04-1 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Partnership of doctors that operate a medical practice; monthly rental charges

Topic

Accounting Periods and Methods

Credits

Exemptions

Date Issued

01-13-2004

January 13, 2004

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ****************:

This is in reply to your letter in which you seek correction of the sales and use tax assessment issued to ***** (the "Taxpayer"), for the period January 1999 through December 2001. I apologize for the Department's delay in responding to your
letter.

FACTS

The Taxpayer is a partnership created by a group of doctors that operate a medical practice (the "Practice"). The Taxpayer and the Practice are separate legal entities but share common ownership. The Taxpayer was created to acquire office furniture and equipment (the "Equipment") for use by the Practice. The Taxpayer and the Practice entered into a lease agreement in which the Practice rents the Equipment from the Taxpayer. The Taxpayer charges the Practice a variable monthly charge for the rental of the Equipment.

As a result of the Department's audit, the auditor assessed the sales tax on the monthly rental charges made by the Taxpayer to the Practice in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-840. The Taxpayer protests the tax and contends that: (1) it is not engaged in the business of leasing tangible personal property, and (2) the imposition of the tax on the rental charges without a credit for the sales tax paid by the Taxpayer to its vendors is double taxation. The Taxpayer cites a number of authorities to support its position.

DETERMINATION

Leasing Business

Title 23 VAC 10-210-840(A) provides that "[a]ny person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay the tax on gross proceeds." The regulation goes on to define "gross proceeds" to mean "the charges made or voluntary contributions received for the lease or rental of tangible personal property ...."

The Taxpayer maintains that it was created solely to own the Equipment used by the Practice and that it leases only to the Practice. Further, the Taxpayer contends that it does not hold itself out to the public or others as being in the business of leasing. For these reasons, the Taxpayer believes that it is not engaged in business within the meaning of the regulation. To support this, the Taxpayer cites Portsmouth v. Citizens Trust Co., 219 Va. 903, 252 SE 2d 339 (1979), Krauss v. City of Norfolk, 214 Va. 93, 197 SE 2d 205 (1973), and Young v. Town of Vienna, 203 Va. 265, 123 SE 2d 388 1962.

The cases cited by the Taxpayer are not persuasive, as they do not address the sales and use taxes, but address the local Business Professional and Occupational License tax. For sales and use tax purposes, the term "business" is defined in Va. Code § 58.1-602 as "any activity engaged in by any person, or caused to be engaged in by him, with the object of gain, benefit or advantage, either directly or indirectly." By its own admission, the Taxpayer is engaged in the business of leasing tangible personal property in accordance with 23 VAC 10210-840. The Taxpayer was created for the sole purpose of acquiring property for lease to the Practice, and the Taxpayer realizes a benefit from this activity. The fact that the Taxpayer leases only to the Practice does not negate the more compelling fact that the transfer of Equipment between the Taxpayer and the Practice for a consideration constitutes a sale as defined in Va. Code § 58.1-602. Based on this definition, virtually any transaction involving transfers of tangible personal property for a consideration, including transfers or leases between entities that share common ownership, is subject to the sales and use tax.

This conclusion is supported by the Tax Commissioner's rulings in Public Documents 93-169 (7/29/93) and 96-369 (12/11/96), in which the Tax Commissioner determined that the sales tax applies to the lease of tangible personal property between entities that share common ownership.

Double Taxation

The Taxpayer paid sales tax to its vendors on the purchase of the Equipment that it subsequently leased to the Practice. In making its rental charge to the Practice each month, the Taxpayer reduced the rental charge by the amount of the tax paid. The Taxpayer contends that it was instructed to follow these procedures by the previous auditor, and it should be given a credit in the current audit for the tax paid to its vendors in order to avoid double taxation. The Taxpayer cites Va. Code § 58.1-604(3), which states, "A transaction taxed under § 58.1-603 shall not also be taxed under this section, nor shall the same transaction be taxed more than once under either section."

The Department prefers to refund the tax through the dealer to prevent misallocations of the 1% local sales tax. With respect to the dealer's discount, 23 VAC 10-20-3040 limits the amount of a refund to those monies actually paid to the state. Thus, if the dealer or customer makes application for a refund to the Department, only the net amount paid to the state can be refunded. For this reason, the Department prefers not to include refunds of this nature as credits in audit findings.

Notwithstanding, I find a basis to grant a credit in this instance for the tax paid by the Taxpayer to its vendors on the purchase of the Equipment, less any applicable dealer's discount. The Taxpayer must provide documentation to the auditor that verifies payment of the tax and identifies the vendors to which the tax was paid.

In regard to the previous auditor's instructions, it is my understanding from the workpapers of the prior audit that the Taxpayer purchased some Equipment via installment contracts that were entered into prior to the commencement of the prior audit. The Taxpayer made the auditor aware of its concern that these vendors would not accept the resale exemption certificate, Form ST-10, and sell the Equipment exempt of the tax after the fact. As such, the auditor advised the Taxpayer that a monthly credit for the tax paid to these particular installment vendors could be taken as a deduction on the sales tax return. The Taxpayer was advised that this credit would be allowed only in connection with the existing installment contracts. I further understand that the Taxpayer was instructed on the correct procedures for filing the sales tax return and the proper use of the resale exemption certificate, Form ST-10, when making purchases for subsequent lease to the Practice. The Taxpayer is advised that it must follow these procedures and that a credit will not be allowed in future audits for tax that is paid improperly to vendors on the purchase of equipment that is subsequently leased to the Practice.

Conclusion

The Taxpayer will be contacted within 30 days to make the credit adjustment. If there is any remaining liability, the Taxpayer will receive an updated bill including accrued interest charges. The bill should be paid within 30 days from the date of the bill to avoid the accrual of additional interest charges.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have additional questions, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/40481J

Rulings of the Tax Commissioner