Did an equipment rental company qualify as a short-term rental business when less than 80% of annual rental receipts came from periods of 92 days or less?

Subject

Equipment renter failed the 80% short-term rental receipts test

Plain-English summary

Virginia upheld the county's determination that an equipment rental company was not a short-term rental business for 2007 and 2008. Under the law then in effect, at least 80% of annual gross rental receipts had to come from transactions lasting 92 consecutive days or less, including all extensions and renewals to the same or an affiliated customer.

The company's contracts used an initial 28-day period, but customers keeping equipment longer were automatically billed for additional time without signing a new agreement. Virginia treated that continued possession as an extension of the original rental. Receipts also counted in each year they were generated even when the rental began in an earlier year.

The county ultimately analyzed all transactions rather than relying only on a sample. Virginia also rejected the company's double-taxation argument and found the rental equipment's situs in the county where the rental activity occurred. If the company had paid business tangible personal property tax to another locality on the same rental equipment, it needed to request a refund from that locality.

What this means for you

• The historical 80% test measured gross rental receipts, not simply the number of contracts labeled 28 days.
• Extensions and renewals counted toward the full rental period even without a newly signed agreement.
• Receipts from one transaction could enter the annual calculation in multiple years.
• Local audit results depend on the actual transaction population and supporting records.
• Property rented from a county location could retain situs there even when customers temporarily moved it elsewhere.

Common questions

Did each automatic 28-day invoice start a new rental?

No. Because no new agreement was executed, the additional time was an extension of the original transaction.

Did the county rely only on a sample?

No. After an earlier sample, the company supplied all transactions and the county analyzed the complete listings.

Why did the double-taxation argument fail?

The evidence did not show improper duplicate taxation, and Virginia found the equipment's situs in the county where it was rented.

Did the law later change?

Yes. The ruling notes that legislation effective for tax years beginning on or after January 1, 2009 changed the tax name and expanded the short-term rental criteria.

Citations and references

• Va. Code §§ 58.1-3983.1, 58.1-3509, 58.1-3510, 58.1-3511, 58.1-3515, and 58.1-3510.4.
• Lawrence Carr, Jr. v. W. H. Forst, 249 Va. 66, 453 S.E.2d 274 (1995).
• George M. Hogan v. County of Norfolk, 198 Va. 733, 96 S.E.2d 744 (1957).
• Star Equipment Corp. v. County of Chesterfield, Law No. 1695-86 (1987).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-102

Original ruling text

June 18, 2010

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Merchant's Capital Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the "Taxpayer") with the Department of Taxation. You appeal the determination by *** (the "County") that the Taxpayer does not qualify as a short-term rental business for tax years 2007 and 2008 for purposes of the Merchant's Capital (MC) tax.

The MC tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of M&T tax assessments. On appeal, a MC tax assessment is deemed prima facie correct i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.

FACTS

The Taxpayer is an equipment rental company with an office in the County. Under audit, the County determined that the Taxpayer was not a short-term rental business for the 2007 and 2008 tax years. The Taxpayer appealed the determination to the County. The County issued a final determination holding that the Taxpayer was not a short-term rental business because less than 80% of the Taxpayer's gross receipts resulted from rentals that were for a period of less than 92 days.

The Taxpayer appeals the final local determination, asserting that the statute limits the transactions used for the 80% test to those transactions that generate the gross receipts in that tax year and originate in that year. The Taxpayer also claims that all of rental agreements are for a period of less than 92 days. Further, the Taxpayer disagrees with the County's auditing methodology and believes the reclassification creates double taxation on the same gross receipts and assets.

ANALYSIS

All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq ., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia. The capital of merchants is segregated for local taxation only. See Va. Code § 58.1-3509. Under this statute, a locality may impose either a merchant's capital tax on the capital of merchants or a Business, Professional and Occupational License (BPOL) tax on a merchant's gross receipts. Under Va. Code § 58.1-3510 1 , merchant's capital includes the Daily Rental Property (DRP) tax imposed on tangible personal property held for rental and owned by a person engaged in the short-term rental business.

Pursuant to Va. Code § 58.1-3510 C (as in effect during the tax years at issue), a person is engaged in the short-term rental business if:

not less than eighty percent of the gross rental receipts of such business in any year are from transactions involving rental periods of ninety-two consecutive days or less, including all extensions and renewals to the same person or a person affiliated with the lessor.

Transactions Beyond the Tax Year

The Taxpayer contends that the County failed to consider the plain meaning of the statute with regard to the total length of a rental period. The Taxpayer contends that the phrase "from transactions" in conjunction with the phrase "in any year" limits the transactions used for the 80% test to those transactions that generate the gross receipts in that tax year and originate in that year.

In Lawrence Carr, Jr. v. W. H. Forst, Tax Commissioner of the Commonwealth of Virginia , 249 Va. 66, 453 S.E.2d 274 (1995), the Virginia Supreme Court stated that if a statute is clear and unambiguous, a court must accept its plain meaning and not resort to extrinsic evidence or rules of construction. Virginia Code § 58.1-3510 C describes which gross receipts are to be used to determine when an entity is a short-term rental business. First, it must be determined which gross receipts are generated in a particular year. Then it is determined whether any rentals created those gross receipts. The phrases "from transactions" and "in any year" do not limit the transactions to those that originate and end within the tax year.

All gross rental receipts must be included for the tax year whether a rental agreement was executed during such year or not. For example, if a taxpayer rented equipment at the end of year one and the rental ended in the beginning of year two, the Taxpayer would have gross receipts in year one and year two. An appropriate portion of the receipts from such a transaction would be included in the computation of the 80% test in each year. If the rental continued into year three, the taxpayer would have gross receipts in year three as well, and such receipts would be included in the computation of the 80% test.

Length of Rental Period

The Taxpayer contends that all of its rentals are short-term rentals for 28 days or less and that customers must enter into a new rental agreement if they want to keep the equipment longer than the 28-day period. The County contends that no new rental occurs when the rental goes beyond the original 28-day period because the Taxpayer automatically issues a new invoice for an additional 28 days.

In determining whether the 92-day period is met for purposes of Va. Code § 58.1-3510 C, the transactions include "all extensions and renewals" to the same or affiliated person. The Taxpayer's rental agreement stipulates that if the rented equipment is not returned by the end of the rental period, it may require the customer to either "continue to pay the rental rate(s) applicable to the [rented equipment]" or "pay any increased rental rate(s) in effect at the time of, or after, the expiration of the [r]ental [p]eriod."

The language of the rental agreement clearly demonstrates that any customer who does not return the equipment within the 28-day period of the contract is charged the daily rate in effect for any days after the 28-day period ends. If a customer holds equipment longer than the 28-day rental period, no new rental agreement is executed. Rather, an invoice is issued for the extra days that the customer holds the equipment.

In the instant case, the Taxpayer's actions with respect to its customers follow the rental agreement. A customer who holds onto the equipment longer than 28 days is billed again at the end of the 28-day period for the additional time that it holds the equipment. Based on the evidence provided, a customer holding equipment after the initial 28-day period receives an extension of the original rental agreement. A new rental agreement is not executed.

Audit Sample

The Taxpayer contends that the County did follow standard audit procedures because it randomly picked a sample that it determined were typical assets used in a heavy equipment rental business.

The County states it used a random sample for the 2005 and 2006 calendar years to determine whether the Taxpayer was a short-term rental business in 2006 and 2007. The County found that the Taxpayer was a short-term rental business for 2006, but not for 2007. The Taxpayer then provided that County with a listing of all transactions for the 2006 and 2007 calendar years. The County analyzed all transactions in its examination of the Taxpayer, not merely a sample. Therefore, I find no error in the County's audit procedures.

Double Taxation of Equipment

The Taxpayer also contends the Business Tangible Personal Property (BTPP) tax is assessed based on the location of the property on January 1st. It claims that it has been paying BTPP tax on equipment located in other jurisdictions. Thus, the Taxpayer asserts that it has been required to collect DRP tax for property on which it has already paid BTPP tax.

The County argues that the taxability of BTPP depends on the classification of the business. Further, the Taxpayer has provided no evidence that it has been reporting equipment to other jurisdictions. The County states it has been prohibited from imposing BTPP tax on property located within the County, but rented from another location. See Star Equipment Corp. v. County of Chesterfield , Virginia, Law No. 1695­-86 (1987).

Generally, the situs for all tangible person property subject to BTPP tax and MC tax is the locality in which such property may be physically located on the tax day or January 1 of each tax year. See Va. Code §§ 58.1-3511 and 58.1-3515. There are exceptions to the general rule, none of which apply to the Taxpayer's property.

In George M. Hogan v. County of Norfolk , 198 Va. 733, 96 S.E.2d 744, (1957), the Virginia Supreme Court found that situs means more than the physical location of the property on tax day. The Court stated the situs of property for BTPP tax is its permanent location, not a casual or incidental location during the course of transit. It is sufficient if it is there and being used in such a way as to be fairly regarded as part of the property of the locality. Property that is located within a locality must be used in such a way that it can be regarded as part of the property of the jurisdiction.

Virginia Code § 58.1-3510 defines "daily rental property" as "all tangible personal property held for rental and owned by a person engaged in the short-term rental business." The Taxpayer rented property from a location within the County. The fact that a renter may take the property into another jurisdiction does not change the use of the property to the owner. It remains rental property. Thus, the situs of such property will be the locality in which it is rented.

DETERMINATION

After careful consideration of the facts and applicable law in this case, it is my determination that the County correctly applied the statute in this case. Accordingly, the Taxpayer was not a short-term rental business for the tax years at issue. Further, the facts do not support the Taxpayer's objections to the audit procedure or the assertion of double taxation.

Finally, regarding the Taxpayer's concern about having to pay BTPP tax on equipment that is located in another locality, because the Taxpayer's rental activities occurred in the County, the situs of the rental equipment is in the County. Thus, if the Taxpayer remitted BTPP tax to another locality on its rental equipment, it did so in error and should pursue refund requests with those localities.

If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3145291013.B

1 House Bill 2472 (Chapter 480, 2009 Acts of Assembly) removed the Daily Rental Property Tax as a component of the MC tax and changed the name to the Short-Term Rental Property Tax. This legislation, as codified as Virginia Code § 58.1-3510.4, expanded the criteria for a taxpayer to be deemed as engaged in a short-term rental business. This legislation became effective for tax years beginning on and after January 1, 2009.