Were equipment leases between sister corporations exempt as intracompany transfers for Virginia sales and use tax?

Plain-English summary

Virginia held that equipment rentals between sister corporations were taxable leases, not exempt intracompany transfers. Common ownership did not merge the affiliates for sales-tax purposes because they remained separate legal entities.

The statutory definition of a sale included leases and rentals for consideration. Since sales tax had not been paid, the taxpayer owed use tax on the rental cost of equipment used or consumed in Virginia.

The Department left the tax assessment in place but abated the separate use-tax compliance penalty because the taxpayer supplied enough information and documentation to qualify for waiver under the alternative compliance method.

What this means for you

• Separate affiliated corporations are separate taxpayers for equipment leases.
• A paper or intercompany rental can still be taxable when consideration is charged.
• Failure to collect sales tax can produce use-tax liability for the lessee.
• Penalty relief does not erase the underlying tax.

Common questions

Did common ownership exempt the leases?

No. The sister companies were separate legal entities.

What was the tax base?

The ruling applied use tax to the cost price of the equipment rentals used or consumed in Virginia.

Was the compliance penalty upheld?

No. It was abated based on the documentation provided.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, and 58.1-604(1).
• The source cites P.D. 85-233, 88-215, and 94-271.

Subject

Leases between sister companies are not exempt intracompany transfers

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-3

Original ruling text

January 11, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period June 2002 through May 2005.

FACTS

The Taxpayer is part of a family of corporations engaged in the construction business. As a result of the Department's audit, the Taxpayer was held liable for use tax on certain equipment leased from a sister company. The Taxpayer contends that the leases should not be subject to the tax because "the rentals were intracompany in nature."

DETERMINATION

Lease transactions

Virginia Code § 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines the term "sale" to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property . . . ." [Emphasis added.] This same section also provides that the term "lease or rental" "means the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property."

The Tax Commissioner has previously ruled that affiliated corporations must be treated as separate entities and leases of tangible personal property between them are not exempt intracompany transfers. See Public Document (P.D.) 85-233 (12/31/85) and P.D. 94-271 (8/30/94). Furthermore, P.D. 88-215 (7/27/88) states that virtually any transaction involving a consideration, including "paper" transfers or rentals between two affiliated companies, is subject to the sales and use tax.

In this case, the Taxpayer and its affiliates are separate legal entities. Based on the above statutes and public documents, the rental of equipment between the Taxpayer and its sister company for a consideration are "sales" and are subject to the sales and use tax. Because sales tax was not paid on the transactions, use tax is due on the cost price of the rentals of equipment used or consumed in Virginia. See Va. Code § 58.1-604 1. Accordingly, I find that the rental transactions at issue were correctly held taxable in the Department's audit.

Compliance Penalty

The Taxpayer was assessed a use tax compliance penalty. It is my understanding that the Taxpayer has provided the auditor with the appropriate information and documentation to warrant waiver of the penalty under the alternative method of computing use tax compliance. Therefore, the assessed penalty will be abated.

CONCLUSION

Based on the above determination, the assessment of tax on the lease transactions is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the assessment is paid within 30 days from the date of the updated bill.

The Code of Virginia sections and public documents 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 web site. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-706967701i