April 13, 2022
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****,
This is in response to your letter in which you appeal the retail sales and use tax assessment issued to ***** (the Taxpayer) as a result of an audit for the periods from May 2015 through April 2018. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a restaurant and hotel in Virginia was audited for sales and use tax compliance. During their examination, the auditor concluded the Taxpayer’s rental payments were being improperly allocated between the real estate and the furniture, fixtures and equipment and adjusted the allocation to 50% real property and 50% tangible personal property. The Taxpayer appeals, contending the property allocation is proper and is supported by the terms of the lease agreement.
DETERMINATION
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…” 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.”
While the lease of real property and figures attached thereto is not subject to the sales tax, the lease of the tangible personal property included in the lease is subject to the tax. See Public Document (P.D.) 95-223 (8/29/1995). Accordingly, the lessor must provide a breakdown of the value of tangible personal property versus the value of the real property included in the lease. If the lessor is not able to provide such a breakdown and no other evidence is available, the tax will apply to the entire lease payment. See P.D. 93-188 (8/26/1993).
In this instance, the Taxpayer has provided an executed lease agreement, which includes an exhibit, which lays out the total value of the tangible personal property included in the lease. According to this exhibit B rental payments are to be allocated 90% to real estate and 10% to furniture, fixtures and equipment. Additional schedules provided by the Taxpayer support the allocation in the lease agreement.
As indicated above, the Department’s long-standing policy is that the underlying document governs the treatment of the transaction for sales and use tax purposes. Therefore, the audit will be returned to the auditor to adjust the tax attributable to the monthly lease payment, pursuant to the terms of the lease agreement. The Taxpayer will receive an adjusted assessment and a revised bill will be issued for any outstanding liability, which should be paid within 60 days to avoid the accrual of additional interest charges.
The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1976.A