Must a lessor charge Virginia sales tax on a separately stated reimbursement of local personal property tax collected from a lessee?

Subject

Separately stated local property tax was excluded from lease sales price

Plain-English summary

Virginia said a lessor did not charge sales tax on a separately stated reimbursement of local personal property tax. Lessors commonly paid the local tax on leased equipment, allocated it to the relevant property, and billed the lessee under the lease.

Va. Code § 58.1-602 excluded "separately stated local property taxes collected" from sales price. Because the property-tax amount was separately billed in addition to monthly rent, it was outside the taxable lease price.

What this means for you

• State the local personal-property-tax reimbursement separately from rent.
• Maintain records connecting the charge to property tax paid on the leased asset.
• A bundled or differently described charge may not receive the same exclusion.

Common questions

Did the rule apply to both true leases and lease-finance agreements?

The ruling described both arrangements and based the answer on the separately stated property-tax charge.

Was the monthly rental payment still taxable?

The ruling addressed only the separately stated property-tax reimbursement, not an exemption for rent.

Citations and references

• Va. Code § 58.1-602.
• P.D. 00-188.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-187

Original ruling text

October 17, 2008

Dear *:

This is in response to your letter written on behalf of * ("ELFA"), in which you request written guidance as to the application of sales and use tax to separately stated personal property taxes a lessor collects from its lessee.

FACTS

Frequently within the leasing industry, a lessor reports and pays personal property tax on all leased property directly to the local taxing jurisdiction. The personal property reported and taxed to a lessor may include property under true leases (assets a lessor depreciates for federal tax purposes) as well as property under lease finance agreements (assets a lessee depreciates for federal tax purposes). The actual amount of personal property tax paid is allocated to the applicable leased property and is collected from the lessee pursuant to the terms of the lease agreement. The personal property tax is a separately stated amount that is collected in addition to the monthly rental amount. You question whether the separately stated property tax charge is subject to the retail sales and use tax.

DETERMINATION

Va. Code § 58.1-602 defines "sales price" as "the total amount for which tangible personal property or services are sold..." The statute excludes from the definition of sales price "separately stated local property taxes collected." Based on this statute, personal property tax charges that are separately stated are not included in the total sales price, and are therefore, not subject to the retail sales and use tax. This is consistent with PD 00-188, in which the Tax Commissioner determined that a lessor was not required to apply sales tax to its separately stated charges for personal property taxes imposed upon its lessees.

I hope the information provided has addressed your questions. The Code of Virginia section and regulation cited, along with other reference documents, are available online in the Tax Policy Library section of TAX's website, located at www.tax.virqinia.gov . If you have any questions about this ruling, you may contact * in TAX's Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner