Tax Type
Retail Sales and Use Tax
Description
Rent to own; Lease vs. conditional sales contract; Charges in connection with lease
Topic
Collection of Tax
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
04-19-1994
April 19, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter of January 18, 1993 in which you seek correction of a retail sales and use tax assessment on behalf of your client, ********** (the "Taxpayer") for the period November 1988 through October 1991.
FACTS
The Taxpayer is in the "rent to own" business, renting household furniture, appliances and electronic equipment to its customers. An audit by the department resulted in an assessment for failure to collect and remit sales tax on specific fees (e.g., processing fees, collection fees, reinstatement fees, and waiver fees).
You contend that the lease-purchase agreement in question is analogous to a conditional sales contract. Consequently, the fees in question are not included in the definition of "sales price" and are not taxable. You cite the Virginia Lease-Purchase Agreement Act (Va. Code §59.1-207.17 et. seq) to support your position.
DETERMINATION
Lease vs. Conditional Sales Contract: Va. Code §58.1-602 contains a specific definition of the term "lease" for purposes of the retail sales and use tax:
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- "Lease or rental" means the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property. (Emphasis added).
The agreement in this case is entitled "Rental Agreement" and states that the rental property is owned by the Taxpayer. The "renter" (lessee) is entitled to use the property only until the paid rental period ends. The agreement provides that upon termination of the agreement, the lessee must immediately return the property to the Taxpayer. Furthermore, the agreement explains that the lessee has "the option to purchase the rented property. (Emphasis added). These provisions make it clear that the agreement in question is a lease.
You contend that the Virginia Lease-Purchase Agreement Act (the "Act") requires that lease-purchase agreements used by the Taxpayer contain explicit information relating to the ultimate ownership of the property. You argue that the Act is "clearly designed to create an ownership interest in goods for a customer who makes payments under a Lease-Purchase Agreement."
The Act does not create an ownership interest in the property, but instead is designed to require full disclosure to customers to ensure that they are aware of the conditions and total charges required before ownership in the property is transferred, if that option is exercised. In fact, §59.1-207.21(2) requires the lessor to disclose that "the consumer will not own the property until the consumer has made the total payment necessary to acquire ownership." (Emphasis added). There is no provision in the Act that creates an ownership interest in the rented property for the lessee.
Based on the foregoing, I find that the agreement in question is a lease and not a conditional sales contract.
Tax Treatment of Leases: Virginia Regulation (VR) 630-10-57 (copy enclosed) provides that any person engaged in the business of leasing or renting tangible personal property to others must collect and pay the tax on gross proceeds. The term "gross proceeds" includes any finance or interest charges, insurance charges, charges for property tax on the property being leased, and other similar charges. Gross proceeds also includes any service charges in connection with the lease of property.
The above cited regulation clearly subjects to the tax any charges in connection with the lease of property. Therefore, the processing fees, in-house collection fees, reinstatement fees and waiver fees charged by the Taxpayer and paid by its customers are taxable, even if separately stated.
Offer in Compromise: The Taxpayer offers to collect and remit that sales tax on 100% of the fees it collects on or after January 1, 1992 and pay the tax on 22% of the fees it collected during the audit period (22% representing the percentage of items which were leased by the Taxpayer and were not ultimately purchased by the consumer who rented the items.)
Va. Code §58.1-105 authorizes the Tax Commissioner to accept an offer in compromise of taxes if it is determined that the assessment is based upon a doubtful or disputed claim or that the tax liability is of doubtful collectibility. In this case, the application of the law and regulations is clear. Furthermore, no documentation has been presented to indicate that the assessment is of doubtful collectibility. Therefore, I cannot accept the Taxpayer's offer.
Accordingly, the assessment is correct as made. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6814F
Rulings of the Tax Commissioner