Tax Type
Retail Sales and Use Tax
Description
Government transactions; Contractor's purchases on behalf of government
Topic
Taxability of Persons and Transactions
Date Issued
06-28-1996
June 28, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*******
This is in response to your letter of May 10, 1996 in which you seek a further review of a sales and use tax assessment issued to **** (the "Taxpayer").
FACTS
The Taxpayer operates primarily as a government contractor. A sales and use tax audit for the period January 1991 through September 1993 resulted in an assessment for various untaxed purchases which I addressed in my determination to you dated December 20, 1995. You seek a review of that determination in regard to one issue: purchases made by the Taxpayer pursuant to one of its federal government contracts.
DETERMINATION
The department has previously ruled that in determining the tax treatment of federal government contracts, it must be determined whether the contract is for the provision of services to the government or whether the contract is for the sale of tangible personal property. If the contract is for the provision of services, and in connection with those services tangible personal property is provided, the contractor is deemed to be the taxable user or consumer of the property and must pay the tax on the purchases. Conversely, if the contract is for the sale of tangible personal property, the contractor may purchase items under resale certificates of exemption and then resell those items to the government exclusive of the tax.
The contract at issue is with a financial regulatory agency of the federal government. The scope of the contract calls for the Taxpayer to furnish and maintain automated systems, associated networks, backup systems and related facilities necessary for the electronic receipt, acceptance and review, and dissemination of information.
A review of the documents you provided with your latest correspondence reveals that the true object of the contract is the provision of tangible personal property. It is apparent that the Taxpayer is required to provide various services, including facilities management services. Nevertheless, it is clear that the goal of the contract is to provide the government with a tangible electronic filing and data processing system which will be used primarily by government technicians and managers who will receive and evaluate financial information. Because the true object of the contract is the sale of tangible personal property, such tangible personal property transferred to the government entity is not subject to the tax.
The tax, however, will apply to tangible personal property purchased by the Taxpayer in connection with the contract but title to which does not pass to the federal government. This would include, for example, those items which the Taxpayer purchases for its own use to provide the mandatory dissemination of information as specified in the contract. Further, and as addressed in Public Document 95-139 (5/31/95), the tax would apply to certain supplies used by the Taxpayer (and not resold to the government), and cabling purchased for installation into real property.
Based on this determination, the purchases made pursuant to the contested government contract will be removed from the assessment, and a revised assessment will be issued as soon as practicable.
If you have any questions regarding this matter, please contact ***** at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11227I
Rulings of the Tax Commissioner