Tax Type
Retail Sales and Use Tax
Description
Finance charges on leases and rentals
Topic
Basis of Tax
Taxability of Persons and Transactions
Date Issued
04-28-1989
April 28, 1989
Re: §58.1-1821 Application: Sales and Use Tax
Dear***************
This will reply to your letter of December 19. 1988, seeking correction of assessment in the above referenced case for the period January 1985, through December 1987.
FACTS
*********** ("The Taxpayer"), in connection with its business as a lessor of office and business equipment, was recently audited and held liable for untaxed finance charges made to its lessees. The department held that the agreements used by the Taxpayer ("the lease") were in fact leases of tangible personal property and taxed the finance charges imposed under such agreements in accord with §630-10-57 of the Virginia Retail Sales and Use Tax Regulations.
The Taxpayer protests the assessment contending that the agreements represent a one-dollar purchase option transaction or a conditional sales contract and that the finance charges under such agreements are not subject to the tax.
DETERMINATION
Based upon the Tax Commissioner's Determination of October 23, 1987, copy enclosed, and for the reasons given below, I find no basis for correction of assessment.
§58.1-602(8) of the Virginia Code defines the term "lease" as 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...." (Emphasis added).
Paragraph 6 of the agreement in the instant case specifically provides in bold print that "[o]wnership of the equipment shall at all times remain with the lessor." (Emphasis added). The lessee under the lease has only the right to possession of equipment "so long as the [l]essee shall not be in default under this lease." (Emphasis added). Taxpayer's Lease paragraph 7.
While title generally remains with the seller in a conditional sales contract. the agreement in the instant case is demonstrably a lease of tangible personal property rather than a conditional sales contract. The agreement is entitled "Lease," payments made to the lessor are referred to as lease payments: the payor is referred to as the lessee and the payee is referred to as the lessor; the possession holder is referred to as the lessee: the title holder is referred to as the lessor. If the Taxpayer intended for the instant document to be a conditional sales contract with finance charges exempt from the sales and use tax. then they should have drafted the document accordingly.
The Taxpayer also contends that the purchase option provision in paragraph 14 of the lease transforms the document from a lease into a sales contract. This provision gives the lessee the option to purchase 'provided...[the] Lessee has paid in full all rentals owing hereunder and is not then in default...." Thus. the purchase option can be exercised only if the lessee had paid all rentals and was not in default of any other lease provisions. Under a conditional sales contract, title passes to the buyer automatically upon completion of the contract terms.
Based on the foregoing, the assessment is due and payable in full within 30 days from the date of this determination. If you have any questions, please contact us.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner