By Elissa Silverman
Washington Post Staff Writer
Tuesday, January 24, 2006

Virginia companies that perform work for the federal government have scored a tentative victory in Gov. Timothy M. Kaine's proposed 2006-to-2008 budget with a provision that is likely to reduce the sales tax charged to their contracts.

The decision by Kaine (D) to change the terms of the "true object" test is a nod to the concerns of the government contracting community in Northern Virginia.

Lobbied heavily by contractors, the political arms of the Fairfax County Chamber of Commerce and the Northern Virginia Technology Council had endorsed Jerry W. Kilgore, the Republican candidate for governor who lost to Kaine in November. Kilgore had pledged to change state law so that sales tax would not be applied to goods bought as part of a contract in service to the federal government.

Kaine had said he wanted to study the issue first but has decided now to at least partially relax the sales-tax law as part of his first budget.

Under the proposal, originally offered by then-Gov. Mark R. Warner (D) but maintained in the budget Kaine has submitted to the Virginia legislature, the state's tax division as of July 1 will look at specific contract task orders when determining if the "true object" is the provision of a service to the government, rather than generalize about an overall contract. Under some conditions, taxes would not be applied.

"The governor was convinced that this change in long-standing tax policy might produce tangible benefits," Kaine spokesman Kevin Hall said, adding that the provision was meant to keep Virginia's contracting community "vibrant."

Contractors have argued for changes to the sales-tax law to keep them competitive with other states.

The provision must be approved by the legislature.