Could a federal contractor buy hardware under a mixed task order for resale and transfer it tax-free to the federal government?

Subject

Mixed federal task order had a tangible-property true object

Plain-English summary

Virginia ruled that the federal contractor could buy the hardware furnished under CLIN 14 for resale and transfer it to the federal government without sales tax. The task order was issued under a contract combining services and tangible personal property.

Virginia's regulation applied the true-object test to orders issued under mixed government contracts on or after July 1, 2006, including task orders and contract line item numbers. A transaction solely for property, solely for services, or constituting a real-property contract did not itself need the test.

CLIN 14 was described as other direct costs, and the contractor documented that it furnished only hardware under that line. Virginia therefore did not apply the true-object test to the CLIN alone. It examined the mixed task order, which required commercial and government software and licenses, computer hardware, customized software, and system maintenance. The Department found that order was primarily for tangible personal property.

The contractor could purchase the CLIN 14 articles under the resale exemption, and its sale to the federal government was exempt under the government exemption. For tax already paid, Virginia preferred refunds from the vendors. A refund claimed directly from the Department would be limited to the net state and local tax remitted and reduced by the vendors' dealer discounts.

What this means for you

• Mixed government contracts can require analysis at the order or line-item level described by the regulation.
• A property-only CLIN does not necessarily end the inquiry when it sits inside a mixed task order.
• The actual deliverables and supporting documents drove the true-object conclusion.
• A contractor may use the resale exemption when the order's primary object is property and that property is transferred to the government.
• Refund route matters because a direct Department refund may exclude dealer discounts.

Common questions

Why did Virginia examine the whole task order?

CLIN 14 itself documented only hardware, but the underlying contract was mixed. The Department used the mixed task order to determine the transaction's primary object.

What was the task order's true object?

Primarily the sale of tangible personal property, based on its software, licenses, hardware, customized software, and maintenance deliverables.

How could the contractor recover tax already paid?

The preferred method was a full vendor refund. A direct Department refund would be reduced by the dealer discount retained by the vendors.

Citations and references

• Va. Code §§ 58.1-609.1(4) and 58.1-1823.
• 23 VAC 10-210-693 and 23 VAC 10-210-3040.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-27

Original ruling text

March 31, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on behalf of * (the "Taxpayer") concerning the application of the retail sales and use tax to purchases of tangible personal property made pursuant to a contract line item number (CLIN) that is part of a government service contract. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is engaged in a service business and is not generally entitled to purchase tangible personal property for resale under its contracts with government entities. Because of the recent change to the Department's policy with respect to the application of the true object test to mixed contracts with the federal government, the Taxpayer specifically requests a ruling as to the application of the sales and use tax to hardware and commercial off-the-shelf software provided under CLIN 14 of a contract task order issued by the federal government in September 2008. The task order is for the provision of tangible personal property and services.

According to the Taxpayer, CLIN 14 is solely for the provision of tangible personal property and the application of the true object test is not necessary. The Taxpayer seeks a ruling that the Taxpayer may purchase CLIN 14 items exempt of the tax, as well as sell them exempt of the tax to the federal government. To the extent the Taxpayer has paid the sales tax on CLIN 14 items, the Taxpayer requests a refund pursuant to Va. Code § 58.1-1823, upon providing all documentation of sales tax paid and other information to support the refund request.

RULING

Application of the Tax

Title 23 of the Virginia Administrative Code (VAC) 10-210-693 was revised effective July 1, 2006. The transitional provisions of this revised regulation (as set out in section F) provide the following:

The true object test shall be applied to all orders issued under all mixed government contracts 1 if executed on and after July 1, 2006, regardless of the date on which the original contract, add-on, or order was executed. [Footnote and emphasis added.]

Thus, the general rule for mixed contracts is to apply the true object test to each individual order. Section A of this regulation defines the term "order" to mean "a specific task assigned to a contractor pursuant to a contract with a government entity" and "includes contract line item numbers (CLINs)." Consequently, the true object test applies to each individual CLIN listed in a task order issued pursuant to a mixed contract executed on or after July 1, 2006. The application of the true object test is not necessary, however, when a transaction between a government entity as defined in the regulation and a contractor is solely for the provision of tangible personal property, solely for the provision of services, or constitutes a real property contract. See section B of Title 23 VAC 10-210-693. Accordingly, the true object test applies to the lowest level mixed order for determining the application of the sales and use tax to a mixed government contract 2 regardless of whether such order is a task order, delivery order, or a CLIN.

Because the contract in this case is a mixed contract, the true object may apply to each CLIN of that contract, although listed as part of a task order issued under such contract. Based on the task order presented, CLIN 14 is described as other direct costs that are not to exceed a specified amount. The Taxpayer furnishes evidence showing the provision of only hardware items to the government in the amount specified by CLIN 14. As such, the application of the true object test to the CLIN is not necessary. Instead, we must look to the mixed task order for determining the application of the tax.

The mixed task order requires the Taxpayer to provide the federal government with commercial off-the-shelf and government off-the-shelf software products and licenses, computer hardware, customized software, and maintenance of the system. Accordingly, the true object of the mixed task order is primarily for the sale of tangible personal property to the government. As such, all articles of tangible personal property purchased pursuant to CLIN 14 may be purchased by the Taxpayer pursuant to the resale exemption. The sale of such personal property by the Taxpayer to the federal government is also exempt of the tax pursuant to the federal government exemption set out in Va. Code § 58.1-609.1 4.

Refund Issue

The preferred refund method is for the Taxpayer to obtain a full refund from individual vendors that collected the sales tax in question. If the Taxpayer seeks the refund directly from the Department, the amount refunded would only be the net amount of the state and local tax remitted to the state on the transactions generating the refund. In other words, the amount of the refund would be reduced by the dealer's discount taken by the various vendors that collected the sales tax. See Title 23 VAC 10-210-3040.

I trust that this responds to your inquiry. This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia section and regulation 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 ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3145335314.R

1.The term "mixed contracts" is defined by Title 23 VAC 10-210-693 as "a contract between a government entity and a contractor that involves the contractor both rendering a service and providing tangible personal property to the government entity under that contract." Title 23 VAC 10-210-693 defines the terms "government" and "government entity" to mean "the United States government, the Commonwealth of Virginia, and any agency, board, commission, political subdivision or instrumentality of the Commonwealth of Virginia" and that such term does "not include any foreign governments, other state governments of the United States, or any political subdivisions of such other state governments."

2. Ibid.