Tax Type
Retail Sales and Use Tax
Description
Rail car leases; Credited railroad mileage fees
Topic
Taxability of Persons and Transactions
Date Issued
08-01-1990
August 1, 1990
Re: §58.1-1821 Application/Sales and Use Tax
Dear ******************
This is in reply to your letter of April 30, 1990 in which you are seeking correction of a sales and use tax assessment for the period of January, 1986 through December, 1989.
FACTS
************* (the Taxpayers) are manufacturers of synthetic fibers. In the course of business, the Taxpayers lease rail cars from various sources. The rail cars are leased on a monthly basis for a specified amount. As a common practice in the railroad industry, the railroad will pay to rail users a mileage fee which is determined by the number of miles travelled on the railroad owned tracks. In the case at hand, the owners of the rail cars collected the mileage fees accruing to the Taxpayers and applied the fees towards the monthly lease charge to the Taxpayer, thereby reducing the actual amount paid by the Taxpayer on the leases.
The total monthly lease amount has been held taxable in the recent audit. It is the Taxpayer's contention that the tax should be computed on the lease amount after the mileage credit has been applied.
DETERMINATION
Virginia Code §58.1-603 imposes the sales tax on "the gross proceeds derived from the lease or rental of tangible personal property, where the lease or rental of such property is an established business, or part of an established business, or the same is incidental or germane to such business." This establishes the fact that the sales tax is to be applied to the "gross proceeds" derived from the lease or rental of tangible personal property.
In order to interpret §58.1-603, we must look to the definition of "gross proceeds" as found in Virginia Code §58.1-602. "Gross proceeds" is defined, in part, as the "charges made... for the lease or rental of tangible personal property... , computed with the same deductions... as for sales price as defined in this section... ." This section goes on to define "sales price", in part, as "the total amount for which tangible personal property or services are sold, ... and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer... ."
The mileage charges, as I understand the railroad industry's practice, accrue to the Taxpayer rather than the owners of the cars. As such, it is the Taxpayers' own funds that are credited to its rental account by the car owners. The mileage credits and other payments by the Taxpayers both represent taxable lease payments and the combination of the credits and other payments represents the car owners' gross proceeds from the leases.
As stated in your letter, it is your position that "the rail car mileage allowances much more closely resemble cash discounts" rather than a credit applied against the monthly lease amount. However, unlike a cash discount, the lessors of the rail cars are not in any way reducing the overall lease charges when they credit the mileage charges to the Taxpayers' rental account.
Based on the foregoing, the tax was properly assessed and the remaining audit liability is now due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner