Tax Type
Retail Sales and Use Tax
Description
Leases between sister companies are not exempt intracompany transfers
Topic
Tangible Personal Property
Date Issued
01-11-2007
January 11, 2007
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period June 2002 through May 2005.
FACTS
The Taxpayer is part of a family of corporations engaged in the construction business. As a result of the Department's audit, the Taxpayer was held liable for use tax on certain equipment leased from a sister company. The Taxpayer contends that the leases should not be subject to the tax because "the rentals were intracompany in nature."
DETERMINATION
Lease transactions
Virginia Code § 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines the term "sale" to mean "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 . . . ." [Emphasis added.] This same section also provides that the term "lease or rental" "means 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 Tax Commissioner has previously ruled that affiliated corporations must be treated as separate entities and leases of tangible personal property between them are not exempt intracompany transfers. See Public Document (P.D.) 85-233 (12/31/85) and P.D. 94-271 (8/30/94). Furthermore, P.D. 88-215 (7/27/88) states that virtually any transaction involving a consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax.
In this case, the Taxpayer and its affiliates are separate legal entities. Based on the above statutes and public documents, the rental of equipment between the Taxpayer and its sister company for a consideration are "sales" and are subject to the sales and use tax. Because sales tax was not paid on the transactions, use tax is due on the cost price of the rentals of equipment used or consumed in Virginia. See Va. Code § 58.1-604 1. Accordingly, I find that the rental transactions at issue were correctly held taxable in the Department's audit.
Compliance Penalty
The Taxpayer was assessed a use tax compliance penalty. It is my understanding that the Taxpayer has provided the auditor with the appropriate information and documentation to warrant waiver of the penalty under the alternative method of computing use tax compliance. Therefore, the assessed penalty will be abated.
CONCLUSION
Based on the above determination, the assessment of tax on the lease transactions is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the assessment is paid within 30 days from the date of the updated bill.
The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-706967701i
Rulings of the Tax Commissioner