Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Equipment sale/leaseback
Topic
Taxability of Persons and Transactions
Date Issued
09-04-1996
September 4, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear**********
This is in reply to your letter of April 16, 1996, in which you seek information on the application of the sales and use tax to sale/leaseback transactions.
Company A originally purchases tangible personal property from a manufacturer. After a period of time Company A sells title to this tangible personal property to a bank, other financial source, or the original manufacturer. Company A leases the tangible personal property back from the bank, other financial source, or the original manufacturer.
You ask for guidance as to the tax ramifications of the sale/leaseback transactions described in your letter. I will address the issues in the same order presented in your letter. Several responses are cited from applicable public documents ("P.D."), Virginia Code statutes, the Virginia Retail Sales and Use Tax Regulations (hereinafter, "VR"), and other reference materials; copies enclosed.
Issue 1: The overall taxability of sale/leaseback transactions.
Code of Virginia § 58.1-609.10(3) provides a sales tax exemption for "[t]angible personal property for future use by a person for taxable lease or rental as an established business or part of an established business, or incidental or germane to such business, including a simultaneous purchase and taxable leaseback."
The exemption applies when property is purchased for lease or rental in a simultaneous sale/leaseback transaction. The sale is exempt from the tax under the resale exemption and the subsequent leaseback transaction is subject to the sales tax. In this case, the transaction involving the sale of the property from the manufacturer to Company A may be made exempt of the tax using a resale exemption certificate (Form ST-10). The subsequent leaseback of the equipment to Company A is subject to the tax. See the Virginia Sales and Use Tax Expenditure Study discussion on leaseback transactions.
Issue 2: The taxability of the sale/leaseback transaction when the original purchase of the tangible personal property was exempt.
As stated above, exempt purchases of tangible personal property are permitted when the intent of the original purchaser is to lease or rent the property in a simultaneous sale/leaseback transaction. The original purchase is made under the resale exemption and the leaseback transaction is subject to the sales tax, therefore avoiding double taxation.
Issue 3: The taxability of the sale/leaseback transaction when the original purchaser paid sales tax when the tangible personal property was first bought.
The department has consistently held that the tax may be refunded regarding property leased in this manner when no use has been made of the property prior to the sale/leaseback transaction. In this instance, Company A may request a refund of tax paid at the time of the original purchase from the manufacturer provided that the property is not placed in use prior to the sale between Company A and the bank, other financial source, or the original manufacturer and the subsequent leaseback to Company A. See P.D. 89-302 (11/1/89) and P.D. 91-266 (10/23/91).
Issue 4: The time period that the original purchaser has to complete the sale/leaseback transaction.
Virginia sales tax law does not limit the time period between the original purchase of the tangible personal property and the completion of the sale/leaseback transaction. The original purchase, however, must be made with the intent to lease or rent the property in a simultaneous sale/leaseback transaction. In addition, no use can be made of the property in the interim period prior to passage of title to the property.
Issue 5: The taxability of the sale/leaseback transaction if the original purchaser uses the tangible personal property.
Refer to the response to Issue 3.
Issue 6: When will the state consider the sale of tangible personal property from the original purchaser to the bank, other financial source, or the manufacturer an occasional or casual sale.
The occasional sale exemption would not apply to sale/leaseback transactions because the intent upon the purchase of tangible personal property is to lease or rent the property in a simultaneous sale and leaseback. The resale exemption applies to avoid double taxation.
Issue 7: The conditions necessary to consider the sale/leaseback transaction a conditional sale.
The department has consistently distinguished between conditional sales contracts and lease agreements and the tax collection thereof. Under a conditional sales contract, title passes to the buyer automatically in the same manner as any other sale of tangible personal property. In a lease agreement the payments are spread over the term of the lease, and title does not pass to the lessee. For sales and use tax purposes, a conditional sales contract is treated in the same manner as any other sale of tangible personal property, while the tax payments on a lease are spread over the term of the lease. This is further discussed in P.D. 96-11 (2/28/96) and P.D. 89--152 (4/28/89).
Issue 8: The conditions necessary to consider the sale/leaseback transaction a financial arrangement.
Code of Virginia § 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Code of Virginia § 58.1-602 defines sale to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property...."
A financing agreement involving a leaseback transaction in which the purpose of the agreement is to refinance debt associated with certain property and where legal title and possession are not transferred from one party to another generally typifies a financial arrangement as opposed to a sale of tangible personal property. Because the transaction in such an agreement does not constitute a sale for retail sales and use tax purposes, as described above, the leaseback transaction in this instance is not subject to the tax. The department recently addressed this type of leaseback transaction in P.D. 96-108 (5/29/96).
Issue 9: The state's interpretation of the intent of the sale/leaseback transaction when the original Purchaser used the tangible personal property prior to the sale/leaseback.
Refer to the response to Issue 3.
If you have further questions regarding the issues discussed in this letter, please contact*******at ***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11146J
Rulings of the Tax Commissioner