Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Resales; Hotel's sublease of furniture and fixtures
Topic
Taxability of Persons and Transactions
Date Issued
11-19-1997
November 19, 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 sales and use tax assessed to your client, ***********the "Taxpayer"), for the period August 1993 through January 1996. I apologize for the delay in responding to your
FACTS
The Taxpayer is the lessee of a hotel and during the audit period subleased the hotel to a third party (the "Operator"). The sublease included the real property on which the hotel is located and the furniture and fixtures in the hotel. The auditor assessed tax on the portion of the monthly sublease payments attributable to the furniture and fixtures.
The Taxpayer contends the furniture and fixtures were subleased to the Operator for the purpose of releasing to hotel guests. The Taxpayer believes the furniture and fixtures portion of the sublease qualifies for the resale exemption under Code of Virginia § 58.1-602 and the exemption for tangible personal property for future lease provided under Code of Virginia § 58.1-609.10(3). The Taxpayer cites Public Document (P.D.) 95-172 (6/26/95) and related Ohio caselaw to support its claim.
The Taxpayer also claims the assessment of tax is inconsistent with advice from prior auditors that the Taxpayer should pay tax on the purchase of furniture and fixtures subleased to the Operator. If the assessment is upheld, the Taxpayer believes the tax should be applied on a prospective basis.
DETERMINATION
Tax Application to Hotels
Code of Virginia § 58.1-612 provides that the sales and use tax is collectible from all persons who are dealers. Code of Virginia § 58.1-612(B)(5) defines a dealer as every person who leases or rents tangible personal property for a consideration, permitting the use or possession of such property without transfer of title. Additionally, Code of Virginia § 58.1--603 imposes the sales tax on "every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth,...or who leases or rents such property within the Commonwealth...."
In this case, the Taxpayer clearly qualifies as a dealer, as it is leasing both real and tangible personal property to the Operator. In addition, the Taxpayer has sufficient activity in Virginia to require registration for collection of the tax on its Virginia leasing activities.
The Taxpayer cites the resale exemption under the definition of "retail sale" in Code of Virginia § 58.1-602 and the exemption for tangible personal property purchased for future lease under Code of Virginia § 58.1-609.10(3). However, Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 provides that charges for rooms, lodgings or accommodations furnished to transients by a hotel constitute taxable service charges. Further, 23 VAC 10-210-730 requires that hotels pay the tax on furniture, linens, carpeting, drapes, and other tangible personal property at the time of purchase. In accordance with the regulations and Code of Virginia § 58.1-603, which imposes the sales tax on the gross proceeds derived from the lease or rental of tangible personal property, the Taxpayer was required to collect the tax on the lease of tangible personal property to the Operator, which as a hotel, was not entitled to purchase the furniture and fixtures exempt of the tax.
As provided under 23 VAC 10-210-730, the resale exemption is not available to purchases of tangible personal property by hotels for use in rooms provided to guests. You cite P.D. 95-172 to support your position that hotels may make certain purchases under the resale exemption. In P.D. 95-172, the Tax Commissioner determined that a hotel's purchase of food items for use in continental breakfasts furnished to guests were not subject to the use tax because the food items were consumed by the guests and taxed as part of the charge for the room accommodations.
In this case, the Operator subleased the hotel, including the furniture and fixtures, for the purpose of providing room accommodations to guests. The furniture and fixtures were not transferred to the guests as the food items were in P.D. 95-172, but instead the furniture and fixtures were placed in the rooms for use by the Operator in the provision of accommodations to guests. The rationale applied to the food items in P.D. 95-172 does not apply in this case, and the Operator should have paid the tax as prescribed under 23 VAC 10-210-730. The auditor was correct in assessing the tax on the furniture and fixtures portion of the sublease payments to the Taxpayer.
You also cite rulings that deal with Ohio sales tax law to support the application of the resale exemption to the sublease of furniture and fixtures between the Taxpayer and the Operator. Based on your description, Ohio law allows hotels to purchase tangible personal property (such as linens, consumable supplies, etc.) exempt from the tax under the resale exemption. This is contrary to Virginia's regulation 23 VAC 10-210-730 which clearly states that hotels must pay the tax on purchases of furniture and other tangible personal property at the time of purchase. Consequently, l find the cited cases to be unpersuasive.
Application of the Tax - Prior Audit
You assert the Taxpayer was instructed by the department's auditors to pay the tax on all purchases of tangible personal property subleased to the Operator. It is your feeling that the Taxpayer should not be required to pay the tax as assessed, but instead pay the tax on a prospective basis.
I have reviewed the prior audit of the Taxpayer, as well as audit information of related entities and find no evidence that instructions were provided by the auditors regarding lease agreements or the payment of tax on property purchased for future lease. Further, you have not provided documentation to support your assertion; therefore, the tax is upheld as assessed.
If you can provide proof that the Taxpayer paid the tax on purchases of the furniture and fixtures subleased to the Operator and that no use was made of such property by the Taxpayer prior to sublease to the Operator, the department will grant a credit against the tax assessed on the sublease payments in the audit. The sublease to the Operator constitutes a new issue and consistent with department policy, the associated penalty will be removed from the audit.
As our policy regarding purchases by hotels is a matter of established policy, l do not feel a conference is necessary at this time. The Taxpayer will receive an adjusted bill including updated interest. If you have additional questions, you may contact ***** at ********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11934J
Rulings of the Tax Commissioner