Tax Type
Retail Sales and Use Tax
Description
Manufacturer has contract with the U. S. government and subcontractors
Topic
Exemptions
Government Contractor
Sale for Resale
Tangible Personal Property
Taxable Transactions
Date Issued
05-20-2014
May 20, 2014
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to certain tasks ordered by the U. S. government in a prime contract with ***** (the "Taxpayer"). You also question the tax application to the same tasks ordered in a subcontract between the Taxpayer and a Virginia subcontractor.
FACTS
The Taxpayer is a manufacturer that has entered into a mixed contract with the U. S. government to furnish goods and services. The statement of work (SOW) of the contract sets out a number of tasks required to be completed by the Taxpayer. The mixed contract covers numerous projects and sub-projects, each of which can include numerous separately identifiable deliverables to the U. S. government. One of the projects under the CLIN 4000 series is a technical instruction ("TI" or Task G of the prime contract) that requires the Taxpayer to provide sixteen separately identifiable deliverables that are labeled as tasks (e.g., Task 1, Task 2, Task 3, etc.). Some of these tasks are mixed (tangible personal property and services), and some of the tasks are for services only. Each task has its own unique identifier, description, and delivery due date. Notwithstanding the individual tasks identified in the TI, the U. S. government indicates in the TI that it is intended to be a material order.
The Taxpayer entered into a subcontract with a Virginia subcontractor that mirrors the requirements of the TI and SOW between the Taxpayer and the U. S. government. The subcontract requires the subcontractor to fulfill all requirements of the TI and the SOW. The Taxpayer will then resell the tangible personal property and services provided by the subcontractor to the U. S. government.
The Taxpayer indicates that there are three mixed tasks (Tasks 3, 14 and 16) listed in the TI and requests a ruling on how these tasks should be treated for Virginia retail sales and use tax purposes.
RULING
Question 1
Should the "true object test" of VAC 10-210-693(C) be applied by the subcontractor to each mixed task under the TI (Tasks 3, 14 and 16) on a task-by-task basis? Alternatively, should the true object test be applied to the TI as a whole, which would encompass all 16 tasks?
Pursuant to subsection E of Title 23 of the Virginia Administrative Code 10-210-693, the application of the sales and use tax to all mixed contracts and indeterminate purpose contracts shall be based on the true object test being applied to each individual order and not to the original contract. Subsection A of such regulation defines the term "order" to mean "a specific task assigned to a contractor pursuant to a contract with a government entity." The regulation goes on to state that the term "order" shall "include, but not be limited to, task orders, delivery orders, work orders, contract line item numbers (CLINs), and shall also include orders issued under a subcontract for fulfillment of work or products required under a general contractor's prime contract with the government . . ." In Public Document 10-27 (3/31/10), the Tax Commissioner ruled that "the true object test applies to the lowest level mixed order for determining the application of the sales and use tax to a mixed government contract regardless of whether such order is a task order, delivery order or a CLIN."
Based on the foregoing authorities, the subcontractor should apply the true object test to each mixed task under the TI (i.e., Tasks 3, 14 and 16).
Question 2
Assuming the Commissioner determines that the "true object test" should be applied at the task level, what is the true object of tasks 3, 14, and 16; tangible personal property or services?
Task 3 requires the Taxpayer to inspect and refurbish a rack assembly, construct and outfit a new rack assembly, provide certain electronic equipment, and installation of such items. Task 14 requires the Taxpayer to develop a description of the desired design changes and upgrades for a prospective redesign of equipment, develop performance specifications for such redesign, develop a list of regression testing required for the redesign, produce a white paper summarizing the hardware and firmware software modifications to interface circuits, and develop circuit schematic design changes, circuit board design, and prototypes of the redesigned equipment. Task 16 requires the Taxpayer to identify system components (servers, network switches, and software) that can be expected to become obsolete within a certain timeframe, identify replacement components for these items, procure replacement components, and perform a prototype installation of such items.
Based on my review of the contract documents furnished, the true objective of each of the tasks in question (i.e., Tasks 3, 14 and 16 of the TI) is for the sale of tangible personal property. The services provided facilitate the acquisition of the tangible personal property but are not the primary purpose of the task.
Question 3
If the "true object" of Tasks 3, 14 and 16 is determined to be for the sale of tangible personal property, can the tangible personal property purchased by the subcontractor in fulfilling these tasks be purchased exempt from Virginia sales and use tax by using a resale or manufacturing exemption certificate (Form ST-10 or ST-11)? Further, can the Taxpayer purchase such tangible personal property from the subcontractor exempt from Virginia sales tax by issuing a resale exemption certificate (Form ST-10) to the subcontractor?
If using the resale exemption certificate (Virginia Form ST-10), the Taxpayer and the subcontractor must both be registered with the Virginia Department of Taxation for the collection of the retail sales tax. If both entities are currently registered, then both entities may use the resale exemption certificate, Virginia Form ST-10. If the subcontractor is not
registered for collection of the sales or use tax, then it is not entitled to purchase tangible personal property exempt of the tax for resale purposes. Alternatively, the Taxpayer may use the exemption certificate, Virginia Form ST-11, if it will be incorporating the end products of Tasks 3, 14 and 16 as component parts of another product that the Taxpayer is manufacturing.
CONCLUSION
I trust that the foregoing has answered your questions. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5602780826.R
Rulings of the Tax Commissioner