Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Combined lease of real and personal property
Topic
Taxability of Persons and Transactions
Date Issued
08-29-1995
August 29, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************:
This will reply to your letter of September 15, 1994 in which you seek relief from the sales and use tax audit assessment of ********(the "Taxpayer") for the period of July, 1991 through June, 1994.
FACTS
The Taxpayer is the owner of a number of chain restaurants throughout Virginia. During a portion of 1992 and 1993, the Taxpayer attempted to sell one of its locations. The tenant of the building expressed an interest in purchasing the restaurant but did not have the financial resources to do so. The tenant proposed to the Taxpayer that he would rent the restaurant from the Taxpayer with an option to purchase the building at the end of two years. Due to the Taxpayer's unsuccessful attempt at selling the building, this appeared to be an reasonable alternative and the Taxpayer agreed to lease the building to the tenant for $6,500 a month with a purchase option at the end of two years.
The lease of the building also includes furniture and fixtures within the building. Due to the fact the lease includes both tangible personal property and real estate, the auditor held the entire amount of the lease taxable. The Taxpayer is taking exception to the taxing of the lease, contending that it is a lease of real estate rather than a lease of tangible personal property. The Taxpayer bases this argument on the fact that the monthly lease amount paid by the tenant is less than the low-end market value for the lease of an unfurnished commercial building in the********* area. For this reason, the Taxpayer feels the allocation of the lease between real estate and tangible personal property should be 100% real estate and 0% tangible personal property.
DETERMINATION
Virginia Regulation (VR) 630-10-57 (copy enclosed) addresses leases and rentals and states, in part, the following:
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- Any person engaged in the business of leasing and renting tangible personal property to others is required to register as a dealer and collect and pay the tax on gross proceeds...
While the lease of real property and fixtures attached thereto is not subject to the sales tax, the lease of the tangible personal property included in the lease is subject to the tax. As previously provided, there is a significant amount of tangible personal property included in the lease of the restaurant. The lease charge to the restaurant operator is a lump sum charge that includes both real property with attached fixtures and tangible personal property, despite the fact that the monthly lease charge may be less than comparable unfurnished buildings in the same area. Had the Taxpayer provided a breakdown of the value of the real property versus the tangible personal property included in the lease, only the portion of the lease attributable to the tangible personal property would have been held taxable. However, no breakdown was furnished. Therefore, the department had no choice but to assess tax on the total lease payment.
Based on identical situations encountered by the department where real and tangible property were not segregated, the department has found that on the average, tangible personal property has comprised approximately 28% of the total lease payment. In fairness to the Taxpayer, I will reduce the tax on the lease of the restaurant to 28% of the total lease payment. An auditor from the**********Office will contact the Taxpayer to make the necessary revisions. Upon completion of the audit revisions, a revised assessment will be issued.
If you should have any further questions, please contact********, office of ax Policy, at***********.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8582K
Rulings of the Tax Commissioner