Tax Type
Retail Sales and Use Tax
Description
Lease of equipment by affiliates; Penalties and Interest
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
08-28-1991
August 28, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letter dated October 11, 1989 on behalf of your client, **********( "Taxpayer" ) . in which you seek correction of sales tax audit assessments for the period September 1985 through June 1988.
FACTS
The Taxpayer is one of three related entities ********* is the 100% owner of the Taxpayer's stock and the 100% owner of stock of ************* ("A" Corporation). *********and his spouse are the sole partners in **************** ("B" Partnership). The contested items in the audit relate to computer and equipment rental transactions from "A" Corporation and from "B" Partnership, respectively, to the Taxpayer. Based upon the following, the Taxpayer requests relief from the tax and penalty and/or the allowance of an installment payment schedule.
The Taxpayer contests the assessment of tax against monthly charges from "A" Corporation to the Taxpayer for the taxpayer's use of a computer system owned by "A" Corporation. The Taxpayer contends that it was purchasing nontaxable computer services from "A" Corporation, rather than leasing the computer equipment. The auditor contends that these contested items were specifically referred to as lease payments, by written contract between the Taxpayer and "A" Corporation.
Further, the Taxpayer contends that to the extent that there is a lease to the Taxpayer from "B" Partnership, the lease is not subject to sales and use tax, because the lessor is a "partnership among husband and wife which simply owns the tangible personal property and receives rent for its use by another." You argue that in accordance with the Virginia Supreme Court case of Krauss v. City of Norfolk, 214 Va. 93 (1973). "B" Partnership is not "engaged in [the] business" of leasing, for purposes of Va. Code §58.1-603. The definition provided in Krauss generally provides that business. "... is a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit". The Taxpayer believes that "B" Partnership's activities are passive and therefore, do not constitute "engaging in [the] business" of leasing for purposes of Va. Code §58.1-603.
Alternatively, the Taxpayer has expressed confusion resulting from alleged inconsistencies in treatment of the contested items in two previous audits by the department, arguing that the Taxpayer did not know that the transactions were taxable. The Taxpayer also offers that tax was paid by the affiliates when the rental property was originally purchased. and protests the taxation of the rental transactions without a credit for taxes previously paid, as double taxation.
DETERMINATION
In an April 12, 1983 ruling of the Commissioner (copy enclosed) the definition of business for sales and use tax purposes was distinguished from the common law definition of business as set forth in Krauss v. City of Norfolk. The General Assembly has defined business for the purpose of Va. Code §58.1-603 (formerly Va. Code §58-441.3(I)) as including "any activity engaged in by any person, or caused to be engaged in by him, with the object of gain, benefit or advantage, either direct or indirect." This definition differs from the common law definition of "business" in that time, attention or labor of men is not required to establish a concern as a "business" within the meaning of the Retail Sales and Use Tax Act.
The transactions in the current audit, between the Taxpayer and "A" Corporation, and between the Taxpayer and "B" Partnership, were invoiced to the Taxpayer as rentals, and as such can be presumed to be subject to tax as provided by Va. Code §58.1-603. In the case of the computer equipment, this presumption is further supported by the fact that the Taxpayer (rather than "A" Corporation) actually operated the equipment. Absent convincing evidence that the transactions were merely time charges for the use of equipment owned and operated by "A" Corporation, the assessment will not be adjusted in this regard.
Transactions similar to those in question were apparently not included in the department's previous audit because "A" Corporation and "B" Partnership were collecting the tax from the Taxpayer and remitting it to the department. As such, I do not see any inconsistencies between the current audit and the audit immediately past.
Nonetheless, the department will allow a credit to the Taxpayer for taxes paid by its affiliates upon the purchase of equipment leased to the Taxpayer, conditioned upon the provision of proof of payment by the Taxpayer that relates directly to the assessment of tax in the audit.
Since there has obviously been great confusion among the Taxpayer and its affiliates, I will also abate the penalties assessed for the affiliated party transactions. Upon receipt of the requested information, a revised notice of assessment will be issued to the Taxpayer under separate cover and a payment plan may be arranged with our Collections Section in order to satisfy the outstanding liability.
Sincerely
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner