Tax Type
Retail Sales and Use Tax
Description
Lease; tangible personal property /real property; Cost vs. depreciated value
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
05-25-2000
May 25, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you request reconsideration of the department's previous determination regarding sales and use tax assessed to ***** (the "Taxpayer"), for the period June 1990 through July 1996. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer once operated a nursing home and an adult residential facility. During the audit period, the Taxpayer leased the facilities to separate parties. The leases included real and tangible personal property, and the Taxpayer failed to collect the tax on the monthly lease payments from each party. The auditor assessed tax on 28% of each monthly lease payment in accordance with Public Document (P.D.) 95-223 (8/29/95).
In a prior appeal letter, the Taxpayer opposed the tax on the allocated portion of the monthly lease payments for both leases and provided an alternative basis for computing tax on the tangible personal property portion of the monthly lease payments. In P.D. 97-352 (8/29/97), the department denied the Taxpayer's alternative method because it did not reflect the value of the tangible personal property at the inception of the lease compared to the cost of the real property or any improvements. The auditor's methodology was supported and the assessment of the tax was upheld.
The Taxpayer submits a breakdown of the values of the real and tangible personal property included in the leases at issue. The Taxpayer requests the department recompute the allocated portion of the monthly lease payments based on the depreciated value of the property rather than on the cost value.
DETERMINATION
Cost vs. Depreciated Value
The Taxpayer's proposed method would apportion the tax to the tangible personal property as its value depreciated over an extended period of time. The sales tax, however, is a transactional tax imposed at the time of taxable sale or lease. Code of Virginia §58.1-603. The tax should be apportioned in the same manner as if the tax had been invoiced and collected on the original lease payments. The charges for the lease payments would have been computed based on the value (cost) of the tangible personal property at the inception of the lease agreements. Therefore, it is reasonable to calculate the taxable portion of the monthly lease payments based on the original cost of the tangible personal property instead of the depreciated value.
This identical issue was addressed in P.D. 94-55 (3/14/94), copy enclosed. In that instance, the taxpayer proposed that the valuation method for determining the taxable portion of a lease involving real and tangible personal property take into account the original costs as opposed to depreciation expense. The Tax Commissioner agreed that a valuation method using historical costs for the land, building, improvements, and equipment would be reasonable.
Allocation of Tangible Personal Property and Real Property
The department will accept the information provided by the Taxpayer regarding the allocation of real and tangible personal property under the lease agreement. Based on P.D. 94-55, the allocated portion of the monthly lease payments for both leases will be recomputed using the original costs as opposed to the depreciated costs.
The audit report will be returned to the auditor to recompute the tax attributable to the monthly lease payments. The Taxpayer will receive an adjusted assessment, which should be paid within 30 days. If payment is not received within the allotted time, additional interest will accrue to present.
The Taxpayer may send payment to ***** in the Office of Tax Policy at P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13181J
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you request reconsideration of the department's previous determination regarding sales and use tax assessed to ***** (the "Taxpayer"), for the period June 1990 through July 1996. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer once operated a nursing home and an adult residential facility. During the audit period, the Taxpayer leased the facilities to separate parties. The leases included real and tangible personal property, and the Taxpayer failed to collect the tax on the monthly lease payments from each party. The auditor assessed tax on 28% of each monthly lease payment in accordance with Public Document (P.D.) 95-223 (8/29/95).
In a prior appeal letter, the Taxpayer opposed the tax on the allocated portion of the monthly lease payments for both leases and provided an alternative basis for computing tax on the tangible personal property portion of the monthly lease payments. In P.D. 97-352 (8/29/97), the department denied the Taxpayer's alternative method because it did not reflect the value of the tangible personal property at the inception of the lease compared to the cost of the real property or any improvements. The auditor's methodology was supported and the assessment of the tax was upheld.
The Taxpayer submits a breakdown of the values of the real and tangible personal property included in the leases at issue. The Taxpayer requests the department recompute the allocated portion of the monthly lease payments based on the depreciated value of the property rather than on the cost value.
DETERMINATION
Cost vs. Depreciated Value
The Taxpayer's proposed method would apportion the tax to the tangible personal property as its value depreciated over an extended period of time. The sales tax, however, is a transactional tax imposed at the time of taxable sale or lease. Code of Virginia §58.1-603. The tax should be apportioned in the same manner as if the tax had been invoiced and collected on the original lease payments. The charges for the lease payments would have been computed based on the value (cost) of the tangible personal property at the inception of the lease agreements. Therefore, it is reasonable to calculate the taxable portion of the monthly lease payments based on the original cost of the tangible personal property instead of the depreciated value.
This identical issue was addressed in P.D. 94-55 (3/14/94), copy enclosed. In that instance, the taxpayer proposed that the valuation method for determining the taxable portion of a lease involving real and tangible personal property take into account the original costs as opposed to depreciation expense. The Tax Commissioner agreed that a valuation method using historical costs for the land, building, improvements, and equipment would be reasonable.
Allocation of Tangible Personal Property and Real Property
The department will accept the information provided by the Taxpayer regarding the allocation of real and tangible personal property under the lease agreement. Based on P.D. 94-55, the allocated portion of the monthly lease payments for both leases will be recomputed using the original costs as opposed to the depreciated costs.
The audit report will be returned to the auditor to recompute the tax attributable to the monthly lease payments. The Taxpayer will receive an adjusted assessment, which should be paid within 30 days. If payment is not received within the allotted time, additional interest will accrue to present.
The Taxpayer may send payment to ***** in the Office of Tax Policy at P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13181J
Related Documents
Rulings of the Tax Commissioner