in question. Rulings of the United States Supreme Court and TAX provide examples of instances in which the credit of the government entity is bound.
  • • Documentation or invoices indicate that the Government is obligated to the vendor for the purchase price and that the vendor will make all demands or claims for payment of the purchase price from the Government. (Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110, 74 S.Ct„ 403 (1954)).
    • Purchases made under the contract are paid for with funds advanced to the contractor by the government, specifically for use in making stock purchases for the sole use of the government. (PD 95-97)
    • Contract or other document is specifically structured to preclude the use of the
    contractor's funds in making acquisitions on behalf of the governmental entity.
    (PD 08-190)
    Vendor invoices or other documents are directly billed to the government, rather
    than the contractor, or vendor invoices state that the contractor is purchasing the
    items using only government funds. (PDs 05-16, 97-416, 88-67 )
    • The contractor is given broad authorization to draw checks on one or more of the government's accounts. (PD 97-416)

(4)(a) Is the following language still sufficient to convey a "purchasing agent" relationship, based on the Court's position in Kern-Limerick: "The Contractor shall act as the purchasing agent of the Government in effecting such procurement and the Government shall be directly liable to the vendors for the purchase price?"

There is no specific language or terminology required to confer purchasing agent status on a contractor. As set forth in PD 98-35, in order to demonstrate to vendors that the transactions are sales to the government, and not to the contractor, the contract must: 1) contain provisions that bind the credit of the government entity in all purchases made by the contractor; 2) designate the contractor as the purchasing agent on behalf of and in the name of the government entity for all purchases; and 3) indicate that payment of purchases must be made directly by the government entity from public funds. The contract language from Kern-Limerick does not bind the credit of the government entity in all purchases, and would therefore be insufficient to confer "purchasing agent" status. Further, even if the contract language conveyed a purchasing agent relationship, the course of dealings between the contractor and the government must be consistent with the express terms of the contract, in order for the contractor to be deemed the purchasing agent for the government.

(4)(b) If so, what type of documentation and signatures are contractors required to have and retain on file to provide a TAX auditor to support that the contractor is designated as a purchasing agent for the government?

Although there is no specific language or terminology required to confer purchasing agent status on a contractor, contractors must retain records that verify that all the requirements set forth in 4(a) above, have been met.

(4)(c) If the language can be added later in an amendment to the contract, is the change effective only from the modification date forward or can the contractor add language to the modification documentation making the change effective since the original contract date?

While language indicating that the credit of the governmental entity is bound can be added subsequently in a modification to the contract, the change would become effective only from the modification date forward. Language cannot be added that would make the change effective retrospectively from the date of the original contract.

(4)(d, e) If the change can be made effective since the original contract date, may a company file a request with TAX for a tax refund? If so, on what form must this tax refund request be filed?

No. Language can not be added that would make the change effective retrospectively from the date of the original contract. As such, the Taxpayer can not file a request with the state for a refund of taxes remitted pursuant to the original language of the contract.

(5) Would TAX also ascertain whether the course of business has been in accordance with the express terms of the contract in order to determine whether the contractor is to be deemed a purchasing agent, or would TAX rely solely on the language in the contract to establish the true contractual relationship between the government and its contractor?

Following the mandate of the Supreme Court in U. S. v. Forst, TAX does not rely solely on the language in the contract to establish the true) contractual relationship between the government entity and its contractor, but also verifies that the course of dealings between the contractor and the government are consistent with the express terms of the contract.

(6a) Specifically, how do the purchases made under this Government contract need to be (a) procured, (b) invoiced, and (c) paid for and what evidence/documentation must be provided on the (a) purchase order, (b) vendor invoice, and (c) payment to support the contractor is designated as a purchasing agent for the government and the Government is directly liable to the vendors for the purchase price.

Purchases made under this government contract must reference the government, rather than the contractor as the purchaser or the invoice (PD 97-416). The purchase order or vendor invoice should note on its face that the credit of the governmental entity is bound directly and the contractor has been officially designated as the purchasing agent. (PD 97-442), that the contractor is acting as purchasing agent and has not assumed any liability to the vendor and that the vendor should look to the government for payment of all obligations resulting from purchases by the contractor.

(6b) Do the purchase orders from the Contractor for all purchases made under this government contract need to show in the "deliver to" address the Government entity's name and address?

No. A contractor's possession of tangible personal property purchased in furtherance of a government contract will not negate the contractor's "purchasing agent" status, provided the credit of the governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity. As set forth in United States v. Forst, State of Alabama v. King and Boozer, 314 U.S. 1, 62 S. Ct. 43 (1941) and Kern-Limerick, Inc. v. Scurlock, it is not critical who holds title to the purchased items, nor is the degree of control the government exercises over the contractor with respect to the purchases critical. The key factor is whose credit, between the government entity, and the contractor, is bound by the purchasing agreement with the seller.

(6c) Do the purchase orders from the Contractor for all purchases made under this Government contract need to be signed by the Contractor's purchasing agent that was designated by the Government and does this signature need to be notated on the purchase order as a "purchasing agent for the government?"

No. The purchase orders for all purchases made under this government contract do not require that the contract be signed by the Contractor's purchasing agent.

(6d) Does the Contractor need to change the general conditions on its purchase order form for all purchases made under this government contract to state something similar to the following:
    • (i) "The Contractor is acting as the purchasing agent of the Government in procurement and the Government is directly liable to the vendors for the purchase price?" OR
    • (ii) "This purchase is made by the Government. The Government shall be obligated to the Vendor for the purchase price, but the Contractor shall handle all payments hereunder on behalf of the Government. The vendor agrees to make demand or claim for payment of the purchase price from the Government by submitting an invoice to the Contractor. Title to all materials and supplies purchased hereunder shall vest in the Government directly from the Vendor. The contractor shall not acquire title to any thereof."

While this language is sufficient to convey that the contractor is the official purchasing agent of the government and that the credit of the governmental entity is directly bound, this exact language is not necessary. There is no specific language or terminology required to confer purchasing agent status on a contractor, and it is outside of TAX's purview to dictate the exact language that must be used in a contract. Provided the contract is structured to clearly show that the contractor is the official purchasing agent of the government and that the credit of the governmental entity is directly bound, and the behavior of both parties is consistent with this express language, the contractor may purchase tangible personal property in furtherance of such contract exempt of the Retail Sales and Use tax.

(6e(i)) The Kern-Limerick case addresses a provision in the contract indicating that where the contractor is required to pay state or local sales taxes, a statement must be provided certifying the accuracy of the bill, etc. Must each invoice issued by a vendor to the Contractor contain a similar certification, and if so, what does the Contractor need to provide the vendors so they will do this?

In the Kern-Limerick case, the purchase order required that the contractor make a certification on the claim for payment. This was a provision that was included in the contract in that particular case, as agreed upon by the contracting parties. The certification statement is not necessary to confer purchasing agent status on the contractor or to convey that the credit of the government entity is bound. The Contractor's vendors do not need to attach any such certification to its claims for payment in order for the Contractor to be eligible for the government exemption.

(6e(ii)) How must vendor payments be made to ensure the vendor gets paid, but at the same time, the Contractor does not violate the requirements of the `government being directly liable to the vendors for the purchase price?' Who is required to pay the vendors for the material purchased for this contract? Can the Contractor get billed directly by vendors and pay vendors directly for the material and supplies purchased for this government contract or does the vendor need to bill the government and the purchases need to be paid directly by the government in order for a contractor to purchase the materials exempt of the tax.

Vendor payments must be structured so that the government entity's credit is bound, rather than the contractor. The government may advance funds to the contractor, specifically for use in making purchases for the sole use of the government. Alternatively, the government may provide express authorization to the contractor to draw checks on one or more of the government's accounts. T he Contractor may also pass the bill directly on to the government, and the government entity can directly pay the vendors for the tangible personal property. So long as payment is being made by the government entity, rather than the contractor the provision conferring liability on the government will not be violated.

I hope this has addressed all of your questions concerning the designation of a contractor as a purchasing agent for a government entity. The Public Documents cited in this ruling are available online on TAX's Policy Library at www.tax.virginia.gov. If you have additional questions or concerns about this matter, you may contact ***** in my Office of Policy and Administration, Policy Development Division at *****.
                • Sincerely,


                • Linda Foster
                  Deputy Tax Commissioner

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46