Were a bowling alley's monthly payments to an affiliate taxable equipment lease payments or nontaxable loan reimbursements?

Plain-English summary

The monthly payments were taxable rent for bowling equipment, not loan reimbursements. An affiliate bought and owned the equipment, made the financing payments, and charged the bowling alley the same monthly amount for using it. The bowling alley did not hold title.

Virginia defined a lease or rental as giving possession or use of tangible personal property for consideration without transferring title. That definition fit the arrangement even though the related companies shared ownership, the affiliate earned no profit on the payments, and there was no written lease.

An earlier ruling about loan payments did not control because that taxpayer had a bill of sale and owned the equipment. Here, the affiliate retained title. Changing the bookkeeping label from “lease” to “loan” also did not alter the substance of the transaction.

The Commissioner upheld the assessment.

Common questions

Q: Does common ownership make an intercompany equipment lease exempt?
A: No. The ruling said common ownership was not a factor.

Q: Does the payment need to include profit to be taxable rent?
A: No. Payment for use while another entity retains title is consideration for a lease.

Q: Can a company avoid tax by changing the ledger description?
A: No. Tax treatment follows ownership and use, not the bookkeeping label.

Citations and references

• Va. Code § 58.1-602.
• Virginia Public Documents 02-48 (April 12, 2002) and 93-169 (July 29, 1993).

Subject

Assessed transactions lease payments/loan reimbursements; Bowling equipment

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-159

Original ruling text

October 12, 2012

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

Dear *:

This reply is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 1, 2009 through December 31, 2011.

FACTS

The Taxpayer operates a bowling alley. As a result of the Department's audit, the Taxpayer was assessed use tax on leased equipment. The Taxpayer argues the assessed transactions are not lease payments but loan reimbursements and cites Public Document (P.D.) 02-48 (4/12/02) to support its position.

DETERMINATION

Virginia Code § 58.1-602 defines " sale" as "[a]ny 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…for a consideration….” The statute also defines "lease or rental" as "[t]he 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 Taxpayer shares 100% ownership with its affiliate, (Company A). Company A purchased equipment for which it secured a loan, and the Taxpayer uses the equipment at its facility. Company A makes monthly loan payments for the equipment and charges the Taxpayer a monthly payment for the same amount. Although the Taxpayer has no written agreement with Company A, during the audit period the Taxpayer referred to the payments made to Company A as "lease payments" in its records. The Taxpayer argues the payments are merely loan reimbursements between related companies and that the lack of profit in the payments supports its contention.

The Taxpayer cites P.D. 02-48 (4/12/02) to support its position. In that document, the taxpayer protested the assessment of tax on amounts classified as lease payments. Although the taxpayer described the transactions as "rental/lease" in its books, it argued they were merely loan payments for financing it obtained from its affiliate. The taxpayer presented a bill of sale that indicated the equipment was sold to the taxpayer. Based on the taxpayer's ownership of the equipment and in accordance with the definition of lease in Va. Code § 58.1-602, the Tax Commissioner ruled that the payments made by the taxpayer to its affiliate represented loan payments and not the lease of tangible personal property.

Although the Taxpayer cites the foregoing public document to support its protest, the public document is not on point. In that case, the taxpayer owned the equipment and retained title to such equipment. In the Taxpayer's situation, the equipment is not owned by the Taxpayer, but is owned by its affiliate, Company A.

P.D. 93-169 (7/29/93) provides further instruction. In that document, the taxpayer was assessed use tax on the lease of medical equipment from an affiliate. Although an agreement between the taxpayer and its affiliate indicated the Taxpayer was leasing tangible personal property for consideration, the taxpayer argued the charges were merely loan repayments. The Tax Commissioner concluded that virtually any transaction involving consideration, including transactions between businesses that share common ownership, is subject to the sales and use tax.

The Taxpayer's argument that no profit is included in the monthly payment is not persuasive. The Taxpayer's payments to Company A for the use of equipment owned by Company A for a consideration, without the transfer of the title of such equipment, constitutes a taxable lease. The exclusion of profit from the payments does not negate this fact, nor does it change the application of the tax.

Finally, the Taxpayer argues that common ownership may render the transaction exempt. Based on the above discussion, the transactions between the Taxpayer and Company A are taxable leases of equipment and common ownership is not a factor.

In accordance with the foregoing authorities, I find that the amounts were correctly assessed in the audit as lease or rental payments. Accordingly, there is no basis for adjustment to the assessment.

The Taxpayer has also stated that it has changed the name of the transaction in its records from "lease" to "loan" payment. It is not the characterization of the transaction in its records that determines the application of the tax. If title to the equipment is retained by Company A and the Taxpayer remits payment for its use, the transaction constitutes a lease or rental and the tax is applicable.

In accordance with the determination, the Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days from the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203. If payment is not received within 30 days of the bill date, collection action will resume and additional interest will accrue.

The Code of Virginia section and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns­

Tax Commissioner

AR/1-5034315387.M