April 10, 2025
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period April 2013 through March 2019.
FACTS
An audit was conducted on the books and records of the Taxpayer, a general contractor that operates in two states, ***** (State A) and Virginia. ***** (the "Company"), a State A limited liability company whose sole member was the Taxpayer, engaged in the business of purchasing equipment that was then rented by the Taxpayer. The lease transactions were recorded as book accounting entries but no funds were exchanged. The intercompany costs were calculated based on equipment hours reported by the Taxpayer’s employees.
The Department’s auditor assessed the Taxpayer use tax on equipment leases from various vendors including the Company. The Taxpayer filed an application for correction contending the lease transactions made with the Company should be removed from the audit because the two entities operate as one business.
ANALYSIS
Virginia Code § 58.1-603 imposes the retail sales and use tax on every person “who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth.” The tax is collected by all persons who are “dealers” as defined in Virginia Code § 58.1-612, which includes “every person that…leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transferring title thereto.”
The Taxpayer cites A.G. Dillard, Inc. v. Stonehaus Construction, LLC, No. 151182, 2016 Va. LEXIS 16 (Va. June 2, 2016) to make a general claim that the LLC veil has been pierced and these entities are not viewed as separate entities. Dillard, however, was not a tax case. Instead, the court was addressing the contractual obligations of related entities. While other precedent has addressed a similar concept in the context of income taxation, in both instances, such principles have generally applied to hold the relevant owners liable. As stated in the Dillard case cited by the Taxpayer:
Generally, when a plaintiff has a claim against a limited liability company, the plaintiff may only pursue that claim against the limited liability company itself and not its members…However, in rare instances, a limited liability company’s corporate veil may be pierced to hold a member personally liable.
A.G. Dillard, Inc. at *6. The Court in Dillard then quotes Dana v. 313 Freemason Condo. Ass’n, 266 Va. 491, 500 (2003) and RF&P Coro. v. Little, 247 Va. 309, 316 (1994), as follows:
A corporate entity cannot be disregarded unless it is proved that the corporation is the alter ego, alias, stooge, or dummy of the individuals sought to be held personally accountable and that the corporate was a device or sham used to disguise wrongs, obscure fraud, or conceal crime.
In this instance, the Department is not making such allegations, and the Taxpayer has not made any admission to indicate that its arrangement with the Company was contrived to avoid liabilities or defraud the Commonwealth. Further, even if this were the case, the application of the retail sales and use tax to a transaction is governed by Chapter 6 of Title 58.1 of the Code of Virginia, which provides specific authority for holding corporate, partnership, and limited liability officers liable within the construct of the retail sales and use tax. Specifically, Va. Code § 58.1-1813 A states:
[a]ny corporate, partnership or limited liability officer who willfully fails to pay, collect or truthfully account for and pay over any tax administered by the Department of Taxation, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty of the amount of the tax evaded, or not paid, collected or accounted for and paid over, to be assessed and collected in the same manner as such taxes are assessed and collected.
See also 23 Virginia Administrative Code (“VAC”) 10-210-850 A and Public Document (P.D.) 98-157 (10/20/1998).
According to the Taxpayer, the Company was formed as a separate legal entity to purchase and own equipment because of the benefits afforded under such a business structure. The Company meets the definition of a dealer under Virginia Code § 58.1-612. Specifically, the Company leases or rents tangible personal property for a consideration and permits the use or possession of such property without transferring title to the Taxpayer as prescribed under Virginia Code § 58.1-612 B 5.
In addition, P.D. 88-215 (7/27/1988) explains that virtually any transaction involving consideration, including transfers or rentals between affiliated companies, is subject to the sales and use tax. Consistent with this ruling, the Department has consistently ruled that an exchange of tangible personal property for a consideration between two related entities is a sale. See P.D. 04-134 (9/16/2004), P.D. 12-159 (10/12/2012), and P.D. 16-84 (5/17/2016).
The Taxpayer also contends that it could liquidate the Company into itself without a sales tax consequence based on the definition of occasional sale found in Virginia Code § 58.1-602. To support its contention the Taxpayer cites P.D. 96-230 (9/17/1996). In that case, the Taxpayer organized a wholly owned subsidiary for the sale of assets from its sister company to the subsidiary in exchange for the stock of the subsidiary. In this case stock was exchanged, not property, and the parent maintained control of the subsidiary. Because of this, the Department determined that an I.R.C. § 351 tax-exempt reorganization of assets is a qualifying reorganization for purposes of the occasional sale exemption. However, this is not the facts of this case.
In this instance, an argument as to what a dealer or consumer could have done or should have done has no bearing on an assessment. Because the retail sales and use tax is a transactional tax, the determination as to the taxation of a specific transaction is based on the underlying documents that support that transaction. See P.D. 00-100 (5/25/2000). As such, the Taxpayer’s argument lacks merit for this assessment.
While you requested a conference in your letter, your request is declined because meetings are not granted on a contingency basis and the Department’s policy is well established in the regulations.
DETERMINATION
Based on the facts and analysis above, the assessment is upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/3573.F