Tax Type
Retail Sales and Use Tax
Description
Damage waiver charges; Leases and rentals
Topic
Taxability of Persons and Transactions
Date Issued
10-23-1987
October 23, 1987
Re: §58.1-1821 Application/ Sales and Use Tax
Dear ******************
This will reply to your letter of February 17, 1987 seeking correction of an assessment on behalf of ************* (taxpayer) for various periods between October, 1983 and July, 1986.
FACTS
In connection with its business as a lessor of office and residential furniture and electronic equipment, the taxpayer was audited and held liable for the sales and use tax on certain untaxed charges made to its lessees. The taxpayer contests the application of the tax to separately stated charges for furniture transportation or delivery, amounts charged for a waiver of damages to rental property, amounts charged for damages to rental property, and amounts charged for late rental payments.
The taxpayer contends that separately stated charges to its customers for the delivery of furniture, whether such delivery is performed by the taxpayer or by some third party, are nontaxable under Virginia Code §58.1-602(17). In addition, the taxpayer contends that charges for a waiver of damages to rental property or for actual damages to such property qualify for exemption from the tax as separately charged labor or services rendered in repairing property sold, under the same provision of the Code cited above. Furthermore, the taxpayer contends that late payment charges in connection with its furniture leases should not have been held taxable in the audit since such charges represent "..service charges on conditional contracts providing for deferred payments of the purchase price," ... under this same section of the Code.
DETERMINATION
If the taxpayer in this case can provide documentation, such as invoices to its customers, showing separately stated charges for transportation/ delivery of its rental property, I will consider removing such charges from the assessment. Such information should be remitted to the address indicated below, within thirty days of the date of this letter. However, for the following reasons, I find no basis for correction of any other portion of the assessment.
§58.1-603(3) of the Virginia Code imposes the tax on "the gross proceeds derived from the lease or rental of tangible personal property." "Gross proceeds" is then defined in Virginia Sales and Use Tax Regulation 630-10-57 as, "the charges made or voluntary contributions received for the lease or rental of tangible personal property computed with the same deductions, where applicable, as for sales price in §630-10-95." Regulation 630-10-95 then provides in pertinent part that the term "sales price" does not include..."separately stated finance, carrying or service charges or interest directly attributable to credit extended on sales under conditional sales contracts (such as installment sales)..." (Emphasis added) In addition, Regulation 630-10-57 specifically provides that the term "gross proceeds" "includes any finance or interest charges, insurance charges, charges for property tax on the property being leased, and other similar charges." (See copies of Regulations enclosed)
The only amounts excluded from the term "sales price" are those specifically stated in §58.1-602(17) of the Code. Accordingly, there is no deduction from "sales price" for waiver of damage charges, or for actual damage charges added directly to charges made in connection with the leasing of tangible personal property. I cannot agree that such charges represent amounts separately charged "for labor or services rendered in installing, applying, or remodeling or repairing property sold". This is true since at the time of entering into the lease it cannot be determined if any of the waiver of damages charges will actually be utilized in providing such repair services. In addition, when such charges are added to the end of a lease term, they may or may not be utilized by the taxpayer in the repair or remodeling of the leased equipment. For example, the taxpayer may decide to apply amounts collected as damage charges to the replacement of leased equipment which has reached the end of its useful life.
Furthermore. such amounts charged are analogous to those held taxable in the 1978 Lutherville Supply and Equipment Company v. Commonwealth of Virginia case. In that case, a copy of which is enclosed, the Circuit Court of Fairfax County held that "an incremental addition to the purchase price ... is not excluded from the imposition of Virginia Sales Tax." The court specifically held that a "finance charge" added at the time of sale to the value of equipment leased with an option to purchase was indeed an addition to the purchase price and as such was taxable. While the Lutherville Supply case involved a "finance charge" rather than waiver of damage or direct damage charge, the latter charges also represent incremental additions to the purchase price of the equipment leased by the taxpayer in this case, and were therefore properly held taxable in the audit.
Nor do I agree with the taxpayer's characterization of the lease contracts in this case as "conditional contracts" under §58.1-602(17) of the Code. Lease contracts such as the ones in this case are unlike conditional contracts since they do not involve the retention by a seller of title to property being sold until completion of a plan of payment, with title passing to the buyer upon final payment. The Lutherville Supply case cited above is instructive in this regard since the court similarly declined to accept the taxpayer's characterization of its lease contract as a "conditional sale" contract. However, even if the transactions in the present case were deemed to be conditional sale contracts, the charges in question could not be deemed exempt "service charges" since they are unrelated to the extension of credit as required under Lutherville Supply and Virginia Code §58.1-602(17)(iii).
Therefore, the late charges imposed in connection with the taxpayer's lease of furniture and equipment in this case were not "service charges in connection with conditional contracts" as contended by the taxpayer.
Based on all of the foregoing, except for the removal of separately stated transportation charges upon receipt of the requested information, I find no basis for correction of the assessment. The taxpayer should send the information within thirty days to the department's Technical Services Section, office Services Division, P.O.Box 6-L, Richmond, Virginia 23282. If the requested information is not received by the department within this time period, the assessment will be payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner