Tax Type
Retail Sales and Use Tax
Description
Tennessee has the first right of taxation in this instance; Leases and rentals
Topic
Collection of Tax
Out of State Tax Credits
Taxable Transactions
Date Issued
06-02-2011
June 2, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in regard to the correspondence seeking reconsideration of the prior determination [Public Document (P.D.) 10-187 (8/25/10)] issued to ***** (the "Taxpayer"). The determination was issued with respect to the retail sales and use tax assessment issued for the period March 2006 through June 2008. I apologize for the delay in responding to this matter. This letter supersedes the determination made in P.D. 10-187.
FACTS
The Taxpayer is a Virginia business that leases or rents construction equipment from a Tennessee lessor for use in Virginia projects. Pursuant to an audit, the Taxpayer was assessed Virginia use tax on such equipment rentals on the basis that the Tennessee sales tax had been erroneously charged and collected on the month-to-month rentals. The Taxpayer appealed such assessment but the Department upheld it. The Taxpayer seeks reconsideration of the Department's prior determination.
DETERMINATION
In this case, there are conflicting laws between Tennessee and Virginia. The prior determination applied Virginia's long-standing policy with respect to the treatment of rentals transported between two states. Under Virginia's policy, each monthly invoice is treated as a separate rental and subject to taxation by the state in which the property is located. However, Tennessee does not treat the rentals at issue as separate transactions. Instead, Tennessee taxes the initial rental agreement and subsequent month-to-month rentals.
After receiving the Taxpayer's request for reconsideration of the prior determination, the Department made inquiries with the legal department of the Tennessee Department of Revenue (TDOR). Based on a review of some of the Taxpayer's redacted rental agreements,1 the TDOR concluded that such rental agreements are taxable in Tennessee because the rental agreements are executed in Tennessee, the property is delivered to the customer in Tennessee, and the rental period is for a continuous period (i.e., without interruption from the pick up of the property in Tennessee to the return of the property to the Tennessee lessor).
Based on these facts, Tennessee has the first right of taxation. Accordingly, while the rented equipment used in Virginia remains subject to taxation in Virginia, a credit pursuant to Va. Code § 58.1-611 will be granted for the Tennessee sales tax paid on the rentals at issue. Because the Tennessee sales tax rate is higher than the Virginia sales tax rate, no tax will be due Virginia on these contested transactions.
Future Compliance
It is my understanding that Tennessee's application of the sales and use tax with respect to leases and rentals may change in the near future. According to Tennessee Notice #07-15 (12/2007), Tennessee passed statutory changes2. that would change sourcing requirements for leases and rentals with recurring periodic payments, provided the rental agreement is executed in Tennessee on or after the effective date of this legislation and the equipment is picked up in Tennessee by the customer and moved to another state for use. For instance, it is my understanding that the initial lease/rental payment would be subject to the Tennessee sales or use tax but all subsequent payments would be subject to taxation by another state if the primary location of the equipment is moved to such other state. This change would directly impact the Taxpayer's equipment rentals at issue in this case. This statutory change was scheduled to take effect July 1, 2009, but was postponed until July 1, 2011. It is my understanding from the TDOR that such statutory change may be further delayed until July 1, 2013.
Accordingly, if such law change takes effect July 1, 2011 or at some other subsequent time, the Taxpayer at such time will be required to pay the Virginia retail sales and use tax on rentals or leases from Tennessee lessors after the first rental payment is made, provided the rented equipment is used in Virginia. Prior to the effective date of such law change, I understand that the TDOR will place information notices on its website located at www.state.tn.us/revenue.
CONCLUSION
The contested assessment will be abated in accordance with this determination.
The Code of Virginia sections and the public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. The Tennessee notice cited is accessible on-line at www.tennessee.gov/revenue on the Library page under Important Notices. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4723677555. R
1. All of the Taxpayer's identifying information was removed.
2. Section 174 of Public Chapter No. 602, Senate Bill No. 2223 of the 2007 Public Acts. This law change is made to comply with the Streamlined Sales and Use Tax Agreement
Rulings of the Tax Commissioner