July 14, 2020
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax to a lease-to-own agreement. I apologize for the delay in responding to your correspondence.
FACTS
You represent that the Taxpayer is a financer based in another state that provides third-party financing to customers for purchases of tangible personal property from dealers throughout the country. The Taxpayer provides this financing to customers who would not otherwise qualify for loans or financing due to credit issues and similar problems.
The Taxpayer contends that other states treat the agreement between the Taxpayer and the dealer’s customer as a finance lease and do not require the Taxpayer to collect sales tax on the sales price of the tangible personal property financed. The Taxpayer requests a ruling as to the sales tax treatment of this agreement in Virginia, particularly with regard to whether the sales tax collected by the dealer on the sales price of the tangible personal property satisfies the tax collection requirements.
RULING
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” 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 and any rendition of a taxable service for a consideration. [Emphasis added.] The statute also 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."
Virginia Code § 58.1-603 2 imposes the retail sales and use tax on the "gross proceeds” derived from the lease or rental of tangible personal property, where the lease or rental of such property is an established business or part of an established business, or the sale is incidental or germane to such business." Virginia Code § 58.1-602 defines “gross proceeds” as "the charges made or voluntary contributions received for the lease or rental of tangible personal property…over the term of the lease, rental, service, or use, but not less frequently than monthly." The statute goes on to explain:
“Gross proceeds” does not include finance charges, carrying charges, service charges, or interest from credit extended on the lease or rental of tangible personal property under conditional lease or rental contracts providing for the deferred payment of the lease or rental price.
It is the Department’s longstanding policy regarding the retail sales and use tax that the underlying document governs the tax treatment of the transaction. Based on the above statutes and regulations, and a review of the Lease Agreement with Option to Purchase (the “Agreement”), the transaction addressed in the Agreement constitutes a conditional lease agreement. The language in the Agreement expressly states transfer of ownership and rights to the property is optional and not incidental to the contract. Within the Agreement, the Taxpayer is referred to as the Lease Company or lessor and the Agreement states that the customer, referred to as the lessee, chooses “to lease the property” for a minimum or 90 days, after which the agreement renews for a subsequent 90 days. Customers can elect to acquire ownership of the property, provided they meet the lease terms, but are able to terminate the lease at any time.
The Taxpayer requests the Department rule on the responsibility of the Taxpayer in these transactions. The Taxpayer argues that the dealer to which the customer went to acquire the tangible personal property collects tax on the transaction, and this should satisfy the Department’s sales tax collection requirement. The Agreement entered into by the customer/lessee is administered by the Taxpayer as lessor, thus transferring ownership of the property to the Taxpayer as it finances the transaction for the customer, and paying the dealer for the property. In this transaction, the Taxpayer pays the sales tax to the dealer on the property at the time of sale and acquires ownership of the property. The Taxpayer then leases this property to the customer/lessee and collects monthly payments for the sales price and any additional fees.
Because the Taxpayer takes ownership of the property according to the Agreement, and no contract between the Taxpayer and dealer was provided to indicate otherwise, the Taxpayer must collect the sales tax from the customer/lessee on the gross proceeds derived from these transactions.
I hope the foregoing responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s web site. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1435L