Tax Type
Retail Sales and Use Tax
Description
Leases; Consulting fees; Substitute exemption certificates
Topic
Exemptions
Property Subject to Tax
Date Issued
03-05-2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to the correspondence submitted on your behalf by **** to request correction of the sales and use tax audit assessments issued to **** (the "Taxpayer"). I apologize for the delay in responding to this matter. Copies of cited sources are enclosed.
FACTS
The Taxpayer is engaged in the leasing business. An audit for the period November 1994 through August 1997 resulted in an assessment of use tax on various untaxed purchases and an assessment of sales tax on untaxed lease fees and other untaxed charges in connection with equipment leases, such as untaxed charges for personal property tax and extension fees. The Taxpayer takes exception to several leases held taxable in the audit. The Taxpayer has paid the audit assessments.
DETERMINATION
Recycling
The Taxpayer takes exception to the sales tax assessed on certain leases in which it failed to obtain an exemption certificate. The Taxpayer maintains that such leases for recycling machinery should be removed from the audit, as it has obtained an exemption certificate from **** (the "Customer") who ultimately assumed such leases.
It is my understanding that the leases at issue were initially with other companies but subsequently assumed by the Customer. The other companies had submitted Form ST-11 exemption certificates for the recycling equipment leases. Although the Taxpayer had failed to obtain a valid exemption certificate from the Customer during the audit period, it has now obtained a substitute exemption certificate claiming exemption from the Virginia sales and use tax.
In reviewing the Customer's substitute exemption certificate, I find that it is not acceptable. To claim the industrial manufacturing, processing, or the research and development exemption, the department's Form ST-11 must be used.
In this case, the Customer has only certified that the leased equipment will be used in manufacturing or processing products for sale or in research and development. Although the Customer certifies the purpose to which the equipment will be used, such purpose is not necessarily exempt under Virginia law. Rather, in order for the manufacturing or processing exemption to apply, the machinery must be used directly in manufacturing or processing products for sale or resale. In order for the research and development exemption to apply, tangible personal property must be used directly and exclusively in research and development in the experimental or laboratory sense. See Items #2 and #5 on the Form ST-11. Clearly, the Taxpayer's substitute exemption certificate does not accurately state that the Taxpayer is using the equipment for a valid exemption under Virginia retail sales and use tax law.
In addition, any exemption certificate obtained during or after an audit for sales made during the audit period is subject to closer scrutiny by the department, as the Taxpayer has not relied upon it to sell or lease the equipment exempt of the tax. In this case, insufficient information has been provided to determine whether the Customer's leased equipment would actually qualify for the industrial processing or manufacturing exemption. Generally, machinery used in recycling operations is subject to taxation unless the material to be recycled through the machinery undergoes a treatment rendering the product more marketable or useful. Mere baling of products does not constitute industrial processing. See P.D. 94-242 (8/10/94) and 94-166 (5/24/94).
Code of Virginia § 58.1-623 places the burden of proof that a sale or lease is not taxable upon the dealer unless the dealer takes a valid exemption certificate from the purchaser or lessee. In this case, I find that the Taxpayer has not met its burden of proof and therefore is directly liable for the tax assessed on the conveyor and baler leases at issue.
Consulting Fees
Pursuant to an equipment lease agreement, the Taxpayer leased equipment to **** (i.e., Third Party) and collected sales tax on the gross proceeds. However, the Taxpayer has been assessed use tax in connection with an untaxed consulting fee agreement on the basis that such fees are taxable services performed in connection with the taxable equipment lease. The Taxpayer takes exception to the use tax assessed on these consulting fees and maintains that such charges are nontaxable.
Code of Virginia § 58.1-609.5(1) provides an exemption for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charge is made . . . ." Generally, the total charge for tangible personal property, including services such as consulting, training, etc., provided in connection with the sale of tangible personal property, is subject to the tax when such services are included in or provided in connection with the sale or lease of the tangible personal property. The tax does not apply to a charge for consulting that involves only the provision of a service. See P.D. 84-257 (12/28/84), and Title 23 of the Virginia Administrative Code (VAC) 10-210-4040.
In this case, it is my understanding that the consulting fees at issue are based upon a percentage of the gross equipment lease. Notwithstanding the link between the consulting fee agreement and the equipment lease agreement, it is critical to note that the parties to these agreements are not the same, e.g., the consulting fee agreement involves the Third Party and the Taxpayer's subsidiary, but the equipment lease agreement involves only the Taxpayer and the Third Party. For this reason and the fact that the Taxpayer's subsidiary is a separate legal entity from the Taxpayer, I must conclude that the two agreements are separate and distinct and, therefore, should be treated as separate transactions. Accordingly, this consulting fee agreement will not be treated as part of the equipment lease agreement. As this consulting fee agreement is for services only, it is nontaxable. Therefore, the consulting fees charged to the Third Party will be removed from the department's audit.
As for the other consulting fees included in the audit, the Taxpayer has not provided any copies of those contracts to show that a similar factual situation exists. If a similar factual situation exists for the other consulting fee agreements, the Taxpayer may provide such information to the department's **** District Office for possible revision of the remaining consulting fees at issue.
Coffee Service
The Taxpayer takes exception to the use tax assessed on gross proceeds received while the Taxpayer serviced a lease of coffee makers and coffee pots between **** (the "Lessee") and **** (the "Lessor"). The Taxpayer collected the monthly lease payment from the Lessee, deducted a minimal fee for servicing the lease, and remitted the balance to the Lessor.
The Lessee claims that it is re-leasing equipment and its lease should qualify for the resale exemption. However, a review of the Lessee's Equipment Rental Agreement which the Lessee says it furnishes to its customers reveals that the equipment is "loaned" and not leased to customers. There is no consideration required for using the equipment. Moreover, it is my understanding that the Lessee provides coffee services. In such instances, the department has historically held coffee service companies liable for the sales and use tax on the purchase or lease of coffee machines. This is consistent with Public Document (P.D.) 92-146 (8/19/92) and P.D. 93-84 (3/26/93). Consequently, the Lessee's equipment lease payments are taxable.
Although the Lessee provided a resale exemption certificate, Form ST-10, such certificate is not completed in its entirety, as the line for describing the kind of business engaged in has been left blank. Therefore, I regret that this exemption certificate is not acceptable as it is invalid on its face. See Title 23 of the Virginia Administrative Code (VAC) 10-210-280.
Conclusion
The requested information on the remaining consulting fees at issue should be sent to ****, Audit Supervisor of the department's **** District Office, within the next 60 days. **** may be reached at ****.
When all final information has been received, the audit will be revised in accordance with this determination. In addition, a refund of the sales tax and interest assessed and paid on the consulting fees, to the extent verified as erroneously assessed, will be issued as soon as practical. Interest will be paid on such overpayment pursuant to Code of Virginia § 58.1-1833.
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
OTP/20796R
Rulings of the Tax Commissioner