Rulings of the Tax Commissioner

April 15, 2015

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 tangible personal property purchased on behalf of the ***** (the "Taxpayer") as purchasing agent.

FACTS

According to the Taxpayer, it will procure specific items on behalf of the U.S. Army for its use as the end user.  These items will be delivered directly to the U.S. Army and not to the Taxpayer.  Prior to procuring the specific items, the U.S. Army will incorporate the following language into its solicitation with the Taxpayer:

The contractor, who has been designated for this effort as a purchasing agent for the government, will coordinate with (insert specific vendor name and specific item to be purchased).  The funding for this action will be provided in advance of the procurement, to the contractor by the government.  Upon execution of this modification, this specific action has been fully funded by the government, which in effect binds the credit of the government.

Provided the U.S. Army identifies the Taxpayer as its purchasing agent for the specific items identified in its solicitation and submits a Virginia ST-12 exemption certificate to the Taxpayer, and further provided that such items are purchased within the scope of the government's contract with the Taxpayer, the Taxpayer asks if it may purchase such items exempt of the Virginia retail sales and use tax.

RULING

Virginia 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.  In regard to real property construction contractors, Title 23 of the Virginia Administrative Code (VAC) 10-210-410 J explains that this exemption is available when "the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity."

In addition, Title 23 VAC 10-210-693 C explains the general application of the retail sales and use tax to government contractors and provides that:

In order to determine whether a particular transaction that involves both the rendering of a service and the provision of tangible personal property constitutes a sale of a service or of tangible personal property, the true object of the transaction must be examined.  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 (e.g., a computerized data retrieval system) or for the provision of an exempt service (e.g., real property facilities management).  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.  The tangible personal property may be resold to the government exempt of the tax. 

However, if a 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 of both.[1]

In determining the application of the tax to purchases by government contractors, the Department is bound by the federal court's decision in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff’d, 569 F.2d 881 (4^th Cir. 1978).  In that case, the federal courts found a federal contractor to be the taxable user and consumer of tangible personal property purchased for use in carrying out its contractual obligations.  A key element in that case was the resolution of the question of whose credit was bound in purchasing tangible personal property for use by a person pursuant to a government contract.  The courts found that the credit of the United States was not bound by the contractor's purchasing agreements with various vendors so as to render the transactions sales to the government.  In addition, even though title to the purchased items passed  to the government, the courts rejected the contractor's argument that the transactions were exempt sales for resale. Therefore, generally, when a contractor purchases property and remains liable to the seller, the contractor similarly remains liable for the sales and use tax regardless of whether title to the property ultimately passes to the government.

The United States Supreme Court has upheld the application of this principle in an analogous case involving contractors for a federal government agency.  In U.S. v. New Mexico, et. al., 455 U.S. 720, 726, 102 S. Ct. 1371, 1378 (1982), a federal agency modified its agreement with certain contractors to permit them to "act as . . . agent[s] [of the Government] . . . for certain purposes."  The court denied the claim that the contractors qualified for tax exemption in making certain purchases as "procurement agents" for the government, since the contractors made all of such purchases in their own names, the vendors were not informed that the government was the only party with an independent interest in the purchases, and the contractors did not have to obtain advance government approval for each such purchase.  The court made this determination despite the fact that title to all property purchased by the contractors passed directly to the government, that the government bore the risk of loss for the property so purchased, and that the government had complete control over the disposition of all property purchased under the contracts.

Notwithstanding the Taxpayer's designation as a "purchasing agent" for the U.S. Army in making contract purchases, no evidence has been presented that vendor invoices for the items being purchased bear only the government's name, that the government's contract with the Taxpayer indicates that the U.S. Army is paying the vendors directly for all of the contract purchases of tangible personal property, and that the Taxpayer has no personal liability to the government under the contract for purchasing such tangible personal property using government funds or on behalf of the government.

Furthermore, despite the government's solicitation declaring that the advance funding binds the credit of the federal government to the purchases, such declaration, by itself, is not sufficient evidence to establish federal immunity for the Taxpayer.  For example, no federal procurement provision, such as from the Federal Acquisition Regulation, court case ruling, or other relevant legal precedent is cited to establish the accuracy of this declaration.  Moreover, the United States Supreme Court concluded that advance funding is an efficient means to "speed up reimbursement of contractors."  The court further commented that "[i]f receipt of advance funding is coextensive with status as a federal instrumentality, virtually every federal contractor is, or could easily become, immune from state taxation."  See U. S. v. New Mexico, 455 U.S., at 725, 741, 102 S.Ct., at 1378, 1386.  Because the receipt of advance funding does not equate to federal instrumentality status, the conclusion of the court was that advance funding did not provide the contractors with federal immunity.  Without conclusive evidence to support an inference that the government's credit is bound to the purchases in question, I find no basis to extend the requested exemption to the Taxpayer.

Of final importance, the facts presented do not explain how the advanced government funds are to be deposited and specifically used.  For example, it is not clear whether the funds will be deposited into a government checking account for official use by the Taxpayer in making purchases under its contract with the U.S. Army, or whether the funds are deposited into a checking account controlled solely by the Taxpayer as to allow the Taxpayer "a substantial independent role in making purchases."  See U.S. v. New Mexico, 455 U.S. at 743, 102 S.Ct., at 1387.  Accordingly, I am unable to rule on whether the U.S Army or the Taxpayer is the purchaser under the described scenario.

CONCLUSION

This response is based on the facts provided as summarized above.  Any change in the facts or the introduction of new facts may lead to a different result. 

The Code of Virginia section and regulations 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 *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5909542892.R