Tax Type
Retail Sales and Use Tax
Description
Lease of motel involving tangible personal property and real property
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
06-14-1994
June 14, 1994
Re: §58.1-1821 Application: Sales and Use Tax
Dear
This will reply to your letter of March 10, 1993 in which you, on behalf of your clients ********** (the "Partnership") and ************* (the "Corporation"), take exception to the recent sales and use tax audits for the period of January, 1987 through March, 1990 and January, 1990 through November, 1992, respectively.
FACTS
The audit of the Partnership and the Corporation both involve the operation of a motel. For the period of January, 1987 through March, 1990 the Partnership owned and leased the motel to the Corporation. The Partnership was dissolved in 1988 and as a result the motel was deeded to one of the partners as the sole proprietor (the "Taxpayer"). From April, 1990 through December, 1990 the motel was leased to the Corporation by the Taxpayer. Due to the fact the lease amount in each situation contained both the provision of tangible personal property and real estate, the auditor allocated the lease amount attributable to tangible personal property by calculating the annual depreciation for tangible personal property as a percentage of the total annual depreciation for all depreciable assets. This resulted in allocating 58% of the lease amount as taxable tangible personal property.
The Partnership and the Corporation's objection to the assessment of tax on the lease amount is two-fold. First, the Partnership and the Corporation contend that the payments, in fact, do not constitute an actual lease but are nothing more than mortgage payments. Secondly, the Partnership and the Corporation take exception to the auditor's method of determining what percentage of the lease constitutes tangible personal property.
DETERMINATION
For purposes of this audit, it was determined that an actual lease of the motel existed based on "lease revenue" reported on the Partnership's federal income tax return, and "lease expense" reported on the Corporation's federal income tax return. The Corporation contends that since the Partnership was dissolved in 1988 and the motel became the property of the Taxpayer, the Taxpayer became the owner, sole proprietor, and operator of the motel and, in reality, a lease did not exist.
Virginia Regulation (VR) 630-10-57 addresses leases or rentals and provides that, "any person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay the tax on the gross proceeds." As the Taxpayer reported lease income for income tax purposes, there is prima facie evidence that the Taxpayer in fact was a lessor of real estate and tangible personal property and thus requiring collection of the tax. This brings us to the question of what portion of the lease in the present situation represents tangible personal property and what portion represents real property. The auditor in this case apportioned the lease payment between real property and tangible personal property based on depreciation expense. The Partnership and the Corporation feel the apportionment based on original cost of the real property and tangible property would more accurately represent a true apportionment between the two types of property involved in the lease.
Based on the fact that depreciation is an attempt to spread the cost of property over the useful life of such property, and the useful life of real property is significantly longer than that of tangible personal property, I feel apportionment between real property and tangible property based on original cost would be an acceptable alternative in this case. Provided documentation can be provided showing or approximating the original cost of the real property and tangible personal property included in the lease, the audit will be adjusted accordingly. A representative from the ******* District Office will contact Taxpayer to make the appropriate revisions.
It is also noted in your letter that you request a copy of the statute which allows the department to extend the statute of limitations beyond the normal three year period. Please find enclosed a copy of Va. Code § 58.1-634 which authorizes the extension of the statute of limitation in cases where the taxpayer has failed to file the required returns.
If you should have any questions, please feel free to contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner