Tax Type
Retail Sales and Use Tax
Description
Rental agreement invoices subject to taxation in Virginia/ Taxes paid to Tennessee
Topic
Records/Returns/Payments
Tangible Personal Property
Taxability of Persons and Transactions
Date Issued
08-25-2010
August 25, 2010
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period March 2006 through June 2008. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a highway contractor. An audit resulted in the assessment of consumer use tax on purchases and rentals of tangible personal property consumed or used in the Taxpayer's business.
The Taxpayer takes exception to the Virginia use tax applied to equipment rentals in which a Tennessee vendor charged and collected the Tennessee sales tax. The Taxpayer indicates that Tennessee has the first right of taxation based on letter rulings #02-07 (3/18/02) issued by the Tennessee Department of Revenue. As such, it contends that no Virginia use tax is applicable to the charges made for such leases.
DETERMINATION
Taxation in Tennessee
The Tennessee ruling letter cited above treats the delivery of a leased automobile in Tennessee as a discrete event that is taxable in Tennessee. Such ruling holds that the Tennessee sales tax applies to the remaining lease payments due after the lessee has relocated and removed the leased vehicle to another state.
The Tennessee ruling relies upon the Tennessee statute, regulation and court interpretations of such statutes. It sets out that a lease or rental in Tennessee constitutes a sale and that a sale means "any transfer of title or possession . . . lease or rental . . . of tangible personal property for a consideration ...." Tenn. Code Ann. § 67-6102(25)(A).
In addition, it cites from Tenn. Comp. R. & Regs. 1320-5-1-.32(2) that the "sales tax shall apply to all leases of tangible personal property delivered to a lessee or rentee in this State, regardless of where the property will be taken or used by the lessee or rentee, whether within or without the State of Tennessee." [Emphasis added.] Thus, the Tennessee ruling concludes that "the sales tax is due on all lease payments if the leased property is delivered in Tennessee." [Emphasis added.]
In further support of its position, the Tennessee ruling cites several rulings issued by the Supreme Court of Tennessee, such as Williams Rentals, Inc. v. Tidwell, 516 S.W.2d 614 (1974), Central Transportation Co. v. Atkins, 305 S.W.2d 940 (1956), and Itel Containers International Corp. v. Cardwell, 814 S.W.2d 29, 36 (1991). The Tennessee ruling also cites a ruling by the Supreme Court of the United States made in Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175, 186 (1995). Based on these court decisions, the Tennessee ruling observes the following:
- Williams Rentals determined that the application of the sales tax to leases of equipment delivered in Tennessee did not violate the Commerce Clause.
Central Transportation determined that the test of whether a lease or rental transaction is taxable in Tennessee is upon where the lease was made. As such, the court held that the tax is based upon the making of the lease in Tennessee.
Itel concluded that the legislature clearly intended to apply the sales tax to leased property delivered in Tennessee even though the lease agreement is executed outside of Tennessee. Itel also held that the transfer of possession of leased cargo containers in Tennessee is a discrete transaction, occurring only within Tennessee.
Oklahoma Tax Commission indicates the court's approval of taxing sales without any division of the tax base among the different states. Instead, the court has held that such taxes are properly measurable by the gross charge for the purchase, regardless of any activity outside the taxing jurisdiction that may precede the sale or occur in the future. The court held that a sale of goods is a discrete event facilitated by the laws and amenities of the place of sale.
Definition of Sale
Virginia Code § 58.1-602 is similar to Tennessee's definition of sale as it defines a 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 . . . for a consideration ...."' Thus, any transfer of possession of tangible personal property for a consideration constitutes a sale. A sales tax is imposed upon a sale, as well as upon the gross proceeds derived from the lease or rental of tangible personal property. See Va. Code § 58.1-603. The term "lease or rental" is defined as "leasing or renting of tangible personal property and the possession or use thereof by the lessee or rentee for a consideration, without transfer of the title to such property." See Va. Code § 58.1-602. Thus, each time the Taxpayer enters into a rental agreement, it enters into a transaction that is subject to taxation in the jurisdiction in which the Taxpayer takes possession of the tangible personal property.
Taxation in Virginia
In the instant case, the Taxpayer entered into rental agreements with Tennessee vendors for the rental of highway construction equipment on a daily, weekly or monthly basis. I understand that no tax was assessed on the initial rental charge if the Taxpayer took possession of the rented equipment in Tennessee initially. However, subsequent rental charges were taxed because the rental agreement or subsequent rental agreement indicates that the equipment was in Virginia at the time such agreement was entered into with a Tennessee vendor.
For instance, a review of the rental agreements (R83570, W00204, W68262, W68625, W68594, W69155, and W69787) and the associated invoices included in the audit clearly indicate that the Taxpayer took possession of the rental equipment at customer pick-up locations in Virginia. Based on this evidence, the event of taking possession of the equipment occurred in Virginia. Thus, the Tennessee sales tax is not applicable and the Virginia sales and use tax applies to such transactions. These will remain in the audit.
On the other hand, the rental agreement T92371 and the associated invoices indicate no customer pick-up location. A member of the Department's Appeals and Rulings staff requested documentation to establish the location of the equipment at the time the rental agreement was entered into with the Tennessee vendor if the rental agreement did not indicate where the Taxpayer took possession of the rental equipment. No such documentation was provided. Notwithstanding, it is my understanding that this equipment was used only in Virginia while it was rented by the Taxpayer. For this reason, it would appear that the circumstances are similar to the other equipment rentals assessed in this audit. Pursuant to Va. Code § 58.1-205 1, any tax assessment issued by the Department is, deemed prima facie correct. Thus, the burden of proving an inaccuracy in the Department's assessment is upon the Taxpayer. The Taxpayer has not met its burden of proof. Accordingly, lacking evidence to the contrary, the invoices associated with rental agreement T92371 appear to be subject to taxation in Virginia and will remain in the audit.
CONCLUSION
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer.
Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty Program. See the enclosure entitled "Important Payment Information."
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- The Code of Virginia sections cited are available on-line at www.tax.virginia.gov
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- Sincerely,
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- Craig M. Burns
Acting Tax Commissioner
- Craig M. Burns
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AR/1-3673864947.R
Rulings of the Tax Commissioner