Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Lease of equipment
Topic
Taxability of Persons and Transactions
Date Issued
12-11-1996
December 11, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This is in reply to your letter in which you seek correction of retail sales and use tax assessments for******* (the "Taxpayer") for the period April 1989 through March 1995. 1 apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates nursing homes located throughout Virginia. Each nursing home is owned by a separate partnership, as required by federal law. Each partnership has the same partners. The nursing homes purchase equipment from vendors and pay the applicable sales and use taxes. For administrative and legal reasons, the nursing homes then place the equipment with the corporate general partner that operates the homes .
An audit of the Taxpayer revealed it was leasing tangible personal property for use in the nursing home operations from several limited partnerships. The auditors assessed the partnerships for the taxes due on the leases of tangible personal property to the nursing homes the Taxpayer operates in Virginia and registered the limited partnerships for the collection of tax on the lease of tangible personal property to the Taxpayer.
The Taxpayer contends that tax is not due on the lease of tangible personal property from the limited partnerships to the Taxpayer because the lessee entities are owned and controlled by the same individuals who own the nursing home partnerships.
If the leases are subjected to sales and use tax, it will amount to double taxation of the equipment because sales taxes were paid at the time the equipment was purchased. Furthermore, the use of separate entities to own and operate the homes is necessitated by federal regulations and is not done to defraud creditors or taxing authorities.
DETERMINATION
Generally: Code of Virginia § 58.1-603(2) imposes the sales tax on "gross proceeds derived from the lease or rental of tangible personal property, where the lease or rental of such property is an established business, or part of 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.
Leasing business: You contend that the partnerships are not engaged in the business of leasing property to others. Your position is that the partnerships and the Taxpayer are composed of the same individual owners and, therefore, are "acting as a unit." As such, tax may not be imposed because the partners are leasing personal property to themselves and not to others. To support this position, you cite VR 630-10-81, which defines "person" to include any individual, firm, partnership, corporation, or other group or combination acting as a unit.
"Business" is defined in Code of Virginia §58.1-602 as "any activity engaged in by any person, or caused to be engaged in by him, with the object of gain, benefit or advantage, either directly or indirectly." In this case, the equipment is transferred to a separate legal entity; the equipment is subsequently leased to the Taxpayer so that it may operate the nursing homes. Based on the information provided, I must conclude that the partnerships (lessors) are engaged in an activity with the object of direct gain or benefit to both the Taxpayer and lessors. Accordingly, the partnerships are in the business of leasing tangible personal property, an activity subject to the sales and use tax.
You maintain that the Taxpayer and the partnerships are owned by the same individuals; therefore, the individual owners are leasing property to themselves. You believe the department must disregard the separate legal entities created and look at the individual owners. While you cite numerous court cases to support your position that separate legal entities may be disregarded, I do not find these cases persuasive. Most of the cases cited deal primarily with situations involving attempts to prevent a fraud, wrong or injustice on third parties. They do not allow separate entities to be disregarded to bestow an advantage. The sales and use tax cases cited are not persuasive, as they do not involve sales and use tax laws identical to Virginia's laws.
A more instructive case is presented in Pemco v. Kansas Department of Revenue, 907 P.2d 863, 258 Kan. 717 (1995). The case involved an interpretation of the definition of "person" similar to the definition found in Code of Virginia §58.1-602. The Supreme Court of Kansas ruled that the language "or any group or combination acting as a unit" was not intended to alter the status of any of the specifically listed entities. Instead, the language was intended to extend "person" status to groups or combinations acting as a unit "even though the group or unit does not fit within the legal definition of any of the specifically designated entities.
There is nothing in the statute defining "persons" to authorize a corporation to deny its legal status in a transaction between it and a separate legal entity and claim to be "a group or combination acting as a unit." It should not be permitted to disregard that form to gain a tax advantage.
I would also note that the department has previously ruled that virtually any transaction involving consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax. See P.D. 88-215 (7127188) (copy enclosed). This policy is applicable to the Taxpayer's situation.
Double taxation: Finally, you claim tax was paid on the initial purchase of the leased property and, therefore, no tax should be due on the rental of the property. Any tax on lease payments would be double taxation.
A review of the audit reveals that the auditor did allow credit for sales taxes paid on the purchases of tangible personal property leased by the partnerships. Thus, there is no double taxation; instead, tax is being imposed on the gross proceeds derived from the leasing of tangible personal property, as required under Code of Virginia §58.1-603(2).
In the future, equipment purchased for future taxable lease may be purchased exempt of the tax using a resale exemption certificate (Form ST-10), provided no use of the property is made prior to the lease. The subsequent lease transaction is subject to the sales and use tax.
Based on the foregoing, there is no basis to revise the assessments. You will shortly receive updated bills with interest accrued through the date of your protest letter. The bills should be paid within 30 days to avoid the accrual of additional interest. If you have any questions regarding this matter, you may contact********of the department's Office of Tax Policy at*********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10916F
Rulings of the Tax Commissioner