Tax Type
Retail Sales and Use Tax
Description
Who is Responsible for Securing Exemption Certificate
Topic
Exemptions
Taxpayers
Date Issued
08-16-2001
August 16, 2001
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This is in response to your letter of May 21, 2001, in which you request a ruling on the sales and use tax collection responsibilities of third parties assigned to collect lease payments or payments on a conditional sale. Copies of cited sources are enclosed.
FACTS
In an assigned lease of tangible personal property, you indicate that a lessor (the "Lessor" or "Assignor") assigns the collection of payments to a third party (the "Assignee"). You indicate that the Assignee does not take title to the property. Rather, title to the property remains with the Lessor. However, the Assignee does acquire a security interest in the property and pays for the property up-front. You indicate that title to the property may be taken by the Assignee if the lease payments are defaulted.
In a conditional sale of tangible personal property, a broker arranges for the sale between a retail merchant and a buyer. The broker finances the transaction. However, the stream of payments is assigned to a third party, i.e., an Assignee, for collection. The Assignee pays for the property up-front.
In both instances, you ask whether the Assignee is responsible for collecting the sales tax or obtaining exemption certificates from the customers.
RULING
Leases
Pursuant to Code of Virginia § 58.1-612, every in-state and out-of-state person who leases tangible personal property to consumers in Virginia is deemed a dealer. Pursuant to Code of Virginia § 58.1-613, every dealer is required to register for the collection and remittance of the sales tax to the department. Generally, a lessor is responsible for collecting and remitting the sales tax to the department based on the gross proceeds derived from the lease of tangible personal property, without deduction whatsoever for any expenses or commissions paid to others in connection with the lease.
A review of the assignment and lease documents presented reveals that these documents do not support a conclusion that the title to the leased property (otherwise known as the "collateral") transfers to the Assignee only upon default. Rather, it appears that title passes upon the assignment of the property to the Assignee.
For example, the master lease agreement states that "all rights of Lessor hereunder may be assigned by Lessor ...." (Emphasis added.) Moreover, the assignment document presented reveals that "FOR VALUE RECEIVED ,...(the) Assignor ...sells, assigns and transfers to ...Assignee...all of Assignor's rights to and a security interest in ...1)...(the) Master Lease Agreement ...2) the Assignor's interest in and to the collateral as specified in the ...lease...and 3) all monies identified as rental payments payable, or to become payable, under the Lease or with respect to the collateral as specified in the ...lease...." (Inserts and emphasis added.)
This assignment goes beyond the mere creation of a security interest, as it conveys all rights of the Assignor in the property to the Assignee. Using the terms "sells" and "transfers" and the phrase "for value received," the document appears to be intended to convey title in the property from the Assignor to the Assignee in exchange for consideration. Accordingly, the Assignee must register for the collection and remittance of the sales tax to the department based on the gross proceeds received from the lease of the tangible personal property in Virginia.
Conditional Sale
In defining the term "sale," Code of Virginia § 58.1-602 provides that "[a] transaction whereby the possession of property is transferred but the seller retains title as security for the payment of the price shall be deemed a sale." Such transactions are typically known as "conditional sales." In this regard, Section 1-28 of the 1979 Virginia Retail Sales and Use Tax Regulations provides that "[a]ny person making conditional, charge or installment sales must report the total selling price and pay the applicable tax for the taxable period in which the contracts of sale are entered into." The same policy still holds true today.
I would note, however, that a lease with a nominal purchase option of $1 or some other amount does not constitute a conditional sale for Virginia retail sales and use tax purposes. Rather, a lease with a nominal purchase option is treated as a lease for Virginia retail sales and use tax purposes. See Public Document 91-284 (10/31/91).
As seller, the retail merchant is the party that the department would generally look to for the collection and remittance of the sales tax on a conditional sale of tangible personal property. In these transactions, the full amount of sales tax must be collected up-front and remitted to the department on or before the twentieth day of the month following the month in which the sales tax became due. However, if the seller fails to collect the sales tax, the Virginia consumer becomes directly liable for remitting the use tax to the department based on the cost price of the item.
Thus, the Assignee would generally not be required to register as a dealer provided it does not obtain title, control or possession of the tangible personal property at the time of sale or at some subsequent time. In the event of a buyer's default on making payments, and the title, control or possession of the property is transferred to the Assignee, the Assignee must register as a dealer to collect and remit the sales tax in order to dispose of the property at retail or to rent or lease it at retail.
Certificates of exemption
Pursuant to Title 23 of the Virginia Administrative Code 10-210-280, all registered dealers must charge and collect the sales tax on all sales, leases and rentals of tangible personal property until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating the property is exempt under Virginia retail sales and use tax law. Thus, when an Assignee is a registered dealer, it is required to obtain exemption certificates if the lessee, rentee, or buyer claims an exemption from the Virginia retail sales and use tax. Of course, failing to register as a dealer when required by law will make the Assignee directly and personally liable for the tax uncollected.
I trust that the foregoing answers your questions. If you have any questions about this response, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures (6)
OTP/34844R
Rulings of the Tax Commissioner