Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Sale and leaseback; Conditional sales
Topic
Taxability of Persons and Transactions
Date Issued
10-02-1996
October 2, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear******************
This is in reply to your letter of September 5, 1996 requesting information on the application of the Virginia sales and use tax to financial transactions structured as sale/leaseback transactions by **************(the "Taxpayer"). I will address the transactions as presented in your letter. I have enclosed copies of all cited statutes, public documents ("P.D."), and other reference materials.
True Sale/Leaseback
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 customer to the Taxpayer may be made exempt of the tax using a resale exemption certificate (Form ST-10). The subsequent leaseback of the equipment to the customer by the Taxpayer is subject to the tax. See P.D. 96-221 (9/4/96) and the Virginia Sales and Use Tax Expenditure Study discussion on leaseback transactions.
To address instances in which the sales tax is paid on the original purchase of tangible personal property to be leased in a simultaneous leaseback transaction, the department has consistently held that such tax may be refunded when no use has been made of the property prior to the leaseback transaction. In this case, the customer may request a refund of tax paid at the time of the original purchase from its vendor provided that the property is not placed in use prior to the sale between the customer and the Taxpayer. See P.D. 89-302 (11/1/89) and P.D. 91-266 (10/23/91).
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.
As provided in your conversation with a member of my staff, the "lease" contract, in this instance, requires that the customer pay all lease obligations in order to exercise a nominal $1.00 purchase option at the conclusion of the "lease" term. In addition, title does not transfer to the customer until the terms of the contract are satisfied and the option is exercised. Consistent with P.D. 94-65 (3/16/94) and P.D. 91-284 (10/31/91), in order for the Taxpayer's "lease" contract to qualify as a conditional sales contract, title must pass to the customer automatically upon completion of the contract terms.
Secured Loan
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 Taxpayer's secured loan transaction does not constitute a sale for retail sales and use tax purposes, as described above, the transaction is not subject to the tax. See P.D. 96-108 (5/29/96) and P.D. 96-221.
Safe harbor transactions, as mentioned in your letter, fall in the category of financial agreements where legal title and possession of tangible personal property are not transferred from one party to another. Under Virginia sales tax law, such transactions are not subject to the tax. See prior ruling of the Tax Commissioner dated December 16, 1982 and the Virginia Sales and Use Tax Expenditure Study discussion on leaseback transactions.
I hope this responds to your inquiry. Should you have additional questions, you may contact *************at *********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11649J
Rulings of the Tax Commissioner