Could a federal museum contractor buy exhibits and installation materials exempt using the agency's government exemption certificate?

Subject

Purchases of tangible personal property for contract with federal government

Plain-English summary

Virginia did not treat the federal exemption certificate as automatically covering every contractor purchase. If the contract's true object was a sale of tangible property, the contractor could buy for resale and make an exempt sale to the agency. If the contract was primarily for services, the contractor consumed the property and owed tax.

Materials incorporated into real property were also consumed by the contractor, even on a government job. The exception was property furnished by the agency itself.

A separate purchasing-agent route existed when the contractor was officially designated to buy for the government and the government's credit was directly bound. Those purchases could use the federal exemption.

What this means for you

• Classify each government contract as property, services, or real-property work.
• A government customer's exemption does not automatically pass through to its contractor.
• Resale treatment requires an actual sale of the property to the agency.
• Purchasing-agent documentation must directly bind government credit.

Common questions

Q: Did the agency's exemption certificate exempt all purchases?
A: No. The contract's true object and the contractor's role controlled.

Q: Were real-property materials exempt?
A: Generally no when the contractor bought and consumed them; agency-furnished property was treated differently.

Q: When could purchasing-agent status help?
A: When the contractor was officially designated and the government's credit was directly bound.

Citations and references

• Va. Code § 58.1-609.1 4.
• 23 VAC 10-210-693 and 10-210-410 A and J.
• P.D. 03-75 (Oct. 27, 2003).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-116

Original ruling text

June 26, 2008

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") requesting a ruling on the application of the retail sales and use tax to purchases of tangible personal property made pursuant to a contract with an agency of the federal government. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer has entered into a contract with the * (the "Agency") to provide engineering, fabrication, transporting, installation and fine­ tuning of all interpretive exhibits, exhibit lighting, audio-visual equipment and associated items for the *** (the "Museum"). The Agency provided an exemption certificate to the Taxpayer, indicating that tangible personal property purchased for use or consumption by the United States is exempt from the Virginia retail sales and use tax.

RULING

Contracts with Respect to Tangible Personal Property or Services

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-693, in order to determine the application of the retail sales and use tax to government contracts, the true object test is applied to the overall contract. When the terms of the contract require that the Taxpayer sell tangible personal property to the Agency, the Taxpayer may purchase the tangible personal property exempt of the tax under a resale exemption. The Taxpayer then may resell the property to the Agency exempt of the tax. However, should the contract require the Taxpayer to provide services to the Agency, the Taxpayer must remit the sales tax on purchases of tangible personal property used in the performance of the services. Please note that this regulation reflects the Department's policy with regard to its interpretation of the "true object" test at the time the contracts at issue were entered into. 1

Contracts with Respect to Real Estate

Title 23 VAC 10-210-410 A defines a contractor as:

Any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon . . ., and in connection therewith to furnish tangible personal property, whether such person be a prime contractor or subcontractor. Unless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.

The regulation further provides that "[t]angible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor." Additionally, the regulation states, "No sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency . . . ." Finally, the regulation sets out that "[a] contractor must remit the use tax on any tangible personal property purchased exclusive of the tax and furnished to him except when such property is purchased and furnished to a contractor by a governmental unit or agency." [Emphasis added.]

Pursuant to Title 23 VAC 10-210-410, when the terms of the contract require the Taxpayer to provide real property construction for the Agency, the Taxpayer will be liable for the tax on items of tangible personal property used to perform the real property construction. However, if the Agency provides such property to the Taxpayer, the Taxpayer will not be liable for the use tax.

Purchasing Agent Status

Virginia Code § 58.1-609.1 4 provides, in pertinent part, that the retail sales and use tax does not apply to "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States."

Pursuant to Title 23 VAC 10-210-693, a government services contractor is deemed "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." However, Title 23 VAC 10-210-410 J allows purchases of such property to be exempt of the tax, provided "the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity . . . ."

In instances where the Taxpayer has been officially designated a purchasing agent for the government, and the credit of the government is directly bound, the Taxpayer can purchase items of tangible personal property used in the performance of the contract exempt of the tax. The exemption granted to government entities and provided in Va. Code § 58.1-609.1 4 would apply to such purchases. See, Public Document 03-75 (10/27/03) for further explanation of the Department's policy regarding purchasing agents for the government.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and regulations 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1073804821P

1 Effective July 1, 2006, the Department's policy with respect to the "true object" test changed as a result of language included in the Budget Bill (House Bill 5002, Chapter 3, 2006 Acts, Special Session 1). The emergency regulation reflecting this change in policy can be found on the Department's website in the Tax Policy Library at Title 23 VAC 10-210-693.