Tax Type
Retail Sales and Use Tax
Description
Interest and finance charges included with lease; Lease vs. conditional sales contract; Medical equipment leases
Topic
Basis of Tax
Penalties and Interest
Taxability of Persons and Transactions
Date Issued
03-16-1994
March 16, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letter of April 19, 1993 in which you seek correction of a retail sales and use tax assessment for your client, *************** (the "Taxpayer") for the period from June 1990 through July 1992.
FACTS
The Taxpayer entered into an agreement to lease medical equipment. Before the equipment was delivered, installed, inspected and accepted by the Taxpayer, it was responsible for making interim interest payments to the lessor. An audit revealed that tax was not remitted on the interest payments, and use tax was assessed. The Taxpayer contends that these payments are part of a conditional sales contract and, therefore, are not subject to the tax.
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:
"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 states that "[t]itle to Equipment shall at all times remain in Lessor." The agreement provides that upon termination of the term of the agreement, the lessee shall have the duty and the lessor shall have the right to remove the equipment from the premises where it is located whether or not affixed or attached to the realty. Equipment Lease paragraph 12. These provisions make it clear that the agreement in question is a lease.
The Taxpayer also contends that the purchase agreement supplemental to the Equipment Lease transforms the document from a lease into a sales contract. This agreement gives the lessee the option to purchase "upon payment in full of all rents and obligations due under" the Equipment Lease Agreement. Thus, the purchase option can be exercised only if the lessee had paid all rentals. Under a conditional sales contract, title passes to the buyer automatically upon completion of the contract terms.
Accordingly, 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 and other similar charges. In this case, the lessor did not collect the tax on the interim interest charges, which are included in gross proceeds; therefore, the Taxpayer became liable for use tax on the "cost price" of the item, in accordance with VR 630-10-109 (copy enclosed).
"Cost price" is defined in Va. Code 58.1-602 as "the actual cost of an item or article of tangible personal property" and is computed in the same manner as the sales price "without any deduction- therefrom on account of ... any charges whatsoever." While Va. Code §58.1-602 specifically provides that "sales price" shall not include finance charges or interest from credit extended on sales of tangible personal property under conditional sales contracts or other conditional contracts providing for deferred payments of the purchase price, interest charges made in connection with the lease of tangible personal property and interim interest charges made in connection with property to be leased are not excluded from the sales price. Similarly, the interim interest charges are properly included in the cost price and subject to the use tax.
Accordingly, the assessment is correct as made and is now due and payable. 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/7268F
Rulings of the Tax Commissioner