Tax Type
Retail Sales and Use Tax
Description
Government contractor purchases; Service contract
Topic
Taxability of Persons and Transactions
Date Issued
10-18-1988
October 18, 1988
Re: Ruling Request/ Sales and Use Tax
Dear******************
This will reply to your letter of August 15, 1988, seeking information on the application of the sales and use tax to transactions involving government contractors such as ************** (taxpayer).
FACTS
The taxpayer, a U.S. government contractor, seeks information on the effect of the recent affirmance by the U.S. Supreme Court of the decision of the Fourth Circuit Court of Appeals in the case of United States v. City of Manassas, 830 F.2d 530 (4th Cir. 1987), on Virginia Regulation 630-10-45(E). Specifically, the taxpayer asks whether as a result of this court case, certain transactions involving purchases by contractors on behalf of the government may now qualify for exemption from the sales and use tax.
RULING
VR 630-10-45(E) provides that:
-
- Persons who contract with the federal government, the State or its political subdivisions to perform a service and in conjunction therewith furnish some tangible personal property are deemed to be the consumers of all such property and are not entitled to exemption on the grounds that a governmental entity is a party to the contract. This is true even though title to the property provided may pass to the government and/or the contractor may be fully and directly reimbursed by the government. The same principle applies to persons who enter into contracts with a governmental entity to perform real property construction or repair.
Further, VR 630-10-27(J) provides that "[a] contractor must remit the use tax on any tangible personal property purchased exclusive of the tax and furnished to him except when such property is purchased and furnished to a contractor by a governmental unit or agency." (Emphasis added) Property furnished to a contractor by the federal government was the central issue in the City of Manassas case.
In addition, in some limited instances a government contractor such as the taxpayer may qualify for a resale exemption when purchasing tangible personal property for subsequent provision to the government. See for example, an opinion of the Attorney General dated October 30, 1987, and a recent ruling of the department dated September 6, 1988, enclosed.
However, the department's consistent policy as set forth in the above referenced regulation, and as supported by the U.S. Court of Appeals in the case of U.S. v. Forst, 569 F.2d 811 (4th Cir. 1978), copy also enclosed, has been to require payment of the tax by all contractors when making purchases on behalf of the government. This is true even when the government takes title to the goods purchased by the contractor and even though the contractor may be directly reimbursed by the government for all such purchases. (See for example, the department's November 28, 1986 ruling enclosed)
It is worth noting further that the court in the City of Manassas case distinguished the case before it from the recent line of U.S. Supreme Court cases which have upheld state use tax assessments on contractors for the government. Citing the U.S. Supreme Court case of United States v. New Mexico, the court stated, "where a use tax is involved, immunity cannot be conferred [on a government contractor] simply because the State is laying the tax on the use of federal property in private hands,... even if the private entity is using the Government property to provide the United States with goods...or services." 455 U.S. 720, 734 (1982).
Even if the court had not made this distinction, the facts of the City of Manassas case would not support the inference which the taxpayer would have the department draw at this time. The City of Manassas case involved an attempt to subject a government contractor to local taxation on property provided by the government for use in contract performance. Based on the specific statute and facts presented in the case, the court invalidated this attempt to subject the contractor to local taxation.
However, the taxpayer in this case would extend the rationale of that case to an entirely different set of circumstances involving purchases made by contractors themselves for subsequent provision to the government. I find nothing in the City of Manassas decision which would support such a conclusion.
I hope that the foregoing and the enclosed materials have responded to your questions, but let me know if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner