Tax Type
Retail Sales and Use Tax
Description
Motor fuels; Fuel used in leased machinery
Topic
Taxability of Persons and Transactions
Date Issued
12-21-1993
December 21, 1993
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 issued to*****************(the Taxpayer) for the period July 1988 through May 1991 .
FACTS
The Taxpayer is in the business of renting contractor's equipment, lawn and garden machinery and other tangible personal property. As is usual in the industry, equipment is delivered to customers fully fueled. While most customers refuel equipment before its return to the Taxpayer, in those instances where the equipment is returned with less than a full fuel tank, the Taxpayer charges the customer for the fuel necessary to refill the tank and adds this fuel charge, plus a mark-up to defray costs, to the customer's invoice.
During the audit it was found that the Taxpayer failed to collect the tax on these fuel charges made in connection with the rental of equipment. You contend that the tax was paid to vendors on the purchase of fuel pursuant to Va. Code §58.1-2104 (Motor Fuel Tax). Therefore, you argue that subsequent sales of this fuel by the Taxpayer are exempt from the retail sales and use tax under authority of Va. Code §58.1-609.1(1) [formerly §58.1608(A)(1)(a)] which exempts "[M]otor vehicle fuels which are subject to the tax imposed by Chapter 21...."
DETERMINATION
Before determining the application of the retail sales and use tax on those fuels used in the Taxpayer's rental equipment, it is first necessary to examine the application of the motor fuel tax and special fuel tax administered by Va. Code §§58.1-2104 and 58.12116.
It is my understanding that the Taxpayer, who is registered with the Department of Motor Vehicles as a bulk user, is allowed to make purchases of fuel used in rental equipment exempt from these motor fuel taxes because this fuel is intended strictly for off-road use. Therefore, since the fuel used in the Taxpayer's rental equipment is not subject to the motor fuel tax or special fuel tax, the exemption provided under Va. Code §58.1-609.1 (1) is not applicable. Indeed, the fuel purchase receipts which you provided show than no motor fuel taxes were charged to the Taxpayer by his fuel vendors, rather, the Taxpayer was charged the 4.5 percent retail sales and use tax on fuel purchases.
Regarding the retail sales and use tax, Virginia Code §58.1-603 imposes the tax on "the gross proceeds derived from the lease or rental of tangible personal property." The term "gross proceeds" is defined in Va. Code §58.1-602 to mean:
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- the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section....
- the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section....
As a precaution, however, the resale exemption applies only to motor fuel intended for off-road use for which a separate charge is made to customers. Fuel for off-road use which the Taxpayer uses himself is deemed to be used in a taxable manner, and the tax on fuel used in such a taxable activity must be accrued and reported on line 2 of the Taxpayer's sales and use tax return. For example, if the Taxpayer uses a lawn mower to maintain his own premises, it is the Taxpayer who is liable for the tax on the cost price of the fuel. Similarly, if the Taxpayer rents equipment with an operator, no tax is charged to the customer as noted in Virginia Regulation (VR) 630-10-57. Therefore, the Taxpayer is liable for accruing the retail sales tax on fuel used in this type of transaction.
Also, because the Taxpayer requires customers to replace fuel used in rental equipment, the fuel is not included as part of the lease price. Consequently, fuel which the Taxpayer provides to customers without making a separate charge is deemed a taxable use by the Taxpayer. For example, fuel used by the Taxpayer to initially fill a new piece of equipment is not resold to customers, and the tax on such fuel must be accrued and reported by the Taxpayer.
In the instant case, the amount of retail sales and use tax paid to vendors for fuel used in rental equipment and for which a separate charge was made will be removed from the audit assessment. The Taxpayer will remain liable, however, for any mark-up on the sales of these fuels and, as noted above, any fuel used by the Taxpayer or provided to customers for which no charge was made. Henceforth, the Taxpayer is required to collect and remit the tax on fuel charges made to customers.
Based on this determination, the auditor will contact the Taxpayer as soon as practicable to determine to what extent the assessment needs to be revised.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6106I
Rulings of the Tax Commissioner