Tax Type
Retail Sales and Use Tax
Description
Lease of equipment to a related company
Topic
Taxability of Persons and Transactions
Date Issued
07-31-1986
July 31, 1986
Re: §58.1-1821 Application/ Sales and Use Tax
Dear ****************
This will reply to your letter of May 20, 1986 seeking correction of an assessment issued in the above referenced case for the period October, 1979 through September, 1985.
FACTS
In connection with its traffic control installation business, ********** (taxpayer), was assessed consumer use tax for certain nontaxed equipment leased from a related company. Taxpayer contends that such leased equipment was exempt of the tax since it represented a lease of equipment with operators, pursuant to §630-10-57(A) of the Sales and Use Tax Regulations. In the alternative, taxpayer contends that if the department finds that its equipment lease was not a lease with operators, that its audit liability pursuant to such lease be limited to the period 1981 through 1985, since it never took receipt of any equipment under the lease until 1981.
In addition, taxpayer contends that the audit assessment is overstated in this case since the department's auditor picked up certain miscellaneous cash payments to taxpayer's lessor between 1981 and 1985 which represented loans between related companies not subject to tax.
DETERMINATION
§58.1-603 of the Virginia Code imposes the tax on anyone "who leases or rents... property within this state...[to the extent of] the gross proceeds derived from the lease or rental of [such]....property, where the lease or rental of such property is an established business, or part of an established business, or the same is incidental or germane to such business."
Taxpayer claims that its lease of certain equipment was exempt of the tax since it represented a lease with operators, under §630-10-57(A) of the Regulations. However, item 3(d), page 2 of taxpayer's lease contract unambiguously provides that, "the Lessee shall cause the Equipment to be operated, in accordance with the applicable vendor's or manufacturer's manual of instruction, by competent and qualified personnel." Therefore, regardless of who taxpayer actually employed to operate such equipment, its lease contract did not specifically provide for a lease with operators as required by the regulations.
Nor can any informal or oral understanding between taxpayer and its lessor regarding who would actually operate such equipment be introduced at this time to alter or contradict the actual terms of its lease agreement at the time it was entered into. (See, e.g., Rowe Co. v. Wallerstein, 145 Va. 191, 133 S.E. 669 (1926))
Similarly, taxpayer's contention that any payments made pursuant to its equipment lease did not actually begin until 1981 is contradicted by the terms of the lease which specifically provides on page one thereof, that, "the Lessee is currently in possession of the Equipment and has been leasing the same from the Lessor under an oral lease with terms identical to those hereinafter stated since the 26th day of April, 1979."
Lastly, taxpayer contends that for the years 1981 through 1985, the assessment is overstated since the maximum amount payable during each of these periods to its equipment lessor is $******** under the terms of the lease. However, it is the department's understanding that at the time of the audit, taxpayer was unable to provide information or documentation showing that such payments did not represent purchases of tangible personal property. Therefore, notwithstanding the fact that such purchases were made in the name of a related company, all such amounts paid by taxpayer were properly held subject to tax in the audit.
However, if taxpayer can produce documentation within 60 days of the date of this letter which affirmatively establishes the nontaxable nature of all or part of such payments, I will consider adjustment of the audit on this basis.
Such documentation should be sent to the department's Technical Services Section, Office Services Division, at P.O. Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner