Real and Tangible Personal Property
February 12, 2025
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you contest the retail sales and use tax assessment issued to ***** (the “Taxpayer”) as a result of an audit for the periods from February 2019 through July 2019.
FACTS
An audit was conducted on the books and records of the Taxpayer, a restaurant in Virginia, for the period at issue. As a result of the audit, untaxed rental payments for the restaurant space and certain assets were adjusted to reflect an allocation of 50% to real property and 50% to tangible personal property. An assessment was issued based on the tangible personal property allocation of the lease. The Taxpayer filed an application for correction contending the property allocation overstates the value of the allocation for the rental of tangible personal property by failing to consider the annual depreciation for such assets.
DETERMINATION
Virginia Code § 58.1-603 imposes the sales tax on every person who sells, leases, or rents tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines the term “sale” to mean “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property…” This same section also provides that the term “lease 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.”
While the lease of real property and fixtures attached thereto is not subject to the sales tax, the lease of the tangible personal property included in the lease is taxable. See Public Document (P.D.) 95-223 (8/29/1995). The 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 lessor is not able to provide such a breakdown and no other evidence is available, the tax will apply to the entire lease payment. See P.D. 93-188 (8/26/1993). Alternatively, in the absence of a formal lease for tangible personal property, or a breakdown of the value of the real property versus tangible property included in the lease, the auditor may rely on the best information available. See P.D. 94-142 (4/29/1994).
The Taxpayer has provided an executed lease agreement, which indicates that the lease includes the building, land and all “furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith…” The Taxpayer has also provided a copy of the Landlord’s 2019 Depreciation and Amortization Report, which includes valuations for both the real and personal property. The Taxpayer argues that the depreciation report evidences a more suitable allocation between the personal and real property included in the lease.
Based on the evidence provided, the Department agrees with the Taxpayer’s contentions regarding the lease allocation. Accordingly, the audit will be returned to the auditor to reduce the allocation for tangible personal property to the percentage indicated by the depreciation report. Once the revisions are complete, the auditor will issue a new audit report, explanation of specific changes, and an updated bill with interest accrued to date. The Taxpayer should remit payment of the balance due within 30 days of the date on the updated bill to avoid the accrual of additional interest or possible collection action.
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 there are any questions regarding this determination, please contact ***** in the Department’s Office of Tax Policy and Legislative Affairs, Tax Adjudication and Resolution Division, at *****, or via email at *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/3574.F