Tax Type
Retail Sales and Use Tax
Description
Lease between affiliated companies
Topic
Taxability of Persons and Transactions
Date Issued
06-13-1988
June 13, 1988
Re: §58.1-1821 Application/Sales and Use Tax
Dear******************
This will reply to your letter of February 24, 1988 in which you seek the correction of sales and use tax assessed to *********** ("taxpayer") as the result of a recent audit.
FACTS
The taxpayer is in the insurance business. The taxpayer was audited for the period June 1, 1981 to August 31, 1987 and held liable for sales and use tax on certain non-taxed items leased from (a Virginia limited partnership and affiliate of the taxpayer). The lease agreement between the taxpayer and the lessor is designed with the intent to automatically transfer title of the property to the taxpayer upon the expiration of the lease term for a token payment of one dollar. The taxpayer contends that the lessor is not in the business of leasing or selling tangible personal property. The taxpayer contends further that the lease agreement is an "occasional sale" of tangible personal property, and thus exempt from the imposition of Virginia sales and use tax.
DETERMINATION
§58.1-603 of the Code of Virginia imposes the sales tax upon "every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth, or who rents or furnishes any of the things or services taxable under this chapter,...or who leases or rents such property within this Commonwealth." The tax is imposed 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 same is incidental or germane to such business."
This section clearly confirms that it is the intent of the sales and use tax law to tax those leases made by one in the business of making such leases. Therefore, the question to be addressed in this instance is whether the lessor is in the business of making such leases.
"Lease" as defined in §58.1-602(8) of the Code of Virginia 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 agreement in question is designed to automatically transfer title to the property to the lessee upon the expiration of the lease for a token payment, title is not transferred until such time as payment is made at the expiration of the lease. Therefore, under the sales and use tax law, the lessor is leasing tangible personal property until such time that title to the property is transferred to the lessee.
"Business" is defined in §58.1-602(1) of the Code of Virginia as "any activity engaged in by any person, or caused to be engaged in by him, with the object of gain, benefit or advantage, either directly or indirectly." While neither the taxpayer nor the lessor is involved in the routine leasing of tangible personal property, I must conclude that the lessor is engaged in an activity with the object of indirect gain, benefit or advantage to both the taxpayer and lessor. Therefore, based on the definition of business for sales and use tax purposes, the lessor is in the business of leasing tangible personal property and thus engaged in a transaction subject to the sales and use tax.
Furthermore, any person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay the tax on the gross proceeds (see Virginia Regulation 630-10-57). As set forth in §58.1-602(12) of the Code of Virginia, an "occasional sale" means a sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration. The lessor in this case is engaged in an activity that requires registration, and therefore, the transaction does not meet all of the tests for an occasional sales exemption.
Based on the foregoing, I find no basis for a correction of the assessment, which is now due and payable. I have enclosed for your perusal copies of previous determinations issued by the department with similar circumstances.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner