Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments
Topic
Collection of Delinquent Tax
Date Issued
05-15-2000
May 15, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of sales and use tax assessed to ****** (the "Taxpayer"), for the period July 1995 through March 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is part of a corporate group that provides telecommunications services throughout the United States. The Taxpayer is a wholly-owned first-tier subsidiary and is the operating unit of the corporate group that provides carrier services to other telecommunications providers. While the Taxpayer engages in the provision of telecommunications services, the actual services are provided by several affiliated entities ("entities") operating in a number of states. The Taxpayer maintains its headquarters and a warehouse in Virginia and is not a public service corporation for Virginia sales and use tax purposes.
During the audit period, the Taxpayer purchased communications equipment ("equipment") that was housed in its Virginia warehouse. A portion of the equipment was sold to an unrelated third party and the remainder was delivered outside Virginia for use by the entities. As a result of the department's audit, the Taxpayer was assessed tax on the equipment housed in Virginia and delivered to the entities. The basis for the assessment is the auditors' conclusion that the equipment was purchased for use in the provision of telecommunications services and that a taxable first use was exercised in Virginia.
The Taxpayer protests the tax and contends the equipment was purchased for resale and subsequently leased to the entities outside Virginia. The Taxpayer asserts that while in Virginia the equipment was held in a resale inventory and delivered outside Virginia for first use. In the opinion of the Taxpayer, a taxable use of the equipment was not made in Virginia. The Taxpayer cites a number of department rulings, Title 23 of the Virginia Administrative Code (VAC) 10-210-780 - Interstate and foreign commerce regulation, and Commonwealth v. Miller-Morton Company, 220 Va. 852 (1980) to support its position.
DETERMINATION
The Taxpayer cites a number of department rulings to support the fact that the lease of tangible personal property between subsidiary entities qualifies as a pure lease transaction for sales and use tax purposes. In addition, the Taxpayer points out that the leased property may be purchased exempt of the tax under the resale exemption. The Taxpayer is correct in that the department has generally held that charges for the lease of tangible personal property between separately incorporated subsidiaries are subject to the sales tax as taxable lease transactions. See Public Document (P.D.) 85-233 (12/31/85) and P.D. 92-30 (4/20/92). Therefore, the purchase of such property may be made under the resale exemption. Code of Virginia § 58.1-602.
The department's policy with respect to leases among subsidiary entities is well established. However, the issue for consideration in this case focuses on whether the Taxpayer's acquisition and transference of the equipment constitute purchases for resale of tangible personal property for subsequent lease to the entities.
In order to determine this, the department looks at certain factors. Generally, a formal lease agreement is entered into by a lessor and the lessee which stipulates the terms of the lease arrangement. In this case, there were no written lease agreements between the Taxpayer and the entities. According to the Taxpayer, there were "informal" lease agreements in which the entities paid the Taxpayer rental fees for the equipment. Other than the federal tax return showing the reporting of rental income, the Taxpayer has not provided any accounting detail or documentation that ties the rental income to the equipment at issue or that establishes any leasing arrangement with the entities.
In addition, the department looks to the method of depreciation for federal income tax purposes. P.D. 97-32 (1/31/97). Pursuant to ' 1221 of the Internal Revenue Code, a capital asset may not include "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." United States Treasury Regulation ' 1.167(a)-2 specifically provides that, with regard to depreciation allowances, "the allowance does not apply to inventories or stock in trade...." The Taxpayer has treated the equipment as depreciable assets and not as resale inventory for federal income tax purposes.
Based on the Taxpayer's failure to provide convincing evidence of any lease agreements with the entities and the Taxpayer's treatment of the equipment for federal income tax purposes, l must agree with the auditor's conclusion that the Taxpayer purchased the equipment for use in the provision of telecommunication services. The equipment was housed and first used in Virginia and therefore is subject to the tax as assessed. P.D. 86-236 (11/19/86) and P.D. 92-207 (10/21/92). Based on this finding, the cited interstate commerce regulation and the Miller-Morton case are not applicable in this instance.
Accordingly, the assessment is correct as issued. Please remit payment for the assessed tax and interest in the amount of $**** within 30 days from the date of this letter. Interest has been assessed through the date of the Taxpayer's letter of appeal. 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/17953J
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of sales and use tax assessed to ****** (the "Taxpayer"), for the period July 1995 through March 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is part of a corporate group that provides telecommunications services throughout the United States. The Taxpayer is a wholly-owned first-tier subsidiary and is the operating unit of the corporate group that provides carrier services to other telecommunications providers. While the Taxpayer engages in the provision of telecommunications services, the actual services are provided by several affiliated entities ("entities") operating in a number of states. The Taxpayer maintains its headquarters and a warehouse in Virginia and is not a public service corporation for Virginia sales and use tax purposes.
During the audit period, the Taxpayer purchased communications equipment ("equipment") that was housed in its Virginia warehouse. A portion of the equipment was sold to an unrelated third party and the remainder was delivered outside Virginia for use by the entities. As a result of the department's audit, the Taxpayer was assessed tax on the equipment housed in Virginia and delivered to the entities. The basis for the assessment is the auditors' conclusion that the equipment was purchased for use in the provision of telecommunications services and that a taxable first use was exercised in Virginia.
The Taxpayer protests the tax and contends the equipment was purchased for resale and subsequently leased to the entities outside Virginia. The Taxpayer asserts that while in Virginia the equipment was held in a resale inventory and delivered outside Virginia for first use. In the opinion of the Taxpayer, a taxable use of the equipment was not made in Virginia. The Taxpayer cites a number of department rulings, Title 23 of the Virginia Administrative Code (VAC) 10-210-780 - Interstate and foreign commerce regulation, and Commonwealth v. Miller-Morton Company, 220 Va. 852 (1980) to support its position.
DETERMINATION
The Taxpayer cites a number of department rulings to support the fact that the lease of tangible personal property between subsidiary entities qualifies as a pure lease transaction for sales and use tax purposes. In addition, the Taxpayer points out that the leased property may be purchased exempt of the tax under the resale exemption. The Taxpayer is correct in that the department has generally held that charges for the lease of tangible personal property between separately incorporated subsidiaries are subject to the sales tax as taxable lease transactions. See Public Document (P.D.) 85-233 (12/31/85) and P.D. 92-30 (4/20/92). Therefore, the purchase of such property may be made under the resale exemption. Code of Virginia § 58.1-602.
The department's policy with respect to leases among subsidiary entities is well established. However, the issue for consideration in this case focuses on whether the Taxpayer's acquisition and transference of the equipment constitute purchases for resale of tangible personal property for subsequent lease to the entities.
In order to determine this, the department looks at certain factors. Generally, a formal lease agreement is entered into by a lessor and the lessee which stipulates the terms of the lease arrangement. In this case, there were no written lease agreements between the Taxpayer and the entities. According to the Taxpayer, there were "informal" lease agreements in which the entities paid the Taxpayer rental fees for the equipment. Other than the federal tax return showing the reporting of rental income, the Taxpayer has not provided any accounting detail or documentation that ties the rental income to the equipment at issue or that establishes any leasing arrangement with the entities.
In addition, the department looks to the method of depreciation for federal income tax purposes. P.D. 97-32 (1/31/97). Pursuant to ' 1221 of the Internal Revenue Code, a capital asset may not include "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." United States Treasury Regulation ' 1.167(a)-2 specifically provides that, with regard to depreciation allowances, "the allowance does not apply to inventories or stock in trade...." The Taxpayer has treated the equipment as depreciable assets and not as resale inventory for federal income tax purposes.
Based on the Taxpayer's failure to provide convincing evidence of any lease agreements with the entities and the Taxpayer's treatment of the equipment for federal income tax purposes, l must agree with the auditor's conclusion that the Taxpayer purchased the equipment for use in the provision of telecommunication services. The equipment was housed and first used in Virginia and therefore is subject to the tax as assessed. P.D. 86-236 (11/19/86) and P.D. 92-207 (10/21/92). Based on this finding, the cited interstate commerce regulation and the Miller-Morton case are not applicable in this instance.
Accordingly, the assessment is correct as issued. Please remit payment for the assessed tax and interest in the amount of $**** within 30 days from the date of this letter. Interest has been assessed through the date of the Taxpayer's letter of appeal. 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/17953J
Rulings of the Tax Commissioner