Tax Type
Retail Sales and Use Tax
Description
Lease agreement vs. conditional sales contract
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
04-13-2001
April 13, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the sales and use tax audit assessment issued to ***** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources (except court case) are enclosed.
FACTS
The Taxpayer is an out-of-state leasing and financing company that leases equipment to customers in Virginia. An audit for the period July 1996 through June 1999 resulted in use tax assessed on the difference between the original purchase price (upon which tax was collected and remitted by the Taxpayer) and the gross proceeds collected.
The Taxpayer takes exception to the tax assessed on non-cancelable leases of tangible personal property with nominal purchase options of one dollar and maintains that these leases are security agreements, not leases. To support its contention, the Taxpayer relies upon the security interest provisions of Virginia's Uniform Commercial Code ("UCC") as set out in Code of Virginia § 8.1-201(37) and the decision of the Virginia Supreme Court in Garcia Enterprises, Inc. v. Enterprise Ford Tractor, Inc., 253 Va. 104, 480 S.E. 2d 497 (1997).
The Taxpayer claims that the leases at issue satisfy all of the security interest criteria of Virginia's UCC and should be treated as conditional sales of tangible personal property in accordance with the Garcia opinion. The Taxpayer maintains that it has properly collected and remitted the sales and use tax on the leases at issue and therefore requests abatement of the assessment.
DETERMINATION
Taxable Leases
Pursuant to the Virginia Retail Sales and Use Tax Act, Code of Virginia § 58.1-603 imposes the retail sales tax on every person who sells, leases or rents tangible personal property in Virginia. The sales tax is a "moment of transaction" tax and is imposed upon: (1) the gross sales price when tangible personal property is sold at retail, and (2) the gross proceeds derived from the lease or rental of tangible personal property.
Code of Virginia § 58.1-602 defines the term "sale" as ". . . any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration .... 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."
This same statute defines the term "lease or rental" as "the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property." The statute also defines the term "gross proceeds" as "the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section over the term of the lease, rental, service, or use, but not less frequently than monthly."
Based on these statutory definitions, the department has consistently distinguished between conditional sales contracts and lease agreements and the tax collection thereof. Under a conditional sales contract, title passes to the buyer automatically upon completion of the contract terms. In a lease agreement, the payments are spread over the term of the lease, and title does not pass to the lessee. For sales and use tax collection purposes, a conditional sales contract is treated in the same manner as any other sale of tangible personal property, while the tax payments on a lease are spread over the term of the lease.
It is also the department's longstanding policy to treat leases of tangible personal property with nominal purchase options as leases for retail sales and use tax purposes. See Public Document 89-152 (4/28/89). Based on the established policies and the statutory definitions noted above, the transactions at issue constitute leases subject to taxation upon their gross receipts.
The Garcia Decision
In Garcia, the parties entered into a contract in which the plaintiff used a backhoe belonging to the defendant in exchange for monthly payments. Upon completion of all payments, the plaintiff had the option to purchase the backhoe for one dollar. The court determined that this contract constituted a security agreement (rather than a lease) for purposes of Virginia's UCC.
The Garcia decision applies only to definitions and issues governed by Virginia's UCC. Although the UCC security interest provisions may govern any commercial transaction, these UCC provisions do not address the application of the retail sales and use tax to commercial transactions. Furthermore, the Garcia decision was rendered only in regard to the Virginia UCC and does not have any bearing on the Virginia Retail Sales and Use Tax Act.
Moreover, the definition of "lease" for retail sales and use tax purposes is specifically set out in the Virginia Retail Sales and Use Tax Act. It is this specific definition which governs the Taxpayer's contested transactions.
Conclusion
Based all of the foregoing, I find that the assessment as issued is proper. Under separate cover, the Taxpayer will be sent a bill for the outstanding balance of
. This liability should be paid within sixty (60) days of the date of this letter to avoid further interest charges.
Based on the issues addressed, I find it unnecessary to meet on this matter. 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
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the sales and use tax audit assessment issued to ***** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources (except court case) are enclosed.
FACTS
The Taxpayer is an out-of-state leasing and financing company that leases equipment to customers in Virginia. An audit for the period July 1996 through June 1999 resulted in use tax assessed on the difference between the original purchase price (upon which tax was collected and remitted by the Taxpayer) and the gross proceeds collected.
The Taxpayer takes exception to the tax assessed on non-cancelable leases of tangible personal property with nominal purchase options of one dollar and maintains that these leases are security agreements, not leases. To support its contention, the Taxpayer relies upon the security interest provisions of Virginia's Uniform Commercial Code ("UCC") as set out in Code of Virginia § 8.1-201(37) and the decision of the Virginia Supreme Court in Garcia Enterprises, Inc. v. Enterprise Ford Tractor, Inc., 253 Va. 104, 480 S.E. 2d 497 (1997).
The Taxpayer claims that the leases at issue satisfy all of the security interest criteria of Virginia's UCC and should be treated as conditional sales of tangible personal property in accordance with the Garcia opinion. The Taxpayer maintains that it has properly collected and remitted the sales and use tax on the leases at issue and therefore requests abatement of the assessment.
DETERMINATION
Taxable Leases
Pursuant to the Virginia Retail Sales and Use Tax Act, Code of Virginia § 58.1-603 imposes the retail sales tax on every person who sells, leases or rents tangible personal property in Virginia. The sales tax is a "moment of transaction" tax and is imposed upon: (1) the gross sales price when tangible personal property is sold at retail, and (2) the gross proceeds derived from the lease or rental of tangible personal property.
Code of Virginia § 58.1-602 defines the term "sale" as ". . . any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration .... 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."
This same statute defines the term "lease or rental" as "the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property." The statute also defines the term "gross proceeds" as "the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section over the term of the lease, rental, service, or use, but not less frequently than monthly."
Based on these statutory definitions, the department has consistently distinguished between conditional sales contracts and lease agreements and the tax collection thereof. Under a conditional sales contract, title passes to the buyer automatically upon completion of the contract terms. In a lease agreement, the payments are spread over the term of the lease, and title does not pass to the lessee. For sales and use tax collection purposes, a conditional sales contract is treated in the same manner as any other sale of tangible personal property, while the tax payments on a lease are spread over the term of the lease.
It is also the department's longstanding policy to treat leases of tangible personal property with nominal purchase options as leases for retail sales and use tax purposes. See Public Document 89-152 (4/28/89). Based on the established policies and the statutory definitions noted above, the transactions at issue constitute leases subject to taxation upon their gross receipts.
The Garcia Decision
In Garcia, the parties entered into a contract in which the plaintiff used a backhoe belonging to the defendant in exchange for monthly payments. Upon completion of all payments, the plaintiff had the option to purchase the backhoe for one dollar. The court determined that this contract constituted a security agreement (rather than a lease) for purposes of Virginia's UCC.
The Garcia decision applies only to definitions and issues governed by Virginia's UCC. Although the UCC security interest provisions may govern any commercial transaction, these UCC provisions do not address the application of the retail sales and use tax to commercial transactions. Furthermore, the Garcia decision was rendered only in regard to the Virginia UCC and does not have any bearing on the Virginia Retail Sales and Use Tax Act.
Moreover, the definition of "lease" for retail sales and use tax purposes is specifically set out in the Virginia Retail Sales and Use Tax Act. It is this specific definition which governs the Taxpayer's contested transactions.
Conclusion
Based all of the foregoing, I find that the assessment as issued is proper. Under separate cover, the Taxpayer will be sent a bill for the outstanding balance of
. This liability should be paid within sixty (60) days of the date of this letter to avoid further interest charges.
Based on the issues addressed, I find it unnecessary to meet on this matter. 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
Rulings of the Tax Commissioner