Document Number
11-207
Tax Type
Retail Sales and Use Tax
Description
Intercompany accounting transactions; Resale exemption; Credit paid to another state.
Topic
Credits
Exemptions
Taxable Income
Date Issued
12-29-2011

December 29, 2011



Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you request a ruling on behalf of an anonymous client regarding the application of the retail sales and use tax to intercompany accounting transactions between related business entities. I apologize for the delay in this response.

FACTS


Company A is a holding company that negotiates and contracts with third parties to purchase and lease equipment. Company B, a subsidiary of Company A, pays the vendor invoices for the equipment purchases and leases negotiated by Company A. Company B also purchases repair parts and services for this equipment. Company B is not registered to collect Virginia sales and use tax but generally pays the Virginia retail sales tax on purchases and leases of equipment in Virginia. For accounting purposes, Company B depreciates the equipment on its books.

Company B provides the purchased and leased equipment to sister companies (Company C and Company D) for use in the performance of engineering, construction and similar service contracts. Companies C and D may use the same equipment interchangeably. The job costs for the equipment are accounted for daily on the books of Company B, Company C and Company D. Job cost entries are recorded to expense and contra expense accounts. Accounting entries are also recorded to "due to" and "due from" accounts. There is no use of receivable and payable accounts to record accounting entries related to the equipment. There are no cash payments made by Company C or Company D to Company A or Company B. Company B does not enter into written equipment rental agreements with Company C or Company D. Company A and Company B do not use the equipment in any manner, and Company A makes no accounting entries related to the equipment at issue.

RULING


Question 1

Would the job cost accounting entry between Company B and Company C or Company D for the use of equipment be considered a sale, rental or a lease subject to Virginia sales and use tax?

"Sale" is defined in Va. Code § 58.1-602 as "any transfer of title or possession, or both, exchange, barter, lease or rental, ... in any manner or by any means whatsoever, of tangible personal property ... for a consideration ...." The Department has previously ruled in several public documents that intercompany accounting entries to record transactions between related but separate entities constitute a consideration for sales and use tax purposes. For example, Public Document (P.D.) 04-134 (9/16/04) discusses a corporate reorganization in which assets were transferred between separately incorporated subsidiaries with a common parent. The transfers were recorded as an adjustment of intercompany balances on the subsidiaries' books. There were no direct payments of cash, exchanges of stock or lines of credit issued between the subsidiaries. The Tax Commissioner ruled that, based on the definition of "sale," the paper or accounting entries that recorded the transfers were a consideration and the asset transfers qualified as sales that were subject to retail sales and use tax.

Virginia Code § 58.1-603 2 imposes the retail sales tax on leases or rentals of tangible personal property if the lease or rental of the property is part of an established business or is germane to the business. The intent of the law is to tax leases made by one in the business of making leases. "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.” I recognize that there are certain benefits to establishing separate but related corporate entities and having each entity engage in specified activities. For example, having Company B as the owner and lessor and Company C and Company D as the lessees of the subject equipment protects the entities and the equipment from possible liability and loss issues. The financial reporting for the related entities can produce more appealing results for shareholders, potential investors and commercial lenders. This accounting arrangement provides certain direct or indirect benefits to Companies B, C and D. Otherwise, there would be no reason to have such an arrangement.

Based on the facts presented, there are no formal lease agreements between Company B and Companies C and D. Company B purchases, takes title to and depreciates the equipment at issue. Possession of the equipment is transferred from Company B to Company C or Company D for use in the provision of engineering and construction services. Virginia Code § 58.1-602 defines "lease or rental" as "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." Company C and Company D take possession of and use the equipment. As previously explained, the use of intercompany transactions to account for the costs associated with the purchase or lease of and the use of the equipment constitutes a consideration. Based on the definition of lease for sales tax purposes, Company B is leasing or renting equipment to Company C and Company D.

Further, while accounting entries are not made to receivable or payable accounts with respect to the costs associated with the use of the equipment, the "due to" and "due from" accounts used by Company B, Company C and Company D are essentially intercompany payable and receivable accounts. Company B, buys parts and services for they equipment used by Company C and Company D. The equipment is used interchangeably between Company C and Company D. The equipment is purchased by Company B for the sole purpose of providing it to Company C and Company D. All the activities engaged in by Company B are consistent with those performed by a lessor of equipment or other tangible personal property. For the reasons stated above, Company B is in the business of leasing equipment. The provision of equipment by Company B to Company C and Company D and the corresponding accounting entries to record the costs for the equipment constitute lease transactions that, absent an applicable exemption, are subject to Virginia retail sales and use tax.

Question 2
    • Would the answer be different if the job cost accounting entries did not include an overhead component?

The response to Question 1 would be the same regardless of whether overhead expenses are included in the job cost expenses recorded on the books of Company B, Company C and Company D.

Question 3
    • If the answer to Issue No. I is "yes," is the sales and use tax paid by Company B on the purchase and/or third party leases of the Equipment, repair parts and motor vehicles creditable against the tax that would be due on the intercompany rentals? If so creditable, Company B wishes to enter into a Voluntary Disclosure Agreement whereby it will pay the Virginia sales tax due on the intercompany rental payments for the past three years, less a credit for any sales tax paid directly to vendors or lessors on the original purchase or lease transactions.

Resale Exemption

"Retail sale" is defined as "a sale to any person for any purpose other than for resale ...." Title 23 of the Virginia Administrative Code (VAC) 10-210-840 C provides that "[t]angible personal property for future use by a person for taxable lease or rental as an established business may be purchased tax exempt under a certificate of exemption." Thus, the resale exemption applies to leases of tangible personal property for future lease or rental as well as to sales for resale. Under the facts presented, purchases or leases of equipment and repair parts by Company B for subsequent lease to Company C or Company D qualify for the resale exemption. In accordance with Title 23 VAC 10-210-280, Company B should issue its vendors properly executed resale exemption certificates (Form ST-10) when it purchases or leases equipment that will be leased to Company C or Company D. Any taxable use of the equipment by Company B prior to its transfer to Company C or Company D is subject to sales or use tax. As a lessor, Company B should report and remit to the Department the appropriate Virginia sales tax based on the intercompany accounting entries recorded each month for leases of equipment in Virginia to Company C and Company D.

Credit for Taxes Paid

Company B wishes to enter into a voluntary disclosure agreement with the Department if this ruling concludes that Company B is leasing equipment to Company C and Company D. In connection with the disclosure agreement, Company B requests a credit for sales taxes paid on the original purchase or lease of the equipment and on repair parts purchased for the leased equipment.

In P.D. 96-270 (10/7/96), a taxpayer maintained that it was not a lessor under Virginia sales and use tax law but was in the business of financing equipment purchases for customers. The taxpayer had paid sales and use tax at the time of purchase on equipment that the Tax Commissioner determined was being leased and was subject to retail sales tax on the lease charges. This was the taxpayer's first audit and it was apparent that the taxpayer had been paying sales taxes charged by vendors on the sales price of the equipment. The Tax Commissioner agreed to allow a credit in the audit for the sales taxes paid, contingent upon verification of purchase invoices showing that the tax was paid. P.D. 94-271 (8/30/94) discusses a similar case in which the lessor paid the tax at the time of purchase on equipment deemed to be part of taxable lease transactions. The lessor was granted a credit against the contested assessment for the amount of sales taxes paid on purchases of the leased equipment.

Based on the Department's past policy on this issue and the fact that the resale exemption applies to purchases made for future lease or rental, a credit will be allowed against Company B's potential sales tax liability attributable to its leasing activities. The credit will be allowed based on the provision and review of documentation that enables the Department to verify that sales or use taxes were paid to vendors or accrued by Company B on the purchase of equipment that was subsequently leased to Company C or Company D.

Please be advised that any credits for tax paid on Company B's purchase or lease of motor vehicles will be allowed only to the extent the taxation of the motor vehicles falls under the jurisdiction of the Department of Taxation and not the Virginia Department of Motor Vehicles.

Voluntary Disclosure Agreement

Company B requests a voluntary disclosure agreement with the Department that would allow Company B to report and pay the Virginia sales tax on taxable leases made over the last three years. This request, with the pertinent information to support it, may be submitted in writing to the attention of Mr. John Roberts in the Office of Compliance, P.O. Box 5640, Richmond VA 23220. A copy of this ruling should be included with that request.

Conclusion

This ruling is based on the facts presented in your letter as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations 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 concerning this ruling, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Craig M. Burns
                  Tax Commissioner


AR/1-3744041885.S

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46