Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Leases designated as financing instruments
Topic
Taxability of Persons and Transactions
Date Issued
02-29-1996
February 28, 1996
Re: § 58.1-1821 Application: Sales & Use Tax
Dear ********************
This will reply to your letter, in which you submit an application for correction of the department's sales and use tax audit assessment issued to ******* (the "Taxpayer"), for the period April 1990 through August 1994.
FACTS
The department's audit disclosed that tax had not been collected on payments received from the leasing of tangible personal property. Prior to the audit by the department, the Taxpayer entered into lease contracts pursuant to standard leasing agreements. The contracts clearly identified the Taxpayer as the owner of the property. Subsequent to the establishment of the leasing agreements, the Taxpayer's accountant advised the Taxpayer to switch their method of handling the agreements, treating the transactions as financing instruments for purposes of income taxation.
The Taxpayer protests the assessment contending that due to the restructuring of the agreements, the transactions represent conditional sales contracts, and the department's assessment is erroneous.
DETERMINATION
After a review of the facts in this case I find that the key provisions of the contracts in question are substantially similar to agreements found to be taxable in past decisions where the protests of other taxpayer's have been denied. Copies of P.D.'s 91-284 and 94-65 as well as a March 30, 1983 ruling are enclosed. I cannot agree that the leases are "conditional sales contracts" given that the common meaning of the terms "lease" and "conditional sales contract" are not synonymous. While the ultimate result in both instances may be the same, the form of "purchase" is substantively different. Under a conditional sales contract, title passes to the buyer automatically in the same manner as any other sale of tangible personal property. In a lease agreement the payments are spread over the term of the lease, and title does not pass to the lessee. A review of the lease agreements supplied to the auditor clearly states that title to the property shall remain with the lessor, the Taxpayer.
Also, I am not persuaded by the federal income tax treatment of the lease agreement in question. In many instances the characterization of items of income or expense is dissimilar for purposes of different taxes. For example, the so-called "safe harbor leases" may be treated differently for income and sales tax purposes depending upon whether an actual transfer of title or possession occurs. In the instant case the lease agreements provide that title does not pass to the lessee.
Based upon the foregoing, I do not find basis for an adjustment of the audit. The assessment remains due and payable and should be paid within 30 days to avoid the accrual of additional interest. If the assessment is not paid within that time interest will accrue on the unpaid balance from the original date of assessment.
If you have any questions regarding this matter, you may contact **** of the department's Office of Tax Policy at*****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9202Q
Rulings of the Tax Commissioner