Tax Type
Retail Sales and Use Tax
Description
Gas cylinders for rent; Depreciation of rental property
Topic
Exemptions
Property Subject to Tax
Date Issued
10-12-2000
October 12, 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 a retail sales and use tax audit assessment issued to **** (the "Taxpayer") for the period November 1994 through November 1997. I apologize for the delay in responding to your letter.
The Taxpayer is in the business of selling compressed industrial gases and welding equipment to its customers. The gases are delivered to customers in pressurized cylinders. When the Taxpayer enters into an agreement to provide gas to a customer, it arranges to lease the cylinder containing the gas to the customer on a periodic basis, either monthly or annually. The Taxpayer purchases the cylinders exempt of the tax under a resale exemption and collects sales tax on the lease payments received from its customers.
An audit by the department resulted in the assessment of use tax on the purchase of the cylinders. The auditor maintains the cylinders were not purchased for resale because they were being capitalized and depreciated for tax purposes by the Taxpayer. The Taxpayer disagrees with the auditor's findings and contends the sole use of the cylinders at issue has been for rental to customers; therefore, the cylinders could be purchased under the resale exemption.
The Taxpayer also questions the assessment of tax on the purchase of certain materials used for refurbishing the cylinders held for rental use. The Taxpayer believes such materials are exempt under Code of Virginia § 58.1-609.3(3).
Code of Virginia § 58.1-609.10(3) exempts from the sales and use tax tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business. Based on the information provided, the cylinders purchased by the Taxpayer were being leased to customers during the audit period. Under the exemption cited above, the Taxpayer is entitled to purchase the gas cylinders exempt of the tax, provided that they are used as part of a taxable lease. In this case, the Taxpayer purchased the cylinders exempt of the tax, but charged its customers tax on the proceeds from the leasing of the cylinders. Accordingly, the exemption under Code of Virginia § 58.1-609.10(3) is applicable to the Taxpayer's purchases of gas cylinders.
Because the cylinders were being capitalized and depreciated for tax purposes by the Taxpayer, the auditor assessed use tax on the cost price of the cylinders. The auditor's position was based on Public Document (P.D.) 97-32 (1/31/97).
In P.D. 97-32, the taxpayer was a propane dealer who maintained that gas cylinders purchased for its business were exempt as packaging resold with the propane gas. The department's auditor noted that the cylinders were depreciated by the dealer for income tax purposes, and the taking of depreciation was inconsistent with the dealer's position that the cylinders were a part of the inventory of goods for resale. This position was supported by United States Treasury Regulation § 1.167(a)-2, which specifically provides that, with regard to depreciation allowances, "[t]he allowance does not apply to inventories or stock in trade . . . ." The department ruled that the taxpayer could not treat its cylinders as depreciable property for income tax purposes while treating the cylinders as sales packaging materials for sales tax purposes.
Code of Virginia § 58.1-623(C) provides that if a taxpayer purchases property with a sales tax exemption certificate and then makes any use of the property "other than an exempt use or retention, demonstration, or display while holding the property for resale, distribution, or lease in the regular course of business," then such use is deemed a taxable sale measured by the cost of the property to the taxpayer. This same subsection continues:
The Taxpayer does not argue that its cylinders are packaging material or otherwise part of the materials sold to its customers, as in P.D. 97-32. The cylinders are rental property held for the production of income. Therefore, under Code of Virginia § 58.1-623(C), the Taxpayer is permitted to collect the tax on the proceeds from the rental of the cylinders, and may purchase the cylinders exempt of the sales and use tax.
Deducting depreciation on the cylinders for income tax purposes is not inconsistent with treating the cylinders as held solely for rental use that may purchased exempt of the sales and use tax. United States Treasury Regulation § 1.167(a)-1 states, in part:
Based on the foregoing, the Taxpayer properly purchased the gas cylinders exempt of the tax and collected tax on the proceeds from the rental of the cylinders. Similarly, the materials used for refurbishing cylinders held for rental use may be purchased exempt of the tax. Accordingly, the audit will be referred back to the auditor, and the tax assessed on cylinders purchased for rental and the refurbishing materials will be removed from the audit assessment.
If you have any questions regarding the audit revisions, you may contact ****, Supervisor for the **** District Office, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16251
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to **** (the "Taxpayer") for the period November 1994 through November 1997. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is in the business of selling compressed industrial gases and welding equipment to its customers. The gases are delivered to customers in pressurized cylinders. When the Taxpayer enters into an agreement to provide gas to a customer, it arranges to lease the cylinder containing the gas to the customer on a periodic basis, either monthly or annually. The Taxpayer purchases the cylinders exempt of the tax under a resale exemption and collects sales tax on the lease payments received from its customers.
An audit by the department resulted in the assessment of use tax on the purchase of the cylinders. The auditor maintains the cylinders were not purchased for resale because they were being capitalized and depreciated for tax purposes by the Taxpayer. The Taxpayer disagrees with the auditor's findings and contends the sole use of the cylinders at issue has been for rental to customers; therefore, the cylinders could be purchased under the resale exemption.
The Taxpayer also questions the assessment of tax on the purchase of certain materials used for refurbishing the cylinders held for rental use. The Taxpayer believes such materials are exempt under Code of Virginia § 58.1-609.3(3).
DETERMINATION
Code of Virginia § 58.1-609.10(3) exempts from the sales and use tax tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business. Based on the information provided, the cylinders purchased by the Taxpayer were being leased to customers during the audit period. Under the exemption cited above, the Taxpayer is entitled to purchase the gas cylinders exempt of the tax, provided that they are used as part of a taxable lease. In this case, the Taxpayer purchased the cylinders exempt of the tax, but charged its customers tax on the proceeds from the leasing of the cylinders. Accordingly, the exemption under Code of Virginia § 58.1-609.10(3) is applicable to the Taxpayer's purchases of gas cylinders.
Because the cylinders were being capitalized and depreciated for tax purposes by the Taxpayer, the auditor assessed use tax on the cost price of the cylinders. The auditor's position was based on Public Document (P.D.) 97-32 (1/31/97).
In P.D. 97-32, the taxpayer was a propane dealer who maintained that gas cylinders purchased for its business were exempt as packaging resold with the propane gas. The department's auditor noted that the cylinders were depreciated by the dealer for income tax purposes, and the taking of depreciation was inconsistent with the dealer's position that the cylinders were a part of the inventory of goods for resale. This position was supported by United States Treasury Regulation § 1.167(a)-2, which specifically provides that, with regard to depreciation allowances, "[t]he allowance does not apply to inventories or stock in trade . . . ." The department ruled that the taxpayer could not treat its cylinders as depreciable property for income tax purposes while treating the cylinders as sales packaging materials for sales tax purposes.
Code of Virginia § 58.1-623(C) provides that if a taxpayer purchases property with a sales tax exemption certificate and then makes any use of the property "other than an exempt use or retention, demonstration, or display while holding the property for resale, distribution, or lease in the regular course of business," then such use is deemed a taxable sale measured by the cost of the property to the taxpayer. This same subsection continues:
- If the sole use of the property other than retention, demonstration, or display in the regular course of business is the rental of the property while holding it for sale, distribution, or lease, the taxpayer may elect to pay the tax on the amount of the rental charged, rather than the cost of the property to him.
The Taxpayer does not argue that its cylinders are packaging material or otherwise part of the materials sold to its customers, as in P.D. 97-32. The cylinders are rental property held for the production of income. Therefore, under Code of Virginia § 58.1-623(C), the Taxpayer is permitted to collect the tax on the proceeds from the rental of the cylinders, and may purchase the cylinders exempt of the sales and use tax.
Deducting depreciation on the cylinders for income tax purposes is not inconsistent with treating the cylinders as held solely for rental use that may purchased exempt of the sales and use tax. United States Treasury Regulation § 1.167(a)-1 states, in part:
- Section 167(a) [of the Internal Revenue Code] provides that a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or of property held by the taxpayer for the production of income shall be allowed as a depreciation deduction. (Emphasis and insert added.)
Based on the foregoing, the Taxpayer properly purchased the gas cylinders exempt of the tax and collected tax on the proceeds from the rental of the cylinders. Similarly, the materials used for refurbishing cylinders held for rental use may be purchased exempt of the tax. Accordingly, the audit will be referred back to the auditor, and the tax assessed on cylinders purchased for rental and the refurbishing materials will be removed from the audit assessment.
If you have any questions regarding the audit revisions, you may contact ****, Supervisor for the **** District Office, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16251
Related Documents
Rulings of the Tax Commissioner