Rulings of the Tax Commissioner

November 14, 2024

Re: Request for Ruling: Retail Sales and Use Tax   

Dear *****:

This is in response to your letter submitted on behalf of your client (the “Taxpayer”) requesting a ruling on the application of the retail sales and use tax on the lease of heating, ventilation, and air conditioning (HVAC) units that are installed for residential customers in Virginia. 

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

FACTS

The Taxpayer furnishes and installs HVAC systems to residential customers in Virginia. The Taxpayer pays consumer use tax on untaxed purchases of tangible personal property used or consumed in its operations as a contractor respecting real property.

As part of their business, the Taxpayer has begun offering a long-term lease option to its customers interested in HVAC replacement. A commonly controlled affiliate (Company A) enters into a lease agreement with the homeowner. Once the lease is secured between Company A and the homeowner, Company A will engage the Taxpayer to furnish and install the HVAC unit. The Taxpayer will invoice Company A for the price of the equipment and installation labor. The Taxpayer pays sales tax on the purchase of the HVAC systems, regardless of whether the unit is sold directly to the homeowner or to Company A for lease to the same.

Under terms of the lease agreement, Company A retains title to the HVAC equipment installed at the homeowner’s residence. The homeowner has the option to purchase the equipment at any time during the lease period. At the lease’s termination, if the homeowner does not renew the lease, the HVAC unit is removed from the home.

The Taxpayer poses three questions regarding its compliance with the retail sales and use tax for the transactions at issue. The Department’s response to each question posed by the Taxpayer is addressed below.

RULING

Question 1

Are the HVAC units furnished and installed by the Taxpayer considered real property fixtures and, therefore, subject to sales or use tax on the cost price of such units?

Regarding the installment of HVAC units, the Taxpayer would generally be considered to be a consuming contractor and must either pay the tax at the time of purchase or accrue and remit consumer use tax on untaxed purchases. See Virginia Code § 58.1-610. 

Question 2

Are Company A’s receipts from the lease of HVAC units to residential customers subject to Virginia sales tax?

Company A engages in a lease which stipulates that title of the HVAC unit does not transfer to the homeowner. In addition, at the conclusion of the lease, there are provisions addressing the removal of the HVAC unit if the homeowner declines to purchase the unit. 

Virginia Code § 58.1-602 provides, in part, that “‘[l]ease or rental’ means the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property.”

In Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941), the Virginia Supreme Court set forth three general tests to determine if an item of tangible personal property should be considered as a fixture. However, the case stipulates that the three general tests are only used “in the absence of any specific agreement between the parties as to the character of a chattel placed upon the freehold.” 

In this case, the lease between Company A and the homeowner satisfies the specific agreement portion of the court decision, classifying the HVAC unit as tangible personal property. As such, the separate lease transactions between Company A and the homeowner are taxable leases, subject to Virginia sales tax. 

Question 3

Would the answer to questions 1 and 2 above change if the Taxpayer furnished and installed the HVAC units and contracted directly with the homeowner for the lease of the equipment?

If the Taxpayer leases HVAC equipment directly with the homeowner, it would still be deemed to be a consuming contractor for the installation of the systems and a retailer regarding the leases. As such, it would be required to pay or accrue sales and use tax on purchase of the HVAC equipment and collect and remit the sales tax on the lease transactions with the homeowner.

The ruling request also states that the homeowner has the option to buy the HVAC unit, during the lease or at the lease’s conclusion. This separate transaction would also be a taxable event. Public Document (P.D.) 89-240 (9/11/1989) provides that any sale of the leased equipment, either during or at the conclusion of the lease, would be considered a completely separate transaction and would be subject to the sales and use tax based on the purchase price.

With regard to double taxation, Virginia Code § 58.1-604 prohibits the imposition of both sales and use tax on the same transaction. The Department, however, has addressed the taxation of separate and distinct transactions on the same tangible personal property on multiple occasions. See P.D. 82-205 (12/27/1982), P.D. 95-287 (11/08/1995), P.D. 00-67 (5/4/2000), and P.D. 09-82 (5/28/2009). Based on the facts presented, the consumption of the HVAC system by the Taxpayer is separate and distinct from the lease, and possible sale, of the same system to a homeowner. 

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) ***** or *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia