Did a federal support contractor owe Virginia use tax on property delivered directly to an Army warehouse?

Plain-English summary

Virginia upheld consumer use tax because the Army task order principally purchased engineering, technical, and analytical support services. The contractor was therefore the taxable user and consumer of property furnished in performing those services.

The items went directly from the vendor to an Army warehouse and were not physically used by the contractor, but those facts did not create resale treatment. Government instructions, reimbursement, and title passage likewise were insufficient.

The documents did not designate the contractor as the government's purchasing agent or bind the government's credit directly to vendors. The contractor made the purchases and remained the taxable consumer.

What this means for you

• Government-contract tax treatment follows the true object of the contract or delivery order.
• A service contractor generally consumes property furnished with its services.
• Direct government delivery and reimbursement do not automatically create resale.
• Purchasing-agent status requires contract evidence and government credit directly bound to vendors.

Citations and references

• 23 VAC 10-210-693.
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 881 (4th Cir. 1978).
• The source cites P.D. 89-154, 01-6, and 04-53.

Subject

Consumer use tax on untaxed purchases of tangible personal property

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 06-137

Original ruling text

October 30, 2006

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request correction of the consumer use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period April 2001 through December 2003. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a government contractor. An audit revealed that the Taxpayer failed to remit consumer use tax on untaxed purchases of tangible personal property.

The Taxpayer contests the tax assessed on items purchased under Task Order #19 issued in connection with an indefinite delivery, indefinite quantity (ID/IQ) contract with the U.S. Army. The Taxpayer maintains that the items purchased under this order were for resale purposes only. The Taxpayer contends that these items were delivered directly to an Army warehouse by the vendor and never used or consumed as part of the services performed by the Taxpayer for the government. In addition, the Taxpayer indicates that the contested items were purchased under separate authorization as part of Task Order #19 rather than under a separate order or contract for the procurement of the items.

DETERMINATION

Title 23 of the Virginia Administrative Code (VAC) 10-210-693 sets out the tax application for government contractors and states:

The appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property (e.g., a computerized data retrieval system) or for the provision of an exempt service (e.g., facilities management or real property construction). If a contract is for the sale of tangible personal property, a contractor may purchase such tangible personal property exempt from the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.

However, if a contract is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services , even though title to the property provided may pass to the government or the contractor may be fully and directly reimbursed by the government, or both. 1 [Emphasis added.]

This regulation is consistent with the ruling in United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2nd 881 (4th Cir. 1978), in which the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer of items provided in the performance of its contract with the United States. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, the items were not "resold" to the United States.

This position has been the consistent policy of the Department as evidenced in Public Document 89-154 (4/28/89). The facts in that determination provide that equipment was purchased at the end of a services contract at the specific request of the federal government. The equipment purchased was totally unrelated to the service contract and was at no time actually used by the contractor in the performance of its duties under the contract. Further, the federal government exercised complete control and direction over the equipment and took title immediately upon delivery of the equipment. The Tax Commissioner found no basis for extending the resale or government exemption to the contractor's equipment purchase.

In the instant case, the objective of the Statement of Work for Task Order #19 is for the Taxpayer to provide engineering, technical and analytical support to the Plans Branch, Plans and Training Division, the Deputy Director of Operations, and the Command Group for the planning and execution of programs and events supporting Army efforts to develop and field future units, systems, doctrine, and procedures.

Based on the Statement of Work, the Taxpayer was clearly engaged to provide engineering, technical and analytical support services to the federal government. Although the Taxpayer furnished certain items in connection with this contract order, the overall purpose of the contract order was to render engineering and other support services to the federal government. In accordance with Title 23 VAC 10-210-693, the Taxpayer is deemed the taxable user or consumer of all items purchased in providing such services.

Additionally, in United States v. Forst , the court found that the credit of the United States was not bound by the contractor's purchasing agreements so as to render the transactions sales to the federal government. In the instant case, there is no evidence that the Taxpayer was designated the purchasing agent for the government and that the government's credit was bound directly to the vendors for the payment on purchases made by the Taxpayer. The contract documents provided make no reference to such a relationship. Instead, the costs incurred by the Taxpayer were billed separately to the government, which reimbursed the Taxpayer.

The Taxpayer asserts that it purchased the items at issue on behalf of the government and on government instructions. This fact is true for a majority of government contractors, an overwhelming number of which must pay the tax on all tangible personal property purchased in connection with their contract with the government.

In this case, it is clear that the Taxpayer is the purchaser of the contested items and the ultimate taxable consumer of all tangible personal property purchased under its contract with the federal government. Therefore, I find no basis for extending the resale or government exemption to those items.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/54317R

1 When a federal ID/IQ contract is involved, the true object test may generally be applied to individual delivery orders rather than to the overall contract if the true object of the contract cannot be readily determined from the language of the underlying contract. See P.D. 01-6 (01/04/01) and P.D. 04-53 (08/18/04)