09-2 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Lease payments and capital purchases included in the lease payments.

Topic

Records/Returns/Payments

Tangible Personal Property

Date Issued

02-04-2009

February 4, 2009

Re: Request for Ruling
Retail Sales and Use Tax

Dear *****:

This is in reply to your correspondence of November 10, 2008, in which you request a ruling regarding the application of Virginia's retail sales and use tax to lease payments and capital purchases included in the lease payments.

FACTS

Your client ("Client A"), a hotel owner, operates a real estate investment trust ("REIT"). Its typical business structure involves multiple legal entities and intercompany transactions. Generally, Client A's hotels, the land, real property and all tangible furniture and fixtures are owned within one legal entity (the "Lessor"). The Lessor will lease the hotel, including the realty, furniture and fixtures, for one lump sum rental charge, to a separate subsidiary (the "Lessee") for the purpose of profiting from the hotel operations. Because Client A is a REIT, the value of the lease payment associated with the tangible personal property should never exceed 15% of the total value.

The generic lease agreement states that rent is a lump sum charge for the rental and includes a base rent charge and a percentage of revenue components (collectively referred to as "rent"). For purposes of this ruling request, it is assumed that the lease stream occurs between separate respected entities for federal tax purposes (as opposed to disregarded entities) and will be respected as separate legal entities for sales and use tax purposes. Additionally, it is assumed that the lease stream is documented by intercompany invoices, lease agreements, and journal entries with consideration passing.

You raise several questions regarding the application of the retail sales and use tax, which are addressed below.

RULING

(1) Is the lease of tangible personal property subject to sales and use tax?

Yes. Virginia Code § 58.1-603 imposes the sales tax upon "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 this Commonwealth." The tax is imposed on the 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, or incidental or germane to such business.

This Code section clearly confirms that it is the intent of the sales and use tax law to tax those leases by one in the business of making such leases. Based on the facts presented, it is clear that the Lessor is in the business of making leases of hotels, including the land, real property, and all tangible personal property and fixtures.

(2) Is the lease of real property subject to the sales and use tax?

No. The sale or lease of real property is not subject to the retail sales and use tax. However, tangible personal property included in a lease of real property is subject to the sales and use tax. See Public Document 95-223 (08/29/95).

(3) Is the lease for one lump sum of tangible personal property and realty subject to the sales and use tax? Does the answer depend on the materiality of the tangible personal property or the manner in which the transaction is booked by the property owner?

Yes. The tax applies to the value of the tangible personal property included in the lease. The dealer (or lessor) must provide a breakdown of the value of tangible personal property versus the value of the real property included in the lease. If the dealer is not able to provide such a breakdown and no other evidence is available, the tax will apply to the entire lease payment. See Public Documents 93-188 (08/26/93) and 95-223.

The application of the tax does not depend on materiality or the manner in which the transaction is booked by the property owner. In Public Document 88-215 (07/27/88) the Department held that, based on the definition of "sale" in Va. Code § 58.1-602, virtually any transaction involving consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax.

(4) If the rental charge is subject to tax, should the property owner be paying tax on the original purchase price?

The Department has determined that an appropriate method of allocation uses the original cost price of the tangible personal property versus the total original cost price of tangible personal property, real property and fixtures. The resulting percentage is applied to each lease payment to determine the amount of the payment attributable to tangible personal property and, therefore, subject to sales tax. This allocation method is proper under Generally Accepted Accounting Principles. See Public Document 93-188.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-3008843781

Rulings of the Tax Commissioner