Tax Type
Retail Sales and Use Tax
Description
Cargo container leasing
Topic
Assessment
Taxpayers' Remedies
Date Issued
03-25-1994
March 25, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*****
This will reply to your letter of July 13, 1993 in which you seek correction of retail sales and use tax assessments for*********and*************(the "Taxpayers").
FACTS
The Taxpayers act in the capacity of shippers and also as lessors of freight containers. Taxpayer #1 has a terminal in Virginia and Taxpayer #2 operates a repair facility in Virginia. An audit revealed that the Taxpayers failed to collect sales tax on the proceeds from shipping container leases. The auditor assessed tax on the rental income and also on the purchase of parts and materials used in the maintenance and repair of the containers. You contend that the leasing of the containers and the parts and materials are not be subject to the sales tax.
DETERMINATION
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...." 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.
You maintain that the Taxpayers have no Virginia customers and, therefore, the leases are not subject to the tax. However, the leasing occurs in Virginia and the property leased is located in Virginia. Furthermore, the shipping points of origin and/or destination are in Virginia. Consequently, the leases are subject to Virginia sales tax.
I would note that last year the United States Supreme Court upheld Tennessee's sales tax on proceeds of leases of containers used in international shipping. The Court ruled that the state's sales tax on leases of cargo containers within the state for use exclusively in international shipping did not violate the Supremacy Clause, the Foreign Commerce Clause, or the Import-Export Clause of the U.S. Constitution. Itel Containers International Corp. v. Huddleston, 113 S.Ct. 1095 (1993).
You cite VR 630-10-67 to support your position that the parts and materials used in the maintenance and repair of the containers are not subject to the tax.
Sales, leases or rentals of motor vehicles are not subject to the retail sales and use tax provided that they are subject to the Virginia motor vehicle sales and use tax administered by the Department of Motor Vehicles. Because the containers at issue do not satisfy the definition of "motor vehicle" found in Va. Code §58.1-2401, they are not subject to the motor vehicle sales and use tax, and the exemption under VR 630-10-67 is not applicable.
Repair parts that become components of leased containers may be purchased under a resale exemption certificate. In this case, the Taxpayers use the containers for shipping and also lease the containers to other parties. No breakdown of the percentage of use of the containers in each activity has been provided. However, I will agree to waive one-half the tax on repair parts to reflect the use of the repair parts in leasing activities.
Accordingly, the assessment for Taxpayer #2 has been revised and one-half the tax on repair parts has been abated; a total of*************is now due and payable from Taxpayer #2. The assessment for Taxpayer #1 correct as made; a total of******** now due and payable. Please send the Taxpayers' payments to the department's Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23282-1880 within 30 days. If payment is not received within 30 days, collection action will resume.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7168F
Rulings of the Tax Commissioner