Retail Sales and Use Tax
Leases and rentals; Administrative fees included in license and rental fees
Taxability of Persons and Transactions
February 18, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in response to your letter seeking correction of the sales and use tax audit assessment issued to ******** (the Taxpayer). I apologize for the delay in responding to your letter.
The Taxpayer is an operator of seafood restaurants. It has both company owned stores and independent locations under licensing agreements. The Taxpayer only manages company owned stores. An audit for the period January 1993 through December 1995, resulted in an assessment of use tax on untaxed fees for the rental of tangible personal property.
In a prior determination [P.D. 94-55 (3/14/94)], the department found that the Taxpayer was liable for the tax on "license and rental" fees charged company and independently owned stores. For the independent locations, each operator agreed to pay a sum equal to ten percent (10%) of the weekly purchases as a license and rental fee for the premises and contents. In addition, the company owned stores were charged the same fee. The department concluded that the fee represented the charge for the lease of real and tangible personal property only. Furthermore, there was no basis to support the Taxpayer's position that one-half of the 10% license and rental fee was for management of the businesses.
In the current audit, the Taxpayer takes exception to the tax assessed on such fees. The Taxpayer maintains that one-half of such fees represents an intercompany administrative or management charge to manage the company owned stores. As such, the Taxpayer requests recalculation of the tax using the following formula: total fees paid minus the administrative and management cost times the percentage representing the tangible personal property leased.
Generally, when a taxable fee is combined with a nontaxable fee and charged as a lump-sum amount, the tax applies to the entire charge. For example, combined shipping and handling charges are taxable as set out in P. D. 91-223 (9/23/91), copy enclosed. Furthermore, if in the Tax Commissioner's judgment the consideration provided for the lease of tangible personal property does not represent the true or actual consideration, Code of Virginia § 58.1--618(C) authorizes the Tax Commissioner to fix the amount of consideration provided for the lease of tangible personal property and to assess the tax on such amount. In such instances, the Taxpayer has the burden of proving that the assessment of tax is erroneous.
Since the fees in question are lump-sum charges, the true or actual consideration received for the lease or rental of tangible personal property is not readily apparent. Using information furnished by the Taxpayer, and the valuation method agreed to in the prior audit determination, the department has assessed tax only on that portion of the fees representing the rental of tangible furnishings to the stores.
The Taxpayer has stated that the fees charged the company owned stores are the same as that provided its independent locations, and such fees have not changed since the prior audit. In an appeal relating to the prior audit, it was determined that the fees charged represented the charge for the lease of real and tangible personal property, and the Taxpayer was advised to treat such charges accordingly in the future. I do not find it reasonable to conclude from the information presented that accounting and management costs have no bearing on, or relationship with, the rental costs associated with the Taxpayer's properties. Although the Taxpayer claims that these fees represent charges to recoup (I) management and administrative costs incurred with operating company owned stores and (ii) equipment and real property costs through the rental of real and tangible personal property, I do not find sufficient basis for accepting the Taxpayer's claims based on the documentation presented.
Based on all of the foregoing, I must conclude that the portion of the fees assessed in this case represents charges for the lease or rental of tangible personal property. Accordingly, I find no basis for revising the audit assessment.
Under separate cover, the Taxpayer will receive an updated bill for the outstanding liabilities of ******. To preclude further interest charges, payment should be sent to the address shown on the bill, or to the attention of ******* of the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within the next 45 days.
Danny M. Payne