Tax Type
Retail Sales and Use Tax
Description
Real Estate Investment Trust; Responsible taxpayer Lessee or Lessor
Topic
Persons Subject to Tax
Sale for Resale
Tangible Personal Property
Date Issued
03-21-2013
March 21, 2013
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** and ***** (the "Taxpayers") in which you seek correction of the retail sales and use tax assessment issued for the periods September 2003 through October 2005 and October 2006 through September 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers operate as hotels that are part of a Real Estate Investment Trust (REIT) structure. Pursuant to the REIT structure, the Taxpayers lease from the Lessor the land, building, furniture, fixtures, and equipment associated with the hotels. Under the REIT structure, the Lessor acquires all assets associated with the hotel and leases the same to the Taxpayers. During the audit, the Taxpayers provided the Lessor's policy paper regarding the application of the Virginia retail sales and use tax on the lease of tangible personal property. The policy paper provides guidance to the parties regarding the Lessor's requirement to register as a dealer with the Department, the calculation of the value of the tangible personal property for the purpose of applying the retail sales and use tax, and the ability to make a claim for refund with the Department with respect to property on which the tax had been paid at the time of purchase, and was subsequently leased to the Taxpayers.
The Taxpayers contest the assessment of tax on the tangible personal property leased from the Lessor. The Taxpayers maintain that the Lessor, not the Taxpayers, carries the tangible personal property at issue on its books and records. The Taxpayers assert that the Virginia sales tax was paid by the Lessor at the time the property at issue was purchased. The Taxpayers state that they have proof the tax was paid by the Lessor, and no additional tax should be assessed. The Taxpayers provide invoices for review. The Taxpayers maintain that the invoices represent tangible personal property purchased by the Lessor and leased to the Taxpayers under the REIT structure. The Taxpayers maintain that the invoices demonstrate that the tax was paid by the Lessor, on the property at issue, at the time of purchase. The Taxpayers request that the tax assessed in the audit with respect to the tangible personal property at issue be abated.
DETERMINATION
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 upon "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 the same is incidental or germane to such business."
Title 23 of the Virginia Administrative Code (VAC) 10-210-840 A states, "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."
In United States of America and Hercules Incorporated v. W. H. Forst, State Tax Commissioner, et al, 422 F.Supp. 920 (W.D. Va. 1977), affd, 569 F.2d 811 (4th Cir. 1978), the court held, "The legal incidence of the Virginia sales and use tax is on the purchaser. Although the seller is legally obligated to collect the tax from the purchaser, the statute makes the tax the legal debt of the purchaser."
Pursuant to the aforementioned authorities, the lease of the tangible personal property at issue is subject to the Virginia retail sales and use tax. While the Lessor is legally obligated to collect the tax from the Taxpayers, the tax is the legal debt of the Taxpayers. The Taxpayers' sales and use tax compliance is not evaluated based upon the Lessor's compliance. Further, the Department is not required to audit the Lessor simply because an audit of the Lessee is performed, nor is the Department required to give credits in the Taxpayers' audit for taxes paid by the Lessor. Additionally, based upon a review of the Lessor's policy paper, it is clear that the Lessor and the Taxpayers have a clear understanding regarding the correct application of the tax to the lease of the tangible property at issue. The fact that the Lessor paid the sales tax on the purchase of the tangible personal property at issue has no bearing on the Taxpayers' retail sales and use tax compliance. Additionally, the documentation provided by the Taxpayers is insufficient to prove that the tax has been paid on the tangible personal property at issue during the audit period. In this instance, the Lessor should have purchased the property for resale pursuant to a resale exemption certificate, and should have charged the sales tax to the Lessee. Accordingly, the assessment is correct as issued.
CONCLUSION
Based upon this determination, a revised bill, with interest accrued to date, will be mailed shortly to the Taxpayers. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayers should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia and regulation sections cited are available on-line at
www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-4985095134.P
Rulings of the Tax Commissioner