Were detention charges paid by truckers for keeping intermodal shipping containers beyond free time taxable rentals?

Subject

Intermodal container detention charges were not taxable rental receipts

Plain-English summary

Virginia removed sales tax from charges billed when truckers kept intermodal shipping containers beyond the allowed free time because the arrangement was not a lease or rental. The containers moved cargo among ships, rail cars, and trucks without unloading at each change of transportation mode.

The Uniform Intermodal Interchange and Facilities Access Agreement governed equipment interchange, liability, and carrier relationships. It did not identify or rent specific containers and was not drafted as a lease. Although truckers possessed and used the equipment without taking title, Virginia said the statutory lease definition also required actual leasing or renting for consideration.

The Department drew on its longstanding treatment of railway demurrage as part of transportation cost. It concluded the container charges did not constitute taxable rental gross receipts and removed them from the audit. Other assessed items remained, so the taxpayer would receive a revised bill rather than complete abatement.

What this means for you

• Possession and use of property without title do not alone establish a taxable rental.
• The purpose and structure of the governing agreement matter.
• Transportation free-time charges can differ from ordinary equipment-rental payments.
• Relief on one audit category does not remove unrelated assessed purchases.

Common questions

What caused the charges?

Truckers kept containers beyond the free time allowed for delivery or return.

Why were the charges not rent?

The interchange agreement managed transportation equipment and liability rather than leasing specific containers.

Was the entire audit abated?

No. Virginia removed these charges and directed a revised bill for the remaining balance.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-387.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-11

Original ruling text

February 4, 2010

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessments issued to * (the "Taxpayer") for the period January 2004 through December 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a shipping business. An audit by the Department resulted in the assessment of sales tax on per diem or detention charges. In addition, consumer use tax was assessed on various items of tangible personal property. At issue is the detention charges billed to truckers for keeping the Taxpayer's shipping containers longer than the allotted free time. The auditor taxed these charges on the basis that the independent truckers used the containers in providing transportation services and paid a consideration to the Taxpayer for such use without transfer of title of the containers.

The Taxpayer indicates that the containers are used to provide intermodal transportation services to its customers. The Taxpayer uses third-party trucking companies to transport its customers' cargo from marine terminals to customers' designated inland delivery points.

These containers are intermodal cargo containers used on ships, rail cars and trucks to haul cargo without removal of the cargo at each change of transportation mode. According to the Taxpayer, there exists a series of uniform tariffs and rules governing the interchange of cargo across modes and between different carriers. In this regard, the Taxpayer furnishes a Uniform Intermodal Interchange and Facilities Access Agreement ("UIIA"), which is a standard contract between intermodal truckers ("motor carriers") and water and rail carriers ("equipment providers"). The UIIA covers liability and other issues related to the interchange of intermodal equipment ( i.e. , containers, chassis, etc.) between two parties. The UIIA eliminates the need to sign individual interchange contracts with each equipment provider, such as the Taxpayer, that participates in the agreement. The Taxpayer also furnishes an addendum to the UIIA, which sets out the Taxpayer's tariffs and rules for its intermodal equipment.

Free time is allowed for one mode of transportation to accept the interchanged container and deliver it either to its destination or to another mode of transportation. Delays associated with picking up containers once they are removed from the water vessel and available for transport by motor carriers are referred to as "demurrage." Delays associated with returning containers once the cargo is unloaded from within are referred to as "detention" charges.

The Taxpayer contends that there is no lease of tangible personal property for a consideration, that it is not engaged in a leasing business, and that the statutory definition of "gross receipts" earned by a leasing business by reason of its leases is irrelevant. The Taxpayer requests a determination that the charges at issue do not constitute gross receipts from a leasing business subject to the sales tax.

DETERMINATION

The Taxpayer cites Title 23 of the Virginia Administrative Code (VAC) 10-210-387, which addresses railway demurrage charges, as follows:

Charges to shippers or consignees for their failure to release a railway car within a specified period after placement, known as demurrage charges, are not subject to the sales and use tax. Such charges are not taxable as they are part of the total nontaxable charge for transporting property. This regulation addresses only those demurrage charges for the retention of railway cars and has no application to taxable demurrage charges for gas cylinders and other tangible personal property.

Based on a review of the development materials for the above cited railway regulation, the drafters of the regulation intended to treat railway demurrage charges as part of the cost of transportation. In coming to that decision, the drafters recognized that the statutory term "lease or rental" contained two elements that must be read together. For instance, Va. Code § 58.1-602 defines the term "lease or rental" as "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." [Emphasis added.] While the demurrage charges at issue satisfy the second element of the definition ( i.e. , possession and use without transfer of title), they do not satisfy the first element of the definition ( i.e. , the leasing or renting tangible personal property) because there is no evidence that the Taxpayer is leasing or renting shipping containers to anyone. For instance, while the UIIA may have some characteristics of a lease or rental agreement, its purpose is not for the lease or rental of any specific tangible personal property. In addition, the UIIA is not structured or prepared as a lease or rental agreement. Accordingly, I must conclude that the UIIA is not a lease or rental transaction regarding shipping containers. Although the language of the above railway demurrage regulation does not apply to other tangible personal property, its interpretation of the term "lease or rental" is long-standing. Based on this and the aforementioned definition of lease or rental, I find that the demurrage charges at issue do not constitute taxable gross receipts. Accordingly, the demurrage charges will be removed from the audit.

CONCLUSION

The audit will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulations and public documents 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 Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2574291999.R