Virginia to end tax ambiguity for contractors

A tax policy that had made it difficult to predict whether Virginia would collect state sales tax on certain contracts has been ended. The latest budget, passed June 28, contains language requiring changes for all contracts awarded after July 1, 2006.

The state's Department of Taxation has until July 2007 to promulgate a formal rule.

Since the early 1990s, Virginia officials applied a "true object test" to all government contracts to determine whether they were primarily for goods or for services. Sales of goods to the government -- federal, state or local -- are exempt from taxation under Virginia law. However, goods that are purchased in the course of a service contract are subject to the state's 5 percent sales tax. Contractors typically pay the tax and then may or may not pass it on to the government customer.

“The world changed around us in Virginia," said Josh Levi, vice president of policy at the Northern Virginia Technology Council. "The federal government started to go to more bundled contracts for both goods and services. When you had those hybrid contracts it was not always clear where it was a taxable transaction or not.”

A sale of 500 computers to the government through a reseller, for example, is clearly tax-exempt. A contract that calls for the contractor to provide 500 computers, network them and create custom software is much more ambiguous, Levi said.

“To some degree it’s subjective, and it’s not always predictable," Levi said. "There’s a lot of uncertainty for companies.”

Under the new provisions, state tax officials will look at individual task orders rather than the contract as a whole to determine what is and is not subject to the sales tax.

NVTC has been lobbying for the change for 10 years, Levi said.