Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Bank service corporation
Topic
Taxability of Persons and Transactions
Date Issued
08-30-1994
August 30, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your correspondence in which you seek correction of a sales and use tax assessment for *************(the "Taxpayer") for the period June 1985 through May 1991.
FACTS
The Taxpayer is a "bank service corporation." During the audit period, certain office equipment owned by the Taxpayer was used by its parent (the "bank"). For internal bookkeeping purposes the bank made rental entries for this equipment. Based on these entries, the auditor assessed the Taxpayer sales tax on the rental amounts.
You contend that the equipment rentals should not be subject to sales tax because no consideration was involved; the transactions were bookkeeping entries only. You also maintain that the Taxpayer is for all practical purposes a part of the bank because a bank service corporation cannot exist except as part of a savings bank. Therefore, the rental of property was not between two separate corporations but rather was an intracompany transaction with no real financial substance.
DETERMINATION
Va. Code §58.]-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...." Virginia Regulation (VR) 630-10-57 explains the tax treatment of leases and requires 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 gross proceeds.
The department has previously ruled that virtually any transaction involving consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax. See P.D. 88-215 (7/27/88) (copy enclosed). In this case, the Taxpayer made rentals of tangible personal property to the bank, evidenced by the entries in the bank's records.
Affiliated corporations must be treated as separate entities, and transactions between them are not exempt intracompany transfers. See P.D. 85-233 (12/31/85) (copy enclosed). While you contend that the Taxpayer is a part of the bank for all practical purposes and not a separate entity, it is clear that the Taxpayer was formed as a separate legal entity to perform certain functions and gain certain advantages which the bank could not because of federal regulations.
Because the tangible personal property was leased from the Taxpayer to its parent (a separate legal entity) for consideration, the sales tax was properly assessed.
You also claim that tax was paid on the initial purchase of the leased property and, therefore, no tax should be due on the rental of the property. You have provided two invoices to support your position. Based on the information provided, a credit against the assessment will be allowed for the amount of sales tax paid on the purchase of the equipment leased by the Taxpayer.
The assessment will be revised accordingly. 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
Tax Commissioner
OTP/7678F
Rulings of the Tax Commissioner