Tax Type
Retail Sales and Use Tax
Description
Taxable lease payments.
Topic
Appropriateness of Audit Methodology
Payment and Refund
Taxability of Persons and Transactions
Date Issued
04-12-2002
April 12, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in reply to your letters in which you seek correction of the retail sales and use tax assessments issued to ***** ("Taxpayer A"), and ***** ("Taxpayer B"). The tax assessed to Taxpayer A is for the period January 1995 through February 1998. The tax assessed to Taxpayer B is for the period March 1992 through March 1995. I apologize for the delay in responding to your letters.
FACTS
Taxpayer A is a bowling alley. Taxpayer B is a 50% stockholder of Taxpayer A. Taxpayer A purchased pinspotter equipment for use in the bowling alley. Taxpayer B entered into an oral agreement with Taxpayer A to provide a loan to finance the pinspotter equipment. It was agreed that Taxpayer A would make monthly payments to Taxpayer B to repay the loan. To support this arrangement, the parties developed a loan amortization schedule for repayment of the loan.
The payments made by Taxpayer A to Taxpayer B were characterized as pinspotter rental/lease on the books of each taxpayer. Based on this characterization of the payments and statements made by Taxpayer B, the auditor assessed the tax on the payments to both taxpayers. The tax was assessed to Taxpayer A for the payments made within the three-year statutory period. The tax was assessed to Taxpayer B for the payments made in the prior period.
You contest the tax assessed to both Taxpayer A and Taxpayer B and contend that the arrangement between the taxpayers is a financing transaction and not a lease. In addition, you provide invoices that show the payment of tax for fixed assets included in the audit of Taxpayer A.
DETERMINATION
Lease versus Financing Transaction
You contend that the pinspotter equipment was purchased by Taxpayer A as evidenced by the bill of sale, and that tax was paid at the time of purchase. Since Taxpayer B did not own the equipment, it could not have leased the equipment to Taxpayer A. You further contend that the intent of the agreement between Taxpayer A and Taxpayer B was to finance the purchase of the pinspotter equipment. Therefore, the payments made to Taxpayer B were repayments on monies loaned and not lease payments.
Code of Virginia § 58.1-602 defines lease or rental to mean "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 bill of sale provides that the pinspotter equipment was sold to Taxpayer A. There is no documentation to support that Taxpayer B ever held ownership of the pinspotter equipment. It appears that Taxpayer B provided the financing of the equipment and that the payments to repay the loan were incorrectly characterized as rental/lease payments. Based on the statutory definition cited above, the agreement between the taxpayers does not represent a lease. Therefore, the payments from Taxpayer A to Taxpayer B in connection with the pinspotter equipment are not considered taxable lease payments.
Overstated Payments
You indicate that the auditor erroneously taxed the entire amount of each payment as a lease of the pinspotter equipment. In actuality, the payments contain an amount that is for another debt owed to Taxpayer B. You set out the portion of the payment that is attributable to the pinspotter equipment.
It has been determined that the portion of the payment in connection with the pinspotter equipment is not taxable. This leaves the remainder of the payment, which according to a separate amortization schedule, appears to be repayment of another loan to Taxpayer B. This portion of the payment does not appear to be taxable for purposes of the sales and use tax.
Fixed Asset Invoices (Taxpayer A)
The invoices you provide indicate that the tax was properly charged on certain fixed assets. These items will be removed from the audit.
Summary
The agreement between Taxpayer A and Taxpayer B in regard to the pinspotter equipment is not considered a taxable lease and the payments for such are not subject to the tax. In addition, the portion of the payment that is attributable to another loan is not taxable. Therefore, the tax will be removed from the pinspotter rental/lease payments in the audits of both taxpayers. In addition, certain fixed assets will be removed from the audit of Taxpayer A based on the invoices provided.
In accordance with the determinations rendered, Taxpayer A and Taxpayer B will receive revised audit reports. Taxpayer A will receive an adjusted bill including updated interest which should be paid within 30 days of the bill date to avoid the accrual of additional interest charges. The bill for Taxpayer B will be abated in full.
If you have questions concerning the revisions to the audits, please contact the auditor, ***** at *****. Questions concerning the determinations in this letter should be directed to ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/16441J
Rulings of the Tax Commissioner