Tax Type
Retail Sales and Use Tax
Description
Sales for Resale; Sublease of Equipment
Topic
Taxability of Persons and Transactions
Date Issued
04-20-1992
April 20, 1992
Re: Request for Ruling: Sales & Use Tax
Dear****************
This will reply to your letter of October 7, 1991 in which you seek a ruling on behalf of a client (the "Taxpayer") on the sales and use tax implications of certain leases and subleases between related entities
FACTS
The Taxpayer is a parent corporation which has several wholly-owned subsidiaries. While the parent corporation has been entering into lease agreements on behalf of the members of the affiliated group, it intends to form an acquisition subsidiary (the "subsidiary") that will be responsible for purchasing and leasing equipment for all members of the affiliated group {the "affiliates"). For the acquisition services that it performs for the group, the subsidiary will receive an arm's-length fee from the Taxpayer.
The subsidiary will enter into leases with unrelated third parties and subsequently sublease the equipment, etc. to affiliates. While the term of the lease between the subsidiary and the third-party lessor may be for a longer period of time, the initial lease with affiliates will be for one year. Thereafter, the subsidiary may renegotiate the lease with an affiliate or if no affiliate is interested in leasing the equipment, it may lease the equipment to an unrelated third party. In the event the subsidiary cannot locate an interested lessee it will terminate the lease with the third party lessor and pay any applicable termination fee.
The leases entered subsidiary will be subsidiary and the affiliates.
into prior to the establishment of the transferred from the parent company to the subsidiary will enter into subleases with the
You seek a ruling on the taxability of the above transactions.
RULING
I will respond to each of the questions specified in your letter individually below:
Use of resale exemption certificates: You maintain that the subsidiary can tender resale certificates to the third party lessors since the equipment/assets will subsequently be subleased to affiliates.
I have enclosed a copy of a prior Ruling of the Commissioner P.D. 87-69 (2/7/87) which addresses the sale of tangible personal property to a taxpayer for subsequent resale to its affiliates. The same is also applicable to leases provided the Taxpayer does not make a taxable use of the leased property prior to entering into a lease agreement. P.D. 86-91 (5/12/86) to which you referred in your letter is also directly on point with this matter.
Accordingly. the subsidiary may purchase under a resale exemption certificate equipment/assets which subsequently will be subleased to affiliates during the first year of its lease with the third party lessor or in years where the terms of the subleases are negotiated between the acquisition subsidiary and its affiliated or an unrelated third party. It, however, must collect and pay the tax on the gross proceeds of the leases to the department.
Assignment of existing leases to the subsidiary: Va. Code §58.1-602 defines the term "sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or any means whatsoever, of tangible personal property...for a consideration." In transferring its preexisting leases to the subsidiary, the parent effectively will be transferring tangible personal property (the equipment/assets). Thus, provided the transfer of leases involves no consideration. it would be nontaxable. If the transfer is accompanied by any consideration the transactions would be taxable. In such an instance, however, the subsidiary could provide the parent with a resale exemption certificate.
Following the assignment of the leases from the parent, the subsidiary may tender resale certificates to third party lessors and collect and remit the tax on the subleases to its affiliates regardless of whether the monthly sublease amounts are based on current fair market rental value of the equipment or are identical to the monthly lease amounts paid under the original lease between the parent and unrelated third parties.
I trust this answers your questions, but should you have any others, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5692H
Rulings of the Tax Commissioner