Tax Type
BTPP Tax
Description
Ownership of property leased under a "lease to ownership plan"
Topic
Clarification
Date Issued
04-12-2005
April 12, 2005
Re: Request for Advisory Opinion
Business Tangible Personal Property Tax
Dear *****:
This is in response to your letter in which you request an advisory opinion regarding the ownership of property leased under a "lease to ownership plan" ("LTOP") for purposes of the business tangible personal property ("BTPP") tax. I apologize for the delay in responding to your letter.
The BTPP tax is imposed and administered by local officials. Section 58.1-3983.1 of the Code of Virginia authorizes the Department to issue advisory opinions on local tangible personal property tax issues. This response provides advisory guidance only, and does not constitute a formal or binding ruling. Any change in the facts or the introduction of different facts by another party may lead to a different result.
The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
You state that the Taxpayer is a lessor of tangible personal property with situs in Virginia. The Taxpayer leases the property to agencies of the federal government (the "Government") pursuant to a LTOP. The LTOP agreement provided by the Taxpayer contains the following provisions:
· After the required lease payments are made, "title shall automatically transfer to the Government at the end of the Lease Term."
· Prior to this transfer, the Taxpayer retains legal title to the leased property.
· Tangible personal property taxes "if applicable" are included in the periodic lease payments charged to the government.
· Termination. The Government has the right to terminate the contract in the event of a "Termination for the Convenience of the Government" as defined by the provisions of Federal Acquisition Regulation ("FAR") 52.249-21, or in the event that a "nonappropriation of funds"2 for the ensuing years of the contract occurs.
For federal income tax purposes, the Taxpayer classifies the LTOP agreements as capital leases. Under a capital lease, the lessee is considered to be the owner of the property and is entitled to depreciate the property for financial accounting purposes. Accordingly, as lessor, the Taxpayer does not depreciate the property, even though it retains title to the property.
In your letter, you raise a number of questions concerning the application of the BTPP tax to property leased under a LTOP. These questions are addressed separately below.
OPINION
1. Is the property leased under the L TOP considered to be owned by the lessee (the Government) for purposes of the local BTPP?
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- Virginia Code § 58.1-3501 states:
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- The aggregate of all tangible personal property owned by any person, firm, association, unincorporated company, or corporation which is leased by such owner to any agency or political subdivision of the federal, state or local governments shall be subject to local taxation.
Although the Taxpayer maintains title to the property for the duration of the lease, that is not dispositive of the question of ownership status. Addressing the question of the relationship between holding title and true ownership status for personal property tax purposes in leasehold situations, the Attorney General has opined: "the holding of legal title in and of itself is not dispositive of ownership status for personal property tax purposes." 1984-1985 Op. Va. Att'y. Gen. 362. An agreement may specify that transactions occur in the form of a true lease or in the form of a security interest. If a lease is in fact a security instrument, it can be regarded as a secured transaction thereby creating a security interest, in which case it would convey ownership status to the lessee. For purposes of the present inquiry, clarification is found in Va. Code § 8.1203 b.
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- A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and . . . the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement. [Emphasis added.]
The generic contract the Taxpayer has with the Government stipulates that title for the property automatically transfers to the Government at the end of the lease term unless the Government exercises an early purchase option. The agreement also allows for the Government to terminate the lease "for Convenience of the Government" or for Is nonappropriation of funds." These termination conditions would preclude the LTOP from creating the security interest necessary for the Government to be considered the "owner" for purposes of local BTPP taxation. The fact that the property is treated as a capital lease for federal income tax purposes has little bearing on its treatment for purposes of the local BTPP tax. The Taxpayer is considered to be the owner of the property until such time as the title of the property passes to the Government. As the owner of the property, the Taxpayer would be subject to the BTPP tax.
2. If it is determined that the lessee is the considered to be the owner, is the property exempt from the BTPP?
It has been established that the Government is not considered to be the owner of the property; therefore, there is no need to address this question. The property in question is not exempt from tangible personal property taxation, and the Taxpayer is liable for all such taxes.
3. Is the lessor (the Taxpayer) required to report or file personal property tax returns with respect to property covered by the L TOP agreement?
Because the property covered by the LTOP is not exempt from property taxation, as explained above, the Taxpayer is required to report and file personal property tax returns for the property covered in the LTOP agreement with the appropriate local jurisdictions.
This opinion rests upon the specifics of the LTOP agreement provided by the Taxpayer. Different factual arrangements may result in a different conclusion. If you have any questions regarding this opinion, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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AR/52825H
1 FAR 52.249-2 specifies that the "Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government's interest. The Contracting Officer shall terminate by delivering to the Contractor a "Notice of Termination" specifying the extent of termination and the effective date."
2Some appropriations for the LTOP contracts are funded on an annual basis. Their renewal is contingent upon Congressional appropriations.
Rulings of the Tax Commissioner