Tax Type
Retail Sales and Use Tax
Description
Purchases by government contractor
Topic
Taxability of Persons and Transactions
Date Issued
02-13-1987
February 13, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear*********************
This will reply to the July 9, 1986 of ************* and other recent correspondence between yourself and the department regarding a sales and use tax audit of ******************.
FACTS
***************** (Taxpayer) is engaged in furnishing naval architecture and engineering services, primarily under contracts with the United States government. In connection with such contracts, the taxpayer purchases or leases equipment, supplies, models, and other tangible personal property, some of which is subsequently furnished to the federal government. A sales and use tax audit by the department identified some such items upon which the Virginia tax was not paid, producing an assessment. The taxpayer contests the assessment of tax on such sales and leases, contending that an item purchased from a subcontractor and delivered to the federal government in the same condition without any additional work being performed by the taxpayer is nontaxable.
In addition, the taxpayer contends that certain purchases were made in other states, but incorrectly invoiced to one of the taxpayer's Virginia offices. Further, the taxpayer notes that sales and use taxes were incorrectly paid to other states on some items purchased from out-of-state vendors. Lastly, the taxpayer contends that its Virginia personnel were not adequately informed by the department as to the application of the sales and use tax to purchases and leases used in performing governmental contracts.
DETERMINATION
§58.1-603 of the Code of Virginia impose a tax upon the sale of tangible personal property and selected services. At the present time, the only service per se that is subject to the tax is the rental of transient accommodations; thus, other purely service transactions are not subject to the sales tax.
In addition, §58.1-608.2 of the Code of Virginia contains an exemption from the tax for "professional...service transactions which involve sales as inconsequential elements for which no separate charges are made." Accordingly, analysis and design services performed by architects and engineers are not subject to the sales tax even though the end product of the services may be a tangible report, design, or model. Similarly, legal services are nontaxable under the statute even though an attorney may produce a contract, will, etc., and medical services are nontaxable event though a physician may furnish his patient with a report.
It is well established that professionals and others who provide a service, rather than sell products, are the taxable users or consumers of all tangible personal property used in rendering their service. It is also well established that a person cannot escape the tax on property used by him in providing services simply because the services are performed pursuant to a contract with the federal government and even though the federal government may ultimately take title to the property. See United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd., 569 F. Supp. 811 (4th Cir. 1878) and various opinions of the U. S. Supreme Court, including most recently United States v. New Mexico, 102 S.Ct. 1373 (1982).
Based on the above authorities, I find no basis for relief of the assessed tax. The taxpayer is engaged in the provision of naval architecture and engineering services and in connection therewith purchases tangible personal property for its own use. In connection with its contracts, the taxpayer will turn over some of the property, such as models, design documents, reports, etc. to the federal government. However, such tangible items are not sold to the government; rather, the items are furnished in connection with the taxpayer's professional services. Accordingly, the taxpayer is deemed to be the ultimate user or consumer of the property.
I would note, however, that the taxpayer would enjoy a resale exemption on any item purchased independent of a contract to perform architectural or engineering services that it resells directly to the federal government. In such an instance, the transfer of property to the government would in fact represent a sale at retail since the property would be furnished totally independent of the provision of services. An example of such a transaction is set forth in a November 29, 1985 departmental
ruling (see enclosed copy, example 8), where a contractor procures and installs materials for the purpose of converting government owned equipment. The enclosed ruling also sets forth the application of the tax to the provisions of engineering, design, and similar services rendered under government contracts.
It is my understanding that all property furnished to the federal government by the taxpayer was in connection with contracts for the provision of architectural, engineering, or similar services. However, the department will revise its audit if the taxpayer can demonstrate that any of the assessed items were resold to the government totally independent from contracts for the provision of services.
As to the other issues raised, I regret that the tax may have been improperly paid to other states on certain purchases made from out-of-state vendors. Nonetheless. the items purchased from out-of-state vendors were delivered to the taxpayer in Virginia and the first taxable use of the property was made in Virginia. Accordingly, I cannot offer relief of the tax assessed on those transactions. It should be noted, however, that refunds of all or part of the tax erroneously paid to other states likely may be requested by the taxpayer from its out-of-state vendors.
Similarly, I see no basis for relief on the grounds that the department did not adequately educate the taxpayer of its liability for the use tax. It is my understanding that a departmental representative explained use tax reporting requirements to personnel in the taxpayer's Arlington office in 1984; yet even if no such explanation had been provided, the use tax is not a concept unique to Virginia law. In fact, as the taxpayer maintains offices in a number of states, it is no doubt familiar with the application of sales and use taxes generally to federal contractors.
Therefore, based upon the foregoing, I see no basis at this time for revision of the department's assessment. However, the department will forego collection activities for a period of 30 days in the event that the taxpayer wishes to submit information to establish that any items included in the audit were actually sold at retail to the federal government. Such information should be furnished to the department's Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner