Tax Type
Retail Sales and Use Tax
Description
Airport storage lockers
Topic
Property Subject to Tax
Date Issued
04-30-1999
April 30, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter in which you, on behalf of your client, ***** (the "Taxpayer'), seek correction of the retail sales and use tax audit for the period of July 1994 through May 1997.
FACTS
The Taxpayer is in the business of renting storage lockers, luggage carts, and strollers at airports, bus stations, and malls throughout the country, including Virginia. The Taxpayer purchases the storage lockers from an out-of-state supplier who ships the lockers directly to the Virginia location for installation. The Taxpayer pays no tax on the lockers at the time of purchase. The lockers are installed into the walls of airports and bus stations by a third party contractor. The lockers are bolted to the floor and also wired to electrical and Local Area Network (LAN) lines. Persons wishing to utilize the lockers will deposit their belongings in the locker, close the locker door and deposit cash or a credit card into the locker pay point. The Taxpayer monitors locker activity through a computer system.
The Taxpayer was audited and assessed tax on the gross receipts received from the rental of storage lockers which have been placed in Virginia. The auditor held the lockers as the rental of tangible personal property. The Taxpayer believes that the lockers become part of realty and should not be held as the rental of tangible personal property.
In the event that the department determines that the lockers in question are in fact tangible personal property, the Taxpayer is requesting two adjustments in the sales and use tax audit calculations. First, the Taxpayer is requesting the removal of two line entries in the audit working papers which were recorded twice. Also, based on the payment method for use of the lockers, the Taxpayer is requesting that they be allowed to back the tax out of the gross receipts by dividing gross receipts by 1.045 to reflect that the tax is included in the gross receipts.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-410.G addresses contractors and retailers who install tangible personal property which becomes real property after installation. This regulation states, in part, the following:
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- A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings (as distinguished from floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items is not classified as a using or consuming contractor with respect to them.
- A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings (as distinguished from floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items is not classified as a using or consuming contractor with respect to them.
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- Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered....
- Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered....
In the present case, the Taxpayer enters into five-year agreements, with a five-year extension option, with Virginia airports for the provisions of lockers. Should the airport elect not to extend its option, the Taxpayer removes the lockers from the premises. The agreement supports a finding that it is not the intention of the parties to make the lockers a permanent fixture. Furthermore, it is the department's understanding that, for local tax purposes, the lockers are classified as business property and not realty. While this is not determinative of the issue, it is strong evidence that the lockers do not become real property. This being the case, the department finds that the lockers in question do not become a permanent fixture. Thus, the lockers maintain their classification as tangible personal property.
Having established the fact that the lockers remain tangible personal property, it must be determined whether the Taxpayer is leasing tangible personal property to its customers or providing an exempt service. The department has traditionally used the "true object' test provided in 23 VAC 10-210-4040, Services, to determine if a transaction constitutes the sale/rental of tangible personal property, or the provision of a service. Subsection D of this regulation provides, in part, for the following:
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- In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object' of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
- In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object' of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
Based on all of the above, the audit will be referred back to the auditor and adjusted accordingly. The Taxpayer will not be subject to the sales tax on the gross receipts received from the rental of the lockers; however, the Taxpayer will be liable for the use tax on the cost price of the lockers installed in Virginia. A revised audit assessment will be forwarded to the Taxpayer upon completion of the audit revisions. If you should have any questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13890K
Rulings of the Tax Commissioner