Tax Type
Retail Sales and Use Tax
Description
Building contractor; Purchasing agent for governmental entity
Topic
Exemptions
Date Issued
02-05-1993
February 5, 1993
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you request a ruling on behalf of your client, ***** (The Authority) regarding the application of sales and use tax to contractual agreements involving the performance of real property construction contracts.
FACTS
The Authority, as a governmental entity, has contracted with and designated a building contractor as its purchasing agent for the procurement of certain building and construction materials regarding the construction of a housing complex. The Authority requests a ruling as to whether the terms of its contract, specifically the purchasing agent agreement, qualifies purchases made on its behalf by the building contractor for exemption from the sales and use tax under Va. Code §58.1-608(A)(1)(e).
RULING
Va. Code §58.1-608(A)(1)(e) 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, Va. Code §5 58.1-610(A), deems real estate contractors to be the taxable users of all tangible personal property purchased in connection with the construction, reconstruction, installation, repair or other services with respect to real estate.
This code section is interpreted in Virginia Regulation (VR) 630-10-27(J), which provides in part that the tax applies to purchases of tangible personal property for use and consumption by contractors in connection with real property construction. It provides further that "[o]nly in instances where 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)
Additionally, in determining the application of the tax to purchases by 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. 2nd 881 (4th 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. Furthermore, 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.
The department's position is also supported by the opinion in U.S. v. New Mexico, et. al., 455 U.S. 720, 102 S. Ct. 1371 (1982), in which the Supreme Court upheld the validity of New Mexico's gross receipts and compensating use taxes as applied to purchases made by cost-plus U.S. Government contractors engaged in the management of federally owned facilities in New Mexico. The Court rejected the government's argument that such purchases were made by the contractors in their capacity as "procurement agents" since the contractors made all such purchases in their own names and the vendors were not informed that the government was the only party with an independent interest in the purchases. Also, the contractors did not have to obtain advance government approval for each purchase. The Court concluded that no agency relationship existed between the contractors and the government given that the contractors acted independently of the government in their day-to-day operations and procurement decisions, and that the identity of interests between the government and the contractors was far from complete.
In contrast to the factual scenarios presented by Forst and New Mexico, the documentation presented by the Authority in the instant case, stipulates in specific contract language the designation of the building contractor as its purchasing agent. The Authority authorizes the building contractor to purchase construction materials and building component systems in its name and assumes responsibility for the payment of such purchases. Moreover, title to such purchases rests solely with the Authority. It is clear that the parties to the contract intend to create an agency relationship, and due to the existence of such relationship, the purchases by the building contractor would have the effect of binding the credit of the Authority as required by VR 630-10-27(J).
Therefore, I must conclude that the purchases made by the building contractor as the purchasing agent under the terms of the contract discussed in this case qualify for exemption under Va. Code § 58.1-608(A)(1)(e).
I have enclosed copies of the cited code sections, regulations and court cases for your information. If you should have any additional questions concerning this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Enclosures (5)
OTP/2791J
Rulings of the Tax Commissioner