Tax Type
Retail Sales and Use Tax
Description
Hospital equipment; Government contract; Sales vs. service
Topic
Taxability of Persons and Transactions
Date Issued
04-15-1996
April 15, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
In your letter of January 9,1996, you seek correction of sales and use tax assessments on behalf of ******Taxpayer) for the periods February 1992 and June 1991 through August ugust 1995.
The Taxpayer has contracted with a federal government hospital to furnish certain medical equipment and services. At issue is the use tax assessed on a magnetic resonance imaging (MRI) machine, computerized tomography (CT) unit and some additional equipment leased or purchased by the Taxpayer in connection with two government service contracts. The Taxpayer maintains that the true object of the contracts is for the lease or re-lease of certain medical equipment to the government and that such items should qualify for exemption from the tax when purchased or leased by the Taxpayer.
The department has previously ruled that in considering the tax treatment of government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. In making such a determination, the department considers the entire contract, including any addenda or task orders. The amount of tangible personal property transferred relative to the overall value of the contract has no bearing on the tax status of the contract. Instead, the "true object" of the transaction as described in Virginia Regulation (VR) 630-10-97.1 is used to determine whether the contract is for the sale of tangible personal property or for the provision of services.
If a contract is for the sale or lease of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. Conversely, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property purchased or leased for use in performing its services, even though title to some or all of the property may pass to the government.
Of additional importance is VR 630-10-57(A) which sets out the department's general policy on leases and rentals. This regulation states that the tax generally applies to leases or rentals of tangible personal property without operators, i.e., a true lease or rental of tangible personal property is deemed to occur when no operator is furnished under the transaction. On the other hand, a lease with an operator is considered a nontaxable service transaction. See PD 89-139 (4/28/89), copy enclosed.
Based on the foregoing and the facts presented, a review of the contracts reveals that the true object of the contracts at issue is the provision of services by the Taxpayer to the hospital. For instance, one contract calls for the Taxpayer to furnish a CT unit and for the Taxpayer's employees to operate it during standard operating hours under the complete control and supervision of the Taxpayer, i.e., without intervention or direction by government personnel. In similar fashion, the MRI contract calls for the Taxpayer to furnish and operate a MRI unit. Each contract specifically states that the purpose of the contract is for the Taxpayer to provide certain tangible personal property for services to the hospital. Although government employees are trained on all functions of the Taxpayer-furnished equipment and are permitted to use such equipment, these activities are of secondary importance to the provision of CT and MRI services by the Taxpayer.
As a provider of a service, the Taxpayer is the user or consumer of all items purchased or leased in connection with these service contracts and is liable for the tax on all such items. Although it may be that the intent of the hospital is to lease the equipment as you contend, the department must rely on the underlying documents which govern each transaction. As each document is an agreement for the provision of services, l can find no basis for correction of the assessment.
The Taxpayer will receive updated notices of assessment for the outstanding balances. Payment should be sent to the attention of***** at the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, within the next 30 days.
Danny M. Payne
Tax Commissioner
OTP/10452R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
In your letter of January 9,1996, you seek correction of sales and use tax assessments on behalf of ******Taxpayer) for the periods February 1992 and June 1991 through August ugust 1995.
FACTS
The Taxpayer has contracted with a federal government hospital to furnish certain medical equipment and services. At issue is the use tax assessed on a magnetic resonance imaging (MRI) machine, computerized tomography (CT) unit and some additional equipment leased or purchased by the Taxpayer in connection with two government service contracts. The Taxpayer maintains that the true object of the contracts is for the lease or re-lease of certain medical equipment to the government and that such items should qualify for exemption from the tax when purchased or leased by the Taxpayer.
DETERMINATION
The department has previously ruled that in considering the tax treatment of government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. In making such a determination, the department considers the entire contract, including any addenda or task orders. The amount of tangible personal property transferred relative to the overall value of the contract has no bearing on the tax status of the contract. Instead, the "true object" of the transaction as described in Virginia Regulation (VR) 630-10-97.1 is used to determine whether the contract is for the sale of tangible personal property or for the provision of services.
If a contract is for the sale or lease of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. Conversely, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property purchased or leased for use in performing its services, even though title to some or all of the property may pass to the government.
Of additional importance is VR 630-10-57(A) which sets out the department's general policy on leases and rentals. This regulation states that the tax generally applies to leases or rentals of tangible personal property without operators, i.e., a true lease or rental of tangible personal property is deemed to occur when no operator is furnished under the transaction. On the other hand, a lease with an operator is considered a nontaxable service transaction. See PD 89-139 (4/28/89), copy enclosed.
Based on the foregoing and the facts presented, a review of the contracts reveals that the true object of the contracts at issue is the provision of services by the Taxpayer to the hospital. For instance, one contract calls for the Taxpayer to furnish a CT unit and for the Taxpayer's employees to operate it during standard operating hours under the complete control and supervision of the Taxpayer, i.e., without intervention or direction by government personnel. In similar fashion, the MRI contract calls for the Taxpayer to furnish and operate a MRI unit. Each contract specifically states that the purpose of the contract is for the Taxpayer to provide certain tangible personal property for services to the hospital. Although government employees are trained on all functions of the Taxpayer-furnished equipment and are permitted to use such equipment, these activities are of secondary importance to the provision of CT and MRI services by the Taxpayer.
As a provider of a service, the Taxpayer is the user or consumer of all items purchased or leased in connection with these service contracts and is liable for the tax on all such items. Although it may be that the intent of the hospital is to lease the equipment as you contend, the department must rely on the underlying documents which govern each transaction. As each document is an agreement for the provision of services, l can find no basis for correction of the assessment.
The Taxpayer will receive updated notices of assessment for the outstanding balances. Payment should be sent to the attention of***** at the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, within the next 30 days.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10452R
Rulings of the Tax Commissioner