Tax Type
Retail Sales and Use Tax
Description
Leases and Rentals; Loaned Equipment
Topic
Taxability of Persons and Transactions
Date Issued
06-24-1992
June 24, 1992
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter in which you seek correction of a sales and use tax assessment for *****(the Taxpayer).
FACTS
The Taxpayer is engaged in the manufacture and sale of industrial chemicals. The Taxpayer was audited for the period of September 1986 through August 1990. The Taxpayer contests that portion of the assessment for loaned equipment on the basis that the equipment was not loaned to the customers but rented. Additionally, the Taxpayer contends that the four storage tanks included in the assessment are part of the manufacturing process and therefore exempt from the tax under the manufacturing exemption.
DETERMINATION
Loaned Equipment
The Taxpayer sells chemicals to its customers which requires the use of specialized equipment which is provided by the Taxpayer. It is the Taxpayer's contention that the equipment is "rented" to the customers and the rental cost is included in the price of the chemicals. The audit revealed that the Taxpayer does not separate out the charge for the "rental" on the invoice to the customer but carries the equipment on its books as "Inventory Equipment - Loaned." The audit held that this equipment was not rented to the customers but, as indicated on the Taxpayer's books, loaned equipment. Virginia Regulation (VR) 630-10-32 provides in pertinent part, that tangible personal property removed from inventory for free distribution by the vendor is subject to the tax on the cost price of the property at the time of withdrawal.
In support of its contention that the equipment is "rented," the Taxpayer has submitted invoices that show varying prices for the same amount of chemicals. However, based upon information provided by the Taxpayer on its pricing structure, the department was told that prices could vary for a number of reasons, including market conditions, competitive prices and quantity of purchases. Further, the Taxpayer has submitted no documentation that substantiates its interpretation.
The Taxpayer has submitted copies of contracts with various customers to support its position that the rental of the equipment is included in the cost of the chemicals. A number of the contracts state that the cost of the equipment must be included in the cost of providing the system for purposes of the bidding process. If the Taxpayer can produce documentation that the cost of the equipment was included in the bid, e.g. the bid was higher than it would have been had the chemicals not been included, then that portion of the assessment attributable to those contracts will be removed from the audit.
Several other contracts require that the Taxpayer furnish the equipment at no expense or charge to the customer. Therefore, the equipment must be given or loaned to the customer free of charge in such instances. The Taxpayer asserts that a prior ruling of the department regarding "give aways" (Ruling of the Commissioner, October 22, 1984) is analogous to the transaction in the present case. However, that ruling differs from the present situation.
In the prior ruling, the items furnished were in effect a discount and the terms of the transaction were clearly spelled out to the purchaser. The Taxpayer has conceded that in certain situations the customer is not aware that the equipment cost is included in the price of the chemicals, in effect the customers believe they are getting free use of the equipment. By not including equipment on invoice or bid proposal, the equipment is not part of the contract. As such, the instant transactions are more analogous to the Ruling of the Commissioner, January 9, 1978, (copy enclosed) in which the department, held that equipment given to customers with no lease provision was deemed to be used by the vendor and subject to the tax. Thus, I see no basis for revising the assessment for that portion of the assessment attributable to equipment given to customers by the Taxpayer.
Storage Tanks
The Taxpayer contests the inclusion of four tanks used to store raw materials for use in the Taxpayer's operations. The Taxpayer contends that each tank is located adjacent to a manufacturing building and dispenses raw materials directly into the manufacturing building for processing.
Va. Code §58.1-602 defines manufacturing to include the "handling and storage of raw materials at the plant." Based on the information provided, I find basis for the removal of the storage tanks from the audit since they are used directly in the Taxpayer's manufacturing process. Therefore, the audit will be revised to remove the Taxpayer's purchase of the storage tanks. Consistent with VR 630-10-63, however, foundations for the tanks are not used directly in production and will remain taxable.
Any documentation submitted by the Taxpayer should be directed to the department's Office Service Division, Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282, within 60 days of the date of this letter. Otherwise, a revised assessment based on the foregoing will be issued to the Taxpayer.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5532I
Rulings of the Tax Commissioner