Tax Type
Retail Sales and Use Tax
Description
Contractor purchases; Public housing project
Topic
Taxability of Persons and Transactions
Date Issued
04-04-1988
April 4, 1988
Re: §58.1-1821 Application/ Sales and Use Tax
Dear****************
This will reply to your letter of August 17, 1987 seeking correction of an assessment issued to *************** (taxpayer), for the audit period February 1982 through March 1987. We apologize for the delay in providing you with this response.
FACTS
The taxpayer, a construction contractor, was recently audited and held liable for consumer use tax on its untaxed purchases of construction materials pursuant to a contract with a local government agency to build a public housing project. The taxpayer seeks correction of the assessment since at the time of making the purchases, based on the terms of a contract change order initiated by the government agency, it believed in good faith that it qualified for tax exemption as the "purchasing agent" of the agency. Under the terms of the contract change order, the agency designated the taxpayer as their "purchasing agent solely for the procurement of Building Component Systems from*********** for construction of eighty apartments... [ for] a net savings of 4% of the purchase price of the Building Component Systems which is equal to the Virginia sales tax on this purchase." In addition, the agency allowed the taxpayer to use their (government) certificates of exemption when making these purchases.
Notwithstanding the foregoing, it is the department's understanding that in making such purchases, the government agency's credit was not bound, the purchase invoices were in the taxpayer's name alone and were paid for using only the taxpayer's funds.
DETERMINATION
Virginia Code §58.1-608(18) provides an exemption from the sales and use tax for "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States." However, §58.1-610(A) of the Code deems real estate contractors to be the taxable users and consumers of all tangible personal property purchased in connection with the "construction, reconstruction, installation, repair or other service with respect to real estate.
Accordingly, Virginia Regulation (VR) 630-10-27(J), copy enclosed, provides generally that, the tax applies to all purchases of tangible personal property by contractors for their own use or consumption in connection with real property construction contracts with the government. This regulation provides further that "[o]nly [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 will such purchases be deemed exempt from the tax." (Emphasis added) As such, the regulation is consistent with U.S. v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F. 2d 881 (4th Cir. 1978), copy enclosed, which upheld the application of the Virginia sales and use tax to purchases made by a government contractor.
While the taxpayer in this case was designated as "purchasing agent" for a government agency in making certain purchases. it did not meet the other test required for exemption: namely, it did not bind the credit of the government agency directly in making such purchases. For example, according to the department's auditor, the vendor invoices for the items purchased bore only the taxpayer's name and made no mention of the fact that the taxpayer was purchasing the items using only government funds or on behalf of a government agency. Instead, the invoices indicated that only the taxpayer was purchasing the items and that only the taxpayer's credit was bound in making the purchases. Moreover, none of the documentation remitted suggests that the contractual designation of the taxpayer as "purchasing agent" for the government agency was intended to make the agency directly liable for the payment of vendors on purchases made by the taxpayer under the contract.
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, 102 S. Ct. 1371 (1982), copy enclosed, 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.
In holding that the modifications to the agreement between the government agency and the contractors did not relieve the contractors from state tax liability on their purchases, the Court stated that "an immunity of constitutional stature [could] not rest on such [a] technical consideration, for that approach [would] allow any government functionary to draw the constitutional line by changing a few words in a contract."
Based on the foregoing, while I am sympathetic to the taxpayer's situation, the law and regulations cited above are clear regarding the taxpayer's liability for the tax in this case.
Notwithstanding the foregoing, based on the circumstances presented, I find basis for the waiver of all penalties assessed in this case. Therefore, a revised assessment will be issued to the taxpayer under separate cover.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner