Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Occasional sales
Topic
Taxability of Persons and Transactions
Date Issued
10-15-1997
October 15, 1997
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 issued to 12 partnerships (the "Partnerships") for periods ranging from April 1989 through March 1995. I apologize for the delay in responding to your letter.
FACTS
Each Partnership owns a single nursing home and the equipment used in that home. The Partnership leases the building and equipment to a commonly owned corporation that actually operates the nursing home. You indicate that this structure is necessitated by the fact that the owners used financing provided by the Department of Housing and Urban Development (HUD) to construct the facilities. HUD regulations require that the only debt of the entity owning the nursing home be the HUD construction loan. To obtain commercial financing to operate the homes, the owners created a separate corporation to lease the nursing home and equipment from the Partnership. The lessee corporation operates the nursing home.
The Partnership purchases the equipment used in the homes because the equipment collateralizes the HUD financing. The purchase and lease of the equipment are at issue in this case. The auditor assessed tax on the proceeds attributable to the leasing of tangible personal property (the equipment). You contend that the proceeds are not subject to tax and present several arguments to support your position.
DETERMINATION
Occasional Sale
You assert that the leases between each Partnership and its related corporation represent an occasional sale exempt from sales and use tax under Code of Virginia § 58.1-609.10(2).
Code of Virginia § 58.1-603(2) imposes the sales tax on the gross proceeds derived from the lease or rental of tangible personal property, where the lease or rental is an established business, or part of an established business. The term "business" is defined in Code of Virginia § 58.1-602 to include "any activity engaged in by any person ... with the object of gain, benefit or advantage, either directly or indirectly." [Emphasis added]. While it is clear that the Partnerships were engaged in leasing activity, you maintain that they were not in the business of leasing or renting to their respective operating corporations "for gain, benefit, or advantage" and need not register as dealers.
I cannot agree that the Partnerships are not engaged in a leasing business for gain, benefit or advantage. You state that the lease payments are to defray the Partnership's acquisition expense dollar for dollar and provide no profitable return or markup to the lessor. However, the law does not require that an activity include a profit or a markup to constitute a business. According to your letter, the equipment was purchased by each Partnership rather than by the operating corporation to collateralize the HUD financing. Furthermore, the leasing of equipment allows the Partnerships to receive commercial financing to operate the homes and conform to HUD regulations. Therefore, the Partnerships receive indirect benefits from the leasing arrangements.
Accordingly, based on the definition of "business" for sales and use tax purposes and the indirect benefits received by the Partnerships in leasing the equipment, I find that the Partnerships are in the business of leasing tangible personal property and are engaged in a transaction subject to the sales and use tax.
Code of Virginia § 58.1-609.10(2) provides an exemption from the tax for an occasional sale as defined in § 58.1-602. That section defines an "occasional sale" as:
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- A sale of tangible personal property not held or used by the seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration.
Based on the fact that each Partnership is engaged in the business of leasing tangible personal property (a taxable activity), I find that the occasional sale exemption is not applicable in this instance.
Definition of a "Person"
You also contend that the Partnerships are not engaged in the business of leasing property to others and, therefore, the leases are not subject to Virginia sales and use tax. One person must lease property to another person for the lease to be subject to tax. You maintain that each Partnership joins together with its commonly owned lessee corporation in a joint venture acting as a unit to carry on the business of each nursing home. Because each joint venture is a separate, distinct person, the leases are internal accounting mechanisms within the joint venture and are not subject to the tax.
No documentation has been provided to indicate each Partnership and its operating corporation entered into a joint venture. In fact, each document reviewed was a lease agreement between a lessor and a lessee. Nothing in the agreements references a joint venture between the two parties. Each agreement recognizes the operating corporation (lessee) as a separate and distinct entity from the Partnership (lessor). Accordingly, there is no basis to conclude that the Partnerships are not leasing to others.
I would note that prior rulings of the department have held that virtually any transaction involving consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax. See Public Documents (P.D.) 88-215 (7/27/88) and 94-271 (8/30/94), copies enclosed.
Credit for Sales Taxes Paid
In the alternative, you argue that if the leases at issue are subject to sales and use tax, the department incorrectly calculated a credit for the Partnership's payment of sales tax on the purchase of the equipment. Each Partnership paid sales tax on its equipment in the year it constructed or acquired its facility. However, the department's assessment covered only the years after the Partnership constructed or acquired its facility. Thus, the department did not give the Partnerships credit for the large majority of the sales tax paid on the original purchases of the leased equipment.
Each Partnership is entitled to a credit against the assessment for the tax paid to its suppliers at the time the property was purchased. I will refer this issue back to the auditor and instruct him to review the documentation regarding the payment of sales tax at the time of purchase and the subsequent use of the equipment. He will then make the appropriate adjustments, if any, to the credits previously calculated.
Apportionment of Master Lease
You assert that the department arbitrarily apportioned the master lease between real estate and tangible personal property by applying an incorrectly calculated percentage to the lease payments. You believe the department's methodology is flawed because it fails to recognize that tangible personal property depreciates in value while real property appreciates. The percentage of the lease payment attributable to tangible personal property should not remain constant but should decrease annually to account for depreciation.
The leases at issue do not allocate the payment between tangible and real property. Under Code of Virginia § 58.1-618(C):
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- In the case of the lease of tangible personal property, if the consideration given or reported by the dealer, in the judgment of the Tax Commissioner, does not represent the true or actual consideration, then the Tax Commissioner is authorized to fix the same and assess and collect the tax ... The assessment so made shall be deemed prima facie correct.
In the absence of a breakdown of the value of the real property versus tangible personal property included in a lease, the auditor must rely on the best information available to compute the taxable portion of the lease. Based on a review of the audit, and the fact that you have not furnished documentation outlining what you believe the correct allocation should be, I find that the allocation method used by the auditor is reasonable.
Summary
The Partnerships are engaged in the business of leasing tangible personal property and must register and collect the tax on the gross proceeds derived from the leases. Accordingly, the assessments issued to the Partnerships are correct. The audit will be referred back to the auditor to ensure the credit for sales taxes previously paid on equipment leased by the Partnerships is properly computed and takes into account taxes paid at the time of purchase.
Following review by the auditor and adjustments to the credits against the assessments (if any), the Partnerships will receive updated bills with interest accrued to date. The bills should be paid within 30 days to avoid the accrual of additional interest.
If you have any questions regarding the policy set forth in this letter, you may contact **** of the department's Office of Tax Policy at *********. Questions concerning the credit computation should be directed to **** or**********of the department's *******District Office at********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12411F
Rulings of the Tax Commissioner