Tax Type
Retail Sales and Use Tax
Description
Lease or Rental; Gross Proceeds; Transportation, Repair and Finance Charges Relating to Crane Rentals
Topic
Basis of Tax
Date Issued
02-21-1991
February 29, 1991
Re: § 58.1-1821 Application: Sales and Use Tax
Dear****************
This will respond to your letter of December 28, 1989 seeking correction of a sales and use tax assessment for your client, ******************* (the "Taxpayer"), for the period February 1, 1986 through December 31, 1986, and for the years 1987 and 1988.
FACTS
The Taxpayer is a contractor which owns, maintains and rents a fleet of cranes. The cranes are offered for rent with skilled operators or on a bare rental basis. The Taxpayer also rents trucks, air compressors and welding machines and owns a fleet of trucks for transporting the equipment. The Taxpayer contests six major areas of its assessment including: (i) transportation-out and knockdown charges, (ii) repair services, (iii) finance charges, (iv) purchases exception list, (v) fixed assets, and (vi) penalties.
DETERMINATION
I will address each of these areas individually below.
1. Transportation-out and knockdown charges
The Taxpayer rents cranes on a "bare rental" basis (without an operator). The rental proceeds are based on equipment usage only, completely independent of any auxiliary services. The lessee will frequently ask the Taxpayer to transport the crane after the lease period has expired, which requires that the crane be "knocked down" or disassembled. Removing the crane from the lessee's site is deemed "transportation out". Absent a specific agreement to the contrary, the services necessary to perform the knockdown and transportation out are the responsibilities of the lessee. The Taxpayer maintains that the transportation out and knockdown charges are fees for services only and are not related to the leasing of the property, and accordingly, should not have been held taxable in the assessment.
Va. Code § 58.1-603 imposes the sales tax on the "gross proceeds derived from the lease or rental of tangible personal property...." "Gross proceeds" is defined in Va. Code § 58.1-602 as "the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price...." Virginia Regulation (VR) 630-10-95 defines "sales price" as including "any services in connection with such sale."
In the instant case, despite the Taxpayer's contention that the knock-down and transportation out charges for the cranes are fees for services unrelated to the leasing of the property and occur outside the lease period, such charges are in connection with the lease of the cranes and accordingly are taxable. Please note that assembly and disassembly ("knock-down") charges are subject to the tax regardless of whether they are separately stated on the invoice for the lease of the cranes or on a completely separate invoice. Thus, the charges were appropriately taxed in the assessment.
2. Repair services on bare rentals
Separately stated labor and mileage charges: Under the bare rental leases, lessees are responsible for normal maintenance and operating the equipment with reasonable care. If the lessee fulfills its responsibilities under the lease, and there is a breakdown, the Taxpayer repairs the crane at its own expense. However, if the breakdown is the lessee's fault because normal maintenance has not been performed or because of negligence, the repairs are the responsibility of the lessee. In this case, the lessee may choose whomever it desires to perform the repairs; however, if requested, the Taxpayer will perform repairs and make separately stated charges for materials, labor and mileage.
The Taxpayer maintains that with the repairs that are the responsibility of the lessee, the repair transaction is entirely separate from the lease agreement and, as such, is not taxable as part of the lease. As with the assembly and disassembly charges above, the charges made by the Taxpayer to the lessee for repairs are in connection with the lease of the cranes and accordingly are taxable.
Other charges: These include separately stated labor charges for repairs done to bare rental cranes which are the responsibility of the lessee but which are performed not by the Taxpayer, but by a third party at the Taxpayer's request. The Taxpayer may not have the time or the expertise to perform the repairs and thus contracts with a third party to perform the repairs for the lessee. The third party in turn bills the Taxpayer and the Taxpayer passes the charges on to the lessee. Once again, the repair charges are charges made in connection with the lease of the cranes and are taxable.
Storage: The Taxpayer charged a third party for the storage of equipment. The tax assessed on this charge will be removed from the audit since the charge is merely for the storage of tangible personal property.
3. Finance charges
The Taxpayer charges interest at the rate of 1 1/2% per month on payments past due. The Taxpayer argues that the interest charges are not part of the gross proceeds of the lease and are separately stated and charged only on past due balances. It maintains that the charges are solely for the use of money and that the proper interpretation of VR 630-10-57 is that such interest or finance charges are taxable only when built into the lease price. These late charges were held taxable in the assessment.
VR 630-10-57 provides that "[a]ny person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay the tax on gross proceeds." (emphasis added) Gross proceeds is defined as including "any finance or interest charges, insurance charges, charges for property tax on the property being leased, and other similar charges." (emphasis added) Accordingly, the interest charges were properly treated in the audit.
4. Purchases exception list
Until recently, the Taxpayer has had its trademark painted on its equipment. Now the company with which it contracts for such (the "company") keeps the Taxpayer's logo on its computer and can enlarge, reduce and color it as the need arises. Most of the time, the company produces customized decals to be affixed to the Taxpayer's equipment, yet occasionally handpaints the trademark on the equipment. The Taxpayer contends that it is purchasing the services of the company and that because the company chooses to produce the image of the trademark on a piece of plastic or vinyl and then to affix it to the equipment is of no consequence and should not affect the substance of the transaction. It maintains that the "true object" of the transaction is that the company place the Taxpayer's name on the cranes.
In the instant case the "true object" of the transaction is to acquire the decal lettering made by the company as the Taxpayer has the option of purchasing only the decals from the company or purchasing the decals and having the company affix them to the equipment. Since tangible personal property is involved, the transaction is taxable. However, charges for logos painted on equipment are exempt from the tax as charges for services.
Since the company specifically makes the decals for the Taxpayer, it is considered a fabricator and, as such, is subject to VR 630-10-37 which provides that a person "regularly engaged in . the fabrication of tangible personal property for sale at retail must collect and pay the tax on the sales price of the property." It provides further that the "tax applies to the total charge for the fabrication of tangible personal property on a special order for a consideration, including labor, even if charges for labor are separately stated." However, application or installation labor is exempt from the tax provided it is separately stated on an invoice.
Thus, the company should have been charging sales tax on its sales to the Taxpayer and could have purchased the materials used tax exempt.
In this assessment, the entire invoice price was held taxable as the sale of tangible personal property. However, if the Taxpayer can furnish documentation from the company to verify the cost of materials used in each invoice, the tax paid on the purchase price of the vinyl used for decal lettering, and the amount of installation labor included in each listed invoice, the department will adjust the audit by taxing only the mark-up on the material used and fabrication labor, and omitting the installation labor from the assessment.
5. Purchase of fixed assets
The Taxpayer was assessed use tax on purchases of fixed assets used in the rental fleet business, primarily cranes and crane repair parts. The Taxpayer disagrees with the assessment for three reasons: (1) some of the equipment has never been rented on a fully maintained and operated basis; (2) the auditor based his computation on the original purchase price of the items involved instead of the cost of the property as carried on the books; and (3) the Taxpayer may elect to pay use tax on the rental payments received as provided in Va. Code § 58.1-623(C).
When a crane is used for dual purposes - for both bare rentals and on a fully maintained and operated basis - the tax will apply in accordance with the manner of taxable or exempt usage at the time of purchase. As such, a crane purchased for rental purposes will be exempt from the tax at the time of purchase. Any repair parts therefore will also be exempt from the tax. However, if the crane is put to a taxable use (rented on a fully maintained and operated basis), the Taxpayer will be liable for the use tax on the fair market value of the crane and any repair parts that have been purchased exempt from the tax if taxable use occurs six months or more after the property was purchased. The Taxpayer may, instead, elect under Va. Code 58.1-623(C) to pay use tax on the rentals received.
Thus, if the Taxpayer can provide additional documentation to substantiate which cranes were used solely for bare rentals, those items will be removed from the audit. Additionally, the department will adjust the assessment on the cranes purchased for use as bare rentals and subsequently rented on a fully maintained and operated basis based on the rentals received for such as provided in Va. Code § 58.1-623(C) provided the Taxpayer can reconstruct such rental charges.
6. Penalties
Based on the information provided, I find basis for waiver of the penalties assessed.
Accordingly, provided that the requested documentation is remitted to the department at the following address within 45 days of the date of this letter: Department of Taxation, office Services Division, Technical Services Section, P. O. Box 6-L, Richmond, Virginia 23282, the assessment will be adjusted as set forth in this letter.
If you have any questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner