Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Lease-purchase agreements
Topic
Taxability of Persons and Transactions
Date Issued
03-25-1994
March 25, 1994
Re: §58.1-1821 Appeal: Retail Sales and Use Tax
Dear*****
This will reply to your letter of August 27, 1993 in which you seek correction of recent sales and use tax assessments to your clients, ****************("Taxpayers A, B and C," respectively).
The Taxpayers are engaged in various rental businesses --Taxpayer A is engaged in the "rent-to-own" business, Taxpayer B leases equipment and motor vehicles only to Taxpayer A, and Taxpayer C is in the movie rental business. A review of the audit assessments reveals that the factual situation addressed below and issues under protest involve only Taxpayer A.
Customers enter into "lease-purchase" agreements entitling them to rent tangible personal property from Taxpayer A for a set period of time. If all the payments are made under the terms of the agreement, title to the property will transfer to the Taxpayer's customer. An audit for the period March 1990 through June 1993 produced an assessment for Taxpayer A's failure to collect sales tax on various charges, including charges for in-home collection of rent, late payments, extended service plans, guaranteed replacement programs, and returned checks, made in connection with its leases to customers.
You contest the assessment of the tax on the charges as you maintain that since they are made in connection with a conditional sale and are separately stated they are nontaxable. The auditor, however, determined the charges to be part of the "gross proceeds" for the rental of the tangible personal property and thus taxable.
DETERMINATION
One of the central concepts of sales and use taxes nationally is that the tax applies to the total charge for which property is sold or leased. This is true for Virginia also, as indicated in the definitions of "sales price" (the starting point for computation of the tax on sales) and "gross proceeds" (the starting point for computation of the tax on leases and rentals) that are set out in Va. Code §58.1-602.
From the sample lease-purchase agreement furnished to our auditor, it is clear that charges for the guaranteed replacement program and in-home collection, as well as late fees and reinstatement fees, are included within the scope of the agreement. The department's policy with respect to service charges in connection with rentals or leases is very clear. It is set forth not only in the department's regulation, VR 630-10-57, but in numerous public documents. Public Documents 87-241 (10/23/87) and 94-7 (1/7/94), copies enclosed, address some of the same issues raised in your audit. Based on those determinations, I find no basis for concluding that the above charges made by Taxpayer A in connection with the rental of tangible personal property were nontaxable.
In addition, VR 630-10-62.1 very clearly sets forth the department's policy on maintenance contracts and warranty plans. Taxpayer A's extended service plans fall within the scope of this regulation; thus, there is also no basis for the removal of these charges from the audit.
However, based upon additional information obtained regarding the returned check fees, I find that in the Taxpayer's case in which the returned check fees were not billed as part of gross proceeds, but instead were charged and collected separate from the other service charges, such fees should not have been held taxable in the assessment. Accordingly, the assessment will be revised to remove the returned check charges. In instances in which returned check fees are listed on the lease agreement and included as part of the rental fee, they are deemed to be part of the "gross proceeds" and thus taxable.
It is also argued that Taxpayer A's customer agreements are actually conditional sales agreements (upon which the tax must be computed at the time of sale) rather than leases (where the tax is computed upon each lease payment). However, based upon the information provided, Taxpayer A's contract represents a typical rental or lease agreement as opposed to a conditional sales contract. Payments are referred to in the contract as "rental payments", "renewal payments" or "rental renewal payments." The customer is referred to as the "renter or lessee" and Taxpayer A as the "lessor."
Furthermore, while the contract provides an option to purchase, there is no purchase requirement and without a requirement to purchase there is no purchase price. The customer has the right to terminate the agreement "at any time without paying any charges other than those previously due." Thus, the agreement does not require the customer to purchase the property as the customer may return it to the Taxpayer at any time during the term of the agreement. In addition, if the customer does not purchase the property, he is not refunded a portion of the payments made.
Additionally, I find nothing in the Virginia Lease-Purchase Agreement Act (Va. Code §59.1-207.17, et sea.) that would characterize the agreements in question as conditional sales contracts. In fact, the Act clearly defines the consumers who enter into the agreements as "persons who rent personal property under a lease-purchase agreement." Also, a rent-to-own business is defined as a "lessor" for purposes of the Act. Finally, the term "lease-purchase agreement" is defined as:
-
- an agreement for the use of personal property by a natural person primarily for personal, family, or household purposes, for an initial period of four months or less that is automatically renewable with each payment after the initial period, but does not obligate or require the consumer to continue leasing or using the property beyond the initial period, and that permits the consumer to become the owner of the property. Emphasis added
As the law is clear, Taxpayer A's offer to pay 20% of the assessment with respect to the charges cannot be accepted. However, as explained above, Taxpayer A's assessment will be revised to remove the returned check fees and a revised Notice of Assessment will be mailed to Taxpayer A shortly. The assessments issued to Taxpayers B and C are correct as no information showing the assessments to be incorrect has been provided. They, too, will shortly receive revised Notices of Assessment with accrued interest. The assessments should be paid within 30 days to avoid the accrual of additional interest and collections activities.
You should note that the department intends to exempt from the tax, on a prospective basis, charges made to customers for the pick up of rental property provided such transportation charges are separately stated. As Public Document 94-7 explains, this policy change is expected to occur on July 1, 1994 upon readoption of VR 630-10-107.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7316H
Rulings of the Tax Commissioner