Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Propane tanks
Topic
Taxability of Persons and Transactions
Date Issued
03-07-1994
March 7, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear******
This will reply to your letter of August 27, 1993 in which you seek correction of a sales and use tax assessment issued to**************("the Taxpayer").
FACTS
The Taxpayer is engaged in the retail sale of propane gas. An audit for the period March 1990 through February 1993 produced an assessment predominantly for the Taxpayer's failure to pay the tax on purchases of certain fixed assets. The only issue under protest is the purchase of propane tanks.
The Taxpayer commenced selling propane gas in 1990. While the general practice in the industry is to charge customers an annual fee for the rental of propane tanks, the Taxpayer waived the annual rental fee as an inducement to attract customers. You maintain, however, that beginning in 1994 all of the Taxpayer's customers will be charged the rental fee on propane tanks, and the Taxpayer will collect the tax on these rental charges.
Because the tanks will ultimately be rented to new and existing customers, the Taxpayer contends that the purchase of propane tanks placed in service prior to 1994 should be partially exempt. Also, the Taxpayer paid the tax on some of the propane tanks purchased during the audit period and further contends that a partial credit should be allowed for the tax paid on these purchases.
DETERMINATION
Va. Code §58.1-609.10(3) provides an exemption from the tax for "tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business...."
This exemption grants to persons engaged in providing tangible personal property for taxable lease or rental the same tax treatment as persons engaged in purchasing tangible personal property for resale. Thus, the exemption allows persons who purchase property for future lease or rental the authority to make such purchases under the resale exemption.
Accordingly, you are correct in determining that propane tanks which will exclusively be rented to customers may be purchased by the Taxpayer exempt of the tax. However, the issue before us is whether the exemption applies to propane tanks which were first provided to customers at no charge and then subsequently rented to customers for an annual fee.
Va. Code §58.1-604 imposes a tax upon the use or consumption of tangible personal property in the Commonwealth. "Use" is defined in Va. Code §58.1-602 to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." (emphasis added)
Further, Va. Code §58.1-623 provides that:
-
- If a taxpayer ... makes any use of [exempt] property other than an exempt use or retention, demonstration, or display while holding property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property ... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale. (emphasis added)
When property is purchased for lease or rental, the purchase is deemed exempt at that moment of transaction. Conversely, under §58.1-623 a purchaser who converts to his own use property purchased for resale is recognized as the ultimate purchaser, and the transaction is deemed subject to the tax at that time.
The Taxpayer exercised a power incident to the ownership of the propane tanks by providing them to customers at no charge, and the subsequent rental of those tanks to customers is a separate and distinct transaction. That the property may subsequently be used in an exempt activity does not negate or lessen the liability arising from the Taxpayer's use of that property.
Furthermore, I have enclosed Public Document 91-312 (12/30/91) which addresses a similar situation dealing with a lessor's purchase of fixed assets. That case concerns a dealer who made exempt purchases of construction equipment for future lease or rental (an exempt use by the dealer). However, the equipment was occasionally withdrawn from rental inventory and used by the dealer in a taxable activity.
As in the instant case, the department concluded that the application of the tax must be determined based upon the particular use of property at the time of varying uses.
Accordingly, I find that the assessment is correct. A payment copy of the assessment, with interest accrued to date, will shortly be mailed to the Taxpayer and must be paid within 30 days to prevent the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7603I
Rulings of the Tax Commissioner