Tax Type
Retail Sales and Use Tax
Description
Leases between affiliated companies
Topic
Taxability of Persons and Transactions
Date Issued
07-27-1988
July 27, 1988
Re: §58.1-1821 Application/Sales and Use Tax
Dear****************
This will reply to your letter dated March 21, 1988 seeking the correction of sales and use tax assessed to your client, ************* , as the result of an audit for the period June 1, 1984 through May 31, 1987.
FACTS
**********("Taxpayer") is part of a "family" of corporations engaged in the construction business. As the result of a recent audit, the Taxpayer was held liable for sales and use tax on certain non-taxed equipment leased from*********** (a "sister" corporation). The Taxpayer contends that the lessor is not in the business of leasing tangible personal property. The Taxpayer maintains that there are no formal or informal leases of equipment between the Taxpayer and the lessor and that bookkeeping entries are made by both the Taxpayer and the lessor only for the purpose of determining the true costs involved in a particular contract. The Taxpayer contends further that it was never the intent of the lessor to seek restitution for the use of "family" equipment and the Taxpayer' s rental debt to the lessor is totally worthless and uncollectible. Therefore, should the department hold the Taxpayer liable for the tax, a credit for the tax would be due under §58.1-621 of the Code of Virginia.
DETERMINATION
"Business" is defined in §58.1-602(1) of the Code of Virginia as "any activity engaged in by any person, or caused to be engaged in by him, with the object of gain, benefit or advantage, either directly or indirectly." While neither the Taxpayer nor the lessor may be involved in the routine leasing of tangible personal property, I must conclude that the lessor is engaged in an activity with the object of direct gain or benefit to both the Taxpayer and lessor. Therefore, the lessor is in the business of leasing tangible personal property and thus engaged in an activity subject to the sales and use tax. As the lessor did not collect the sales tax in this instance, the Taxpayer became liable for the use tax (see Virginia Regulation 630-10-109).
The term "sale" is defined in §58.1-602(16) of the Code of Virginia as "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...for a consideration. In addition, "lease" as defined in §58.1-602(8) of the Code of Virginia 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 the property." Thus, virtually any transaction involving consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax.
While §58.1-621 of the Code of Virginia provides that a dealer is entitled to a credit on accounts which have been found to be worthless, the Taxpayer in this instance is the taxable user of the equipment and was properly assessed use tax since no tax was remitted to the department by the lessor on the rental charges. Consequently, no credit would be due the Taxpayer under this section since the department has assessed the lessee and not the lessor.
Based on the foregoing, I find no basis for a correction of the assessment, which is now due and payable. I have enclosed for your perusal copies of previous determinations issued by the department involving similar circumstances.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner