Did Virginia use tax apply to lease payments after equipment moved from California when California tax had been correctly paid upfront on the full lease value?

Subject

The taxpayer appealed the assessment of tax on the lease payments

Plain-English summary

A semiconductor-equipment manufacturer entered a five-year lease for equipment first used in California. California treated it as a capital lease, and the company paid sales tax in the first year on the full value of all lease payments. Two years later, the equipment moved to Virginia, where an audit assessed use tax on the lease payments made while it was located in the Commonwealth.

Virginia removed the assessment. Va. Code § 58.1-611 allowed a credit for qualifying tax paid to another state, and the California tax had been correctly paid upfront on the total lease value. That distinguished the transaction from a month-by-month tax arrangement, under which Virginia tax would have been due for months when the property was used in Virginia.

The Department directed a refund of the tax and interest already paid, plus refund interest, and abated any remaining assessment balance.

What this means for you

• Correctly paid upfront tax on an out-of-state lease's full value could offset Virginia use tax after the equipment moved into Virginia.
• Tax merely paid in error to another state did not qualify for the credit.
• If the other state taxed each payment as it came due, Virginia tax could apply to payments for periods of Virginia use.
• Lease documents, possession records, and proof of the other state's tax base and payment timing are essential.

Citations and references

• Va. Code § 58.1-611, credit for tax paid to another state.
• 23 VAC 10-210-450, no credit for tax erroneously charged or incorrectly paid elsewhere.
• P.D. 01-39 (April 12, 2001), equipment-lease credit guidance.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-38

Original ruling text

April 20, 2007

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

Dear ***:

This is in response to your letter in which you seek waiver of the penalty included in the retail sales and use tax assessment issued to * (the "Taxpayer") for the period April 2003 through March 2006. I note that the Taxpayer has made a payment in the amount of *** for the assessed tax and interest.

FACTS

The Taxpayer is a manufacturer of equipment used in the production of semiconductors. The Taxpayer was assessed tax on an equipment lease. The equipment was originally purchased for use in California via a five-year lease with biannual lease payments. The lease was treated as a capital lease for California use tax purposes and the Taxpayer paid California sales tax on the total value of the equipment (the total of all lease payments) in the first year of the lease. The Taxpayer began leasing the property in 2002 and in 2004 the property was transferred to Virginia.

In the Department's audit, the Taxpayer was assessed tax on the lease payments for the equipment for the period it was located in Virginia. The Taxpayer requests an abatement of the penalty assessed in the audit.

DETERMINATION

Virginia Code § 58.1-611 provides, in pertinent part, that "[a] credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state."

Pursuant to Title 23 of the Virginia Administrative Code 10-210-450, the credit does not apply to tax erroneously charged or incorrectly paid to another state.

In Public Document (P.D.) 01-39 (4/12/01), the taxpayer leased equipment from out-of-state vendors. The taxpayer took possession of the equipment outside Virginia and paid sales tax to the vendor in the state where the transaction originated. In an audit, the taxpayer was assessed tax on lease payments made once the equipment was transferred to Virginia. The taxpayer appealed the assessment of tax on the lease payments. The Tax Commissioner ruled that if the total tax was properly paid at the inception of the lease to the state in which the taxpayer took possession of the equipment, the assessed use tax on the lease payments would be removed from the audit. If the tax was paid on a month-by-month basis at the time the lease payments became due, it was ruled that the Virginia use tax would be due for those months in which the equipment was being used in Virginia.

In this instance, the Taxpayer paid the total amount of sales tax due on the lease in the first year of the lease to the state of California. Pursuant to Va. Code § 58.1-611 and P.D. 01-39, the Taxpayer is not liable for the Virginia use tax once the equipment was transferred to Virginia because the tax was correctly paid to California. Accordingly, the tax assessed in the audit on the lease payments is incorrect. The Taxpayer will receive a refund of the tax and interest remitted to the Department, plus refund interest. Any remaining balance of the assessment will be abated.

The Code of Virginia section, regulation and public document cited 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

ARM-954012777P