Tax Type
Retail Sales and Use Tax
Description
Leases and rentals
Topic
Taxability of Persons and Transactions
Date Issued
08-26-1993
August 26, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will reply to your letter of November 13, 1992 in which you seek correction of a retail sales and use tax for the five above named taxpayers.
FACTS
The taxpayers have built and equipped nursing homes which are leased to operators for monthly payments. Lease payments cover use of the land, buildings, furniture and equipment. The taxpayer agrees that Virginia law and the regulations subject leased tangible personal property to sales tax. At issue in this case is how to make a reasonable allocation of the lease payments between realty and tangible personal property when contained in one lease.
The taxpayers' method of allocation compared the basic cost price of the furniture and equipment for a facility to the total cost of the project, including financing and interest costs. The resulting percentage was then applied to each lease payment to determine the amount of the payment attributable to tangible personal property and, therefore, subject to sales tax.
The auditor, believing the taxpayers' method did not accurately reflect the taxable portion of the leases, compared the furniture and equipment cost to the cost of the real estate and the contract amount for constructing the building. Financing and interest costs were not included in the auditor's computation.
You object to the auditor's method, claiming that elimination of financing and interest costs from the cost of the buildings dilutes the ratio of building costs to equipment costs. You request that the taxpayers' method to compute the tangible personal property portion of the lease payments be accepted.
DETERMINATION
You have provided documentation supporting your position that the interest and finance charges were attributable to loans incurred for the construction of the facilities. Additional documentation indicates that the purchases of furniture and equipment were made after the construction of the facilities and after the finance and interest costs were incurred. The inclusion of the finance and interest costs, which related directly to the construction of the building, in the basis of the real property is proper under Generally Accepted Accounting Principles.
Accordingly, I find that the taxpayers' method of allocating the lease payments between realty and tangible personal property is reasonable. To date, you have provided documentation for only two of the taxpayers, but you have indicated that similar information is available for the other taxpayers. In order for the department to properly adjust the entire assessment, documentation for all the taxpayers is required. Information pertaining to the remaining taxpayers should be sent to the department's Audit Review Unit, P.O. Box 1880, Richmond, Virginia 23282-1880 within 30 days of the date of this letter. Once received, the documentation will be reviewed and the assessment will be revised as appropriate. If you have not supplied the necessary information within the 30 days, or shown good cause for extending the period to supply this information, the information on which the assessment was originally based for the remaining taxpayers will be presumed to be the best available. The assessment will then be immediately due and payable, and collection action will resume.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6555F
Rulings of the Tax Commissioner