Could a semiconductor manufacturer sell equipment tax-free to unrelated lessors for immediate exempt leaseback using resale certificates?

Subject

Leaseback, Semiconductor manufacturing and Resale Exemptions

Plain-English summary

Virginia allowed the manufacturer to accept resale certificates from unrelated lessors buying equipment for immediate leaseback, even though the leaseback itself was assumed exempt as semiconductor manufacturing.

The manufacturer's concern was statutory and form language referring to property bought for a "taxable" lease. The Commissioner distinguished that special leaseback language from the broader resale rule. A purchase by a leasing business for subsequent lease was a resale transaction because leases fell within the definition of sale, regardless of whether the later lease was taxable or exempt.

Each lessor could therefore provide a completed Form ST-10 with item 2 checked, allowing the manufacturer's sale to the lessor without tax. The manufacturer would then provide Form ST-11B to show that its lease of the equipment qualified for the semiconductor exemption.

The ruling did not confirm the underlying equipment exemption. Virginia had not reviewed the equipment types or their actual use and expressly assumed qualification for purposes of the answer.

What this means for you

• A lessor's resale purchase and the lessee's exemption are separate steps requiring separate support.
• The lessor uses the resale certificate; the exempt manufacturer supports the lease exemption with the applicable manufacturing certificate.
• An exempt lease can still follow an exempt resale purchase under the reasoning applied here.
• Obtain a property-by-property use analysis because this ruling did not validate any specific asset.

Common questions

Did the word "taxable" on Form ST-10 invalidate the resale certificate? No. The Commissioner relied on the general resale definitions and prior leasing guidance.

Did Virginia confirm every asset was semiconductor-exempt? No. The ruling assumed that fact without reviewing the assets or their use.

Which forms did the ruling identify? Form ST-10 from each lessor and Form ST-11B from the manufacturer to each lessor.

Citations and references

• Va. Code § 58.1-609.10(3), § 58.1-603, and § 58.1-602.
• Va. Code § 58.1-609.3(14).
• P.D. 97-241 (May 23, 1997).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-152

Original ruling text

September 27, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your request for a ruling submitted on behalf of * (the "Taxpayer"), regarding the application of the retail sales and use tax to sale-leaseback transactions.

FACTS

The Taxpayer is a manufacturer that is contemplating the sale and simultaneous leaseback of manufacturing assets located at its Virginia manufacturing site. The Taxpayer states that the assets in question qualify for the semiconductor manufacturing exemption in Va. Code § 58.1-609.3 14. There are two groups of assets and each group will be sold to a different financial entity (the "Lessors"). The Lessors are not related to the Taxpayer. The Lessors will simultaneously lease the assets back to the Taxpayer for use in its semiconductor manufacturing operations. The manufacturing assets will remain at the manufacturing facility, and there will be no interruption in the Taxpayer's manufacturing activities while the sale-leaseback transactions are consummated.

The Taxpayer seeks a ruling concerning the good faith acceptance from the Lessors of the Department's resale exemption certificate, Form ST-10. The Taxpayer suggests that certain language found on Form ST-10 and in Va. Code § 58.1-609.10 3 limits the resale exemption to purchases made for taxable lease or taxable leaseback. Because the Taxpayer's leaseback of the manufacturing assets would qualify for the semiconductor manufacturing exemption, the leaseback would not be taxable. Thus, the Form ST-10 would appear to be invalid on its face and the Taxpayer could not accept this exemption certificate in good faith from the Lessors as proof of an exempt sale for resale.

RULING

Leaseback Exemption

Virginia Code § 58.1-609.10 3 provides an exemption for:

Tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business, or incidental or germane to such business, including a simultaneous purchase and taxable leaseback. (Emphasis added.)

The language on Form ST-10 mirrors the language in the above statute. The presence of the word "taxable" in the statute and on Form ST-10 is the Taxpayer's primary concern. The Taxpayer's leaseback of the manufacturing assets qualifies for the semiconductor manufacturing exemption, so the leaseback will not meet the statutory requirement that the lease or leaseback be taxable to qualify for exemption.

Resale Exemption

Virginia Code § 58.1-603 imposes the retail sales tax on the retail sale, lease or rental of tangible personal property in Virginia. Virginia Code § 58.1-602 defines "retail sale" to mean "a sale to any person for any purpose other than for resale . . . ." The term "sale," as defined in this same section, includes leases or rentals. Based on these definitions, an exempt sale for resale occurs when tangible personal property is sold to a business that intends to lease the property. This is true regardless of whether the lease or leaseback is taxable or exempt because the tax is imposed on retail sales, which, by definition, do not include sales for resale.

As the Taxpayer notes, the Department has historically recognized that the manufacturing exemption applies to leases of qualifying manufacturing equipment. Public Document 97-241 (5/23/97) discusses a business that sold manufacturing equipment to leasing companies that then leased the equipment to manufacturers. This ruling does not specifically address the statutory language in Va. Code § 58.1-609.10 3 that concerns the Taxpayer, but it clearly acknowledges that the manufacturing exemption applies to leases of manufacturing equipment and that leasing companies may purchase manufacturing equipment exempt of the tax under the resale exemption. The ruling states that a leasing company that purchases equipment for subsequent lease to a manufacturer should provide the seller of the manufacturing equipment with a completed and signed Form ST-10 with item (or box) #2 checked. It is clear from P.D. 97-241 that leasing businesses may use Form ST-10 to make exempt purchases under the resale exemption regardless of the taxable status of the subsequent lease or leaseback.

Summary

The Taxpayer may accept a properly completed and signed Form ST-10, with item #2 checked, from each of the Lessors. The acceptance of Form ST-10 allows the Taxpayer to sell the manufacturing equipment to the Lessors exempt of the tax. The Taxpayer should then provide each of the Lessors with a properly completed Form ST-11B as evidence that the leased equipment qualifies for the semiconductor manufacturing exemption in Va. Code § 58.1-609.3 14.

The Taxpayer asks for confirmation that the semiconductor manufacturing exemption applies to all the property that will be leased back from the Lessors. Without reviewing the types of equipment that will be leased or the manner in which it is used by the Taxpayer, I am unable to confirm that the manufacturing assets qualify for exemption under Va. Code § 58.1-609.3 14.

This ruling is based on the facts presented as summarized above and assumes that the semiconductor manufacturing exemption applies to the property that will be leased back by the Taxpayer. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this ruling, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely

Janie E. Bowen

Tax Commissioner

AR/1-1718151908S