Could a Navy contractor buy office equipment tax-free for task orders whose true object was renting temporary office facilities?

Plain-English summary

Virginia found that the Navy task orders were principally leases or rentals of temporary office trailers and equipment. The contractor's related purchases qualified for resale treatment, the contested items were removed from the audit, and the paid overassessment was refunded with interest.

The ship-repair contractor furnished temporary office facilities near naval vessels. The task orders included trailers, workstations, cabinets, printers, paper, toner, fax machines, phones, network equipment, cabling, drinking fountains, fire extinguishers, and other furnishings. The contractor also supplied utilities, climate control, janitorial work, restroom cleaning, sewage service, and maintenance.

Under 23 VAC 10-210-693(E), the true-object test applied separately to each post-July 1, 2006 task order. A service order made the contractor the taxable user of property. A property-sale or rental order allowed property tied to the order to be purchased exempt for resale.

Virginia rejected treatment as real-estate rental. The services made the temporary trailers and equipment useful and fully functioning, but the principal transaction remained the lease or rental of tangible personal property.

One order also included a full-time temporary administrative assistant. That minor service did not outweigh the private office facility, equipment, and supplies. The true object remained property rental.

23 VAC 10-210-840(C) allowed property acquired for future lease or rental as an established business to be purchased under a resale certificate, even when the lessee was a tax-exempt government organization. Va. Code § 58.1-609.1(4) separately covered government use.

What this means for you

• Apply the true-object test to each government task order, not just the master contract.
• Tie each resale purchase to the specific property-rental order.
• Supporting services do not necessarily change a property rental into a service contract.
• A government exemption and a contractor's resale exemption address different stages of the transaction.

Common questions

Q: Were the temporary office trailers treated as real estate?
A: No. Virginia treated them as rented tangible personal property.

Q: Did janitorial, utility, and sewage services change the result?
A: No. They facilitated the rented office facilities.

Q: Did the administrative assistant make one order a service transaction?
A: No. The assistant was a minor part of an order whose true object remained office-facility and equipment rental.

Citations and references

• Va. Code §§ 58.1-609.1(4) and 58.1-1833.
• 23 VAC 10-210-693(E) and 10-210-840(C).
• Virginia resale exemption certificate, Form ST-10, discussed in the ruling.

Subject

Consumer use tax on untaxed purchases of tangible personal property

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-202

Original ruling text

November 1, 2013

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 retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period May 2007 through October 2012.

FACTS

The Taxpayer repairs ships. An audit by the Department resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property that the auditor determined were not eligible for an exemption from the retail sales and use tax.

The Taxpayer takes exception to certain office equipment held in the audit, such as the rental of copy machines, fax machines, office equipment and computers. The Taxpayer maintains that such items were furnished to U.S. naval personnel as part of task orders in which the true object was to furnish tangible personal property to the U.S. Navy. The Taxpayer maintains that these contested purchases and their subsequent rental to the government qualify for the resale exemption, and the subsequent use by the government qualifies for the government exemption set out in Va. Code § 58.1-609.1 4.

DETERMINATION

Virginia Code § 58.1-609.1 4 provides an exemption from the retail sales and use tax for tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.

Section E of Title 23 of the Virginia Administrative Code (VAC) 10-210-693 sets out the tax treatment of task orders executed on and after July 1, 2006, as follows:

As of July 1, 2006, the application of the sales and use tax to all mixed contracts and indeterminate purpose contracts shall be based on application of the true object test to each individual order and not the original contract. If the true object of an order is the provision of a service, the government contractor is deemed the user and consumer of all tangible personal property used in providing the service. If the true object of the order is the sale of tangible personal property, tangible personal property purchased by the contractor to fulfill that order, even if not expressly identified by the terms of the order itself, may be purchased exempt of the tax, provided the property can be tied back to the order for resale. For add-ons to government contracts executed on or after July 1, 2006, the true object test will be applied to each separate add-on without regard to the true object of the original contract. This amended treatment of orders executed on and after July 1, 2006, shall not apply to vendor orders as defined in subsection A of this section.

Subsection C of Title 23 VAC 10-210-840 provides that "[t]angible personal property for future use by a person for taxable lease or rental as an established business may be purchased tax exempt under a certificate of exemption." [Emphasis added.] In this instance, the appropriate certificate of exemption is the Department's resale exemption certificate, Form ST-10. While this regulation uses the phrase "taxable lease or rental," it is applicable regardless of whether the lessee is a taxable business or a tax exempt organization.

Work Items #1343, #1458, and #1380

Based on the contract documents presented, the scope of work of each of these work items is for the provision of temporary office facilities and furnishings to the government within close proximity of a naval vessel. The office space consists of trailers. The furnishings may consist of work stations, file cabinets, printers, paper, toner, fax machine, bookcases, phones, trash cans, standard IP connections, service stations (network server, monitor, printer and chair), various cabling, connectors, telephone lines, drinking fountains, fire extinguishers, etc. In addition, the Taxpayer provides and maintains a sewage tank on a daily basis, provides and maintains all temporary water lines and electrical cabling, provides daily cleaning of restrooms and office spaces, and maintains heating and cooling of the office space within a specified range.

For these work items, the main purpose of each transaction is for the lease or rental of office facilities ( i.e. , office trailers or mobile offices). The furnishing of janitorial services and sewage removal and the furnishing of power and water are to render the office trailers more useful and provide for fully functioning office facilities. For these reasons, it is my determination that these transactions do not constitute the rental of real estate. Rather, the true object of these transactions is for the lease or rental of office trailers at a temporary location. The required services facilitate the servicing and maintenance of the trailers and equipment furnished and were provided as a part of the lease or rental of the equipment.

Work Item #1563

The Taxpayer did not furnish contract documentation for this work item but submits a contract claiming that it has the same requirements as for work item #1563. Based on the contract documentation furnished, the scope of work is to provide a private office facility with equipment, supplies and an administrative assistant. Thus, this work item is uniquely different from the other work items addressed in this determination in that "one" administrative assistant is furnished to provide administrative services to the government on a full time but temporary basis. Despite this administrative requirement and the janitorial services requirement, the true object of the transaction is for the lease or rental of tangible personal property. While the inclusion of minor administrative assistant services provides for a more fully functioning office environment, it is insufficient to transform the main purpose of the transaction from the lease or rental of tangible personal property to a service transaction.

CONCLUSION

Based on this determination, the audit will be revised to remove the contested items from the audit. Because the assessment is paid in full, a refund of the overpaid amount will be issued as soon as practical and will include refund interest as computed in accordance with Va. Code § 58.1-1833.

The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact * in the

Department's Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5386247730.R