Tax Type
Retail Sales and Use Tax
Description
Occasional sales, including mergers; Lease of equipment to corporation by officers
Topic
Taxability of Persons and Transactions
Date Issued
07-12-1993
July 12, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter of September 30, 1992 in which you seek correction of a retail sales and use tax assessment for *************(the "Taxpayers").
FACTS
The Taxpayers leased certain pieces of equipment, a pile hammer and an excavator, to************* (the "Corporation") for use in the Corporation's excavating business. The Taxpayers are officers of the Corporation and have owned all of the issued and outstanding stock of the Corporation since the beginning of the lease transactions.
The Taxpayers did not collect sales tax from the Corporation in connection with the leasing of the equipment. The Taxpayers contend that sales tax was paid when the equipment was purchased and that they are not in the business of renting equipment. In addition, they claim that the leasing transaction was an isolated, financially neutral transaction in which no profit was realized. Consequently, the Taxpayers assert that the leasing of the equipment is not subject to sales tax. The auditor claims that the Taxpayers are in the business of renting equipment and assessed sales tax on the lease transactions. You object to the auditor's position and request that the assessment be abated.
DETERMINATION
Va. Code §58.1-603(2) imposes the sales tax 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 issue in this case is whether the Taxpayers are in the leasing business.
"Business" is defined in Va. Code §58.1-602 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." [Emphasis added]. While it may be argued the Taxpayers are not involved in the routine leasing of tangible personal property, I must conclude that the Taxpayers are engaged in an activity with the object of indirect gain, benefit or advantage to both the Taxpayers and the Corporation.
According to your letter, the equipment was purchased by the Taxpayers rather than by the Corporation to avoid an increase in the Corporation's debts for accounting purposes and a corresponding decrease in its bonding capacity. You maintain that the only benefit from the leasing of the equipment was obtained by the Corporation, as the Taxpayers did not realize any gain, but rather only recovered their costs. However, the Taxpayers (who are also the sole shareholders of the Corporation) received an indirect benefit. The balance sheet for the Corporation did not reflect an increase in the Corporation's debts, thus maintaining its bonding capacity. This direct benefit to the Corporation indirectly benefited the Taxpayers/shareholders. Recognition of this indirect benefit does not require one to disregard the separate legal existence of the Corporation, as you assert. The Taxpayers also benefited by receiving a stream of payments for a number of years (covering the entire audit period from August 1985 to July 1991), reimbursing them for their costs.
Accordingly, based on the definition of "business" for sales and use tax purposes and the indirect benefit received by the Taxpayers in leasing the equipment, I find that the Taxpayers were in the business of leasing tangible personal property and were engaged in a transaction subject to the sales and use tax.
You argue that even if the Taxpayers were in the business of making leases, the lease of property was not an established business, or part of an established business, as required under Va. Code §58.1603(2). However, I cannot accept your conclusion that, because the leasing was an "isolated" action (as you label it), it was not part of an established business. The Taxpayers purchased the equipment for the sole purpose of leasing it to the Corporation. Consequently, they established a leasing business; the leasing of equipment was part of that established business.
Based on the foregoing, I find that the assessment is correct as made. However, the department will allow the Taxpayers a credit against the assessment for taxes paid at the time the equipment was purchased, conditioned upon proof of payment by the Taxpayer that relates directly to the assessment of tax in the audit. If the necessary documentation is not provided within 30 days, the assessment will be immediately due and payable, and collection action will resume.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6767F
Rulings of the Tax Commissioner