Tax Type
Retail Sales and Use Tax
Description
Fitness facilities; Lease of tanning beds
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
06-03-1991
June 3, 1991
Re: §58.1-1821 Application: Sales and Use Tax
Dear****************
This will respond to your letters, dated July 16, 1990 and October 31, 1990, in which you contest the assessment of sales and use tax levied against**************(the "taxpayer"), pursuant to an audit by the department for the period January 1, 1985 through December 31, 1987.
FACTS
The taxpayer owns and operates various fitness clubs located in Virginia, Maryland, and the District of Columbia. The fitness facilities are equipped with sun tanning beds owned by a Maryland corporation. The taxpayer contracted with the corporation to remit 45% of the gross tanning session revenues collected by the taxpayer from its customers, on a monthly basis, to the corporation. The contract also provided that the tanning beds be operated solely by the taxpayer and its employees. The owner of the beds assumed no responsibility for daily operation of beds.
The auditor contends that the payment to the corporation constitutes rental of the sun room equipment by the taxpayer. The taxpayer contests the portion of the assessment that is attributable to such rental of sun tanning beds by the taxpayer, stating that the 55% of gross tanning session receipts retained by the taxpayer constitute real estate rental payments from the owner of the beds for the use of the taxpayer's facilities .
DETERMINATION
Nothing in the agreement between the taxpayer and the owner of the beds suggests that the owner sought to lease real estate from the taxpayer. To the contrary, the agreement expressly states that the "Manager, [the taxpayer], desires to have sun beds installed and operated" and that the owner "agrees to install in the Manager's place of business ... the sun beds."
Although the agreement states in one section that the owner will operate the sun beds, it nonetheless is clear that the owner was not engaged in the actual provision of the tanning services to the taxpayer's customers. In fact. the agreement expressly states in §8 that "the Solarium will be operated by Manager and Manager's employees. exclusively." Further, the taxpayer? by agreement. maintained all necessary licenses, permits and authorizations and part of the insurance necessary to carry on the tanning operation, at its own expense. The third party delivered the beds to the taxpayer, rather than the tanning services to the customers. The tanning services were not provided until the electric current was supplied by the taxpayer and the taxpayer's services were provided to operate and maintain the tanning equipment on the taxpayer's premises on a daily basis.
Finally, nothing in the agreement suggests that the taxpayer was merely acting as the agent of the owner in operating the owner's sun beds. In this respect, the agreement states that the "Manager shall be the sub-agent for (the owner) solely with respect to the collection of cash receipts ... and the transfer of such funds [to the owner]." (Emphasis added).
The manner in which the operating arrangement was carried out (i.e., the owner charged the taxpayer an amount based upon the usage (or rental) of the tanning beds), indicates that the monthly payments by the taxpayer to the owner were for the rental of the equipment. Virginia Regulation (VR) 630-10-57(A) provides. " ... the tax applies to leases or rentals of machinery and equipment which is leased or rented without an operator." As such, the arrangement between the third party and the taxpayer is subject to the sales and use tax as a lease of the tanning beds. However, the "rental" by the taxpayer to the taxpayer's customers was not subject to tax. because operators were provided with the equipment being rented.
Based upon the foregoing, and upon reexamination of the audit findings, information previously submitted by your firm, and the written agreements between the third party and the taxpayer, the transactions in question were correctly held taxable in the audit. Therefore, the assessments remain due and payable.
The owner of the tanning beds may be entitled to seek a refund of the sales taxes paid on the original purchases of the tanning beds from the state to which the taxes were paid (presumably, Maryland).
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner