Tax Type
Retail Sales and Use Tax
Description
Lease of radio system; Government contractor
Topic
Taxability of Persons and Transactions
Date Issued
05-27-1994
May 27, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear*****************
This will reply to your letter of March 11, 1994 in which you request a ruling on the application of the retail sales and use tax to specific transactions.
FACTS
The Taxpayer is a limited liability company. Its sole business activity will be leasing a trunked radio system, including radios and broadcasting antennae and related equipment ("equipment") directly to various agencies of the United States Government for use by the employees of and contractors to these agencies. The leasing activity will be pursuant to a 36-month contract, with options to extend for an additional 36 months. Payments under the lease will be made from public funds.
In accordance with the terms of the contract, the equipment will be purchased and owned by the Taxpayer at no cost to the federal government. The contract contains no provisions allowing the government to purchase the equipment at any time during or at the conclusion of the contract.
Revenue to be generated from this activity will be from monthly lease payments received directly from the government and any residual value realized through the sale of the equipment at the conclusion of the lease.
You request a ruling on the application of the tax to (1) the purchase of the equipment; and (2) the lease payments received from the federal government.
RULING
Purchase of the equipment: Virginia Regulation (VR) 630-10-57 explains the tax treatment of leases. Subsection C of the regulation provides that "[t]angible personal property for future use by a person for taxable lease or rental as an established business may be purchased tax exempt under a certificate of exemption."
Based on the facts presented, the equipment is being purchased by the Taxpayer for the sole purpose of leasing it to the federal government. Because the equipment will be leased to another party, the equipment may be purchased under a resale certificate of exemption. However, if the equipment is leased with an operator, VR 630-10-57(A) provides that the lease is not taxable. In such a case, the Taxpayer must pay the tax at the time the equipment is purchased.
Lease payments received from the federal government: 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....
Va. Code §58.1-609.1(4) exempts from the sales and use tax tangible personal property for use or consumption by the United States. In interpreting this statute, VR 630-10-45 provides that the tax does not apply to sales to the United States if the purchases are pursuant to required official purchase orders to be paid out of public funds. The facts indicate that the lease payments under the contract satisfy these requirements; therefore, they are exempt from the tax.
It should be noted that the exemption does not apply to sales or leases to privately owned financial and other privately owned corporations chartered by the United States.
If you have any questions or need additional information, please contact the department.
Sincerely
Danny M. Payne
Acting Tax Commissioner
OTP/7723F
Rulings of the Tax Commissioner