How did Virginia tax an out-of-state company's equipment leases, maintenance contracts, delivery, Internet access, and third-party billing?

Subject

Equipment leases, maintenance, Internet, and billing-agent tax

Plain-English summary

The out-of-state equipment lessor had to register as a Virginia dealer and collect and remit sales tax on its Virginia leases. Its Virginia billing agent could not remit the lessor's tax under the agent's own registration number.

Virginia treated a flat maintenance agreement covering both parts and labor as one-half taxable. The lessor could use resale certificates to acquire qualifying equipment, maintenance contracts, and repair parts connected with property held for lease.

Separately stated installation and transportation charges were exempt. For this arrangement, Virginia also allowed installation and transportation to be combined as one identified invoice charge. Standalone Internet access purchased from an ISP was exempt from retail and communications tax, but when its cost was bundled into the monthly equipment lease, the lease charge was taxable.

What this means for you

• An out-of-state lessor with equipment leased to Virginia customers must register and report its own tax.
• A third-party billing company cannot substitute its registration for the dealer's without authorization, and none was granted here.
• Parts-and-labor maintenance contracts were treated as 50% taxable under the rule applied.
• Invoice presentation matters for installation and transportation exemptions.
• Bundling exempt Internet access into a taxable lease did not carve that cost out of the lease price.

Citations and references

• Va. Code §§ 58.1-623, 58.1-609.5 1 and 2, and 58.1-648.
• 23 VAC 10-210-840, 10-210-910 B 3, and 10-210-340.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-179

Original ruling text

October 24, 2014

Re: Request for Ruling
Retail Sales and Use Tax

Dear *:

This will reply to your letter submitted on an anonymous basis for a company (hereinafter "Company A"), requesting information regarding the application of the Virginia retail sales and use tax to the lease and maintenance of tangible personal property to Virginia customers. You also inquire about the proper sales tax reporting requirements when Company A contracts with a Virginia billing and collection company. I apologize for the delay in responding to your request.

FACTS

Company A is an out-of-state company that leases equipment to Virginia customers. Company A is not registered with the state of Virginia for the collection of the Virginia sales or use tax. Company A leases equipment to Virginia customers under two different scenarios. In the first scenario, Company A purchases, delivers, installs and maintains the equipment for Virginia customers. In the second scenario, Company A purchases the equipment from a third party ("Company B"), and pays Company B a flat fee to deliver and install the equipment at Company A's customer's site in Virginia. Company A also purchases flat fee maintenance agreements from Company B that include parts and/or labor to service the equipment at Company A's customers site in Virginia. Additionally, Company A may be charged by Company B for any parts and labor that fall outside the flat fee maintenance agreement.

Company A has also entered into a contractual agreement with Company C for billing and collection from Company A's Virginia customers. Company C is registered for the collection of Virginia sales tax. Company C collects the monthly lease payments from Company A's Virginia customer, along with the appropriate sales tax on the lease payments. Company C submits to Company A the lease payments it has collected on Company A's behalf, but remits the sales tax collected on the leases directly to Virginia under Company C's registration number. Neither Company A nor Company C has received approval for this collection and remittance process from the Department of Taxation. Company A pays Company C a fee for their collection services.

You request a ruling, on behalf of Company A, regarding the proper Virginia sales and use tax application to the transactions between Company A and Company B, and also between Company A and Company C.

RULING

Taxability of Leases

Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are subject to the retail sales and use tax until the contrary is established. Title 23 of the Virginia Administrative Code (VAC) 10-210-840 addresses leases and rentals and provides, in part, that "a lessor of tangible personal property whose place of business is outside this state and who leases or rents tangible personal property to Virginia customers is required to register as a dealer and to collect and pay the tax on the gross proceeds." As an out-of-state company leasing tangible personal property to Virginia customers, Company A is required to register as a Virginia dealer and collect and remit the tax on all taxable leases to Virginia customers. Online registration can be performed via the Department's website at www.tax.virginia.gov .

In regard to the specific issues set forth in your letter, I will address them in the same order as presented.

Issue 1

Can Company A issue a resale certificate to its suppliers for the purchase of a third party service contract (labor and parts) and any separately charged labor and parts used exclusively to maintain its inventory of leased equipment?

Based on the information provided in your letter, Company A purchases the equipment from Company B for lease by Company A to its Virginia customer. Under a separate contractual agreement, Company A purchases a service agreement from Company B, which includes parts and labor for Company B to maintain the equipment leased to the Virginia customer. Company A pays Company B a monthly flat fee for the service contract.

Title 23 VAC 10-210-910 addresses the Virginia sale tax application to maintenance contracts and warranty plans. Subsection B.3 addresses maintenance contracts that provide both parts and labor and states the following:

Maintenance contracts that provide for the furnishing of both repair or replacement parts and repair labor are a combination of taxable sales and nontaxable services. As it is impossible to determine in advance the percentages of labor and parts that will be provided under the contract, the contract will be deemed to be a contract for one-half labor and one-half parts, regardless of the percentages of labor and parts actually provided under the contract. Thus, one-half of the total charge for such a contract is subject to the tax. Persons providing maintenance pursuant to such contracts may purchase repair or replacement parts under a resale certificate of exemption, but are liable for the tax on all items purchased for their own personal use and consumption in performing repairs or maintenance.

Based on the above, the maintenance contract between Company A and Company B would be taxed on one-half of the total charge. Company A would be able to use a resale exemption certificate to purchase maintenance contracts or parts and service plans exempt of the tax from third party providers. The equipment in question is owned by Company A for the purpose of leasing it to their customers; therefore, maintenance and repair parts covered under a service agreement are being installed on exempt pieces of equipment for resale/re-lease.

Issue 2

Can Company A issue a resale certificate to Company B for the shipping and installation charges that it pays to Company B for the shipping and installation of equipment that it subsequently leases to its customers, if (i) the shipping and installation are separately stated on each invoice, (ii) the shipping and installation are a lump sum charge on each invoice?

Virginia Code § 58.1-609.5.2 provides a sales and use tax exemption for "an amount separately charged for labor and services rendered in installing... property sold or rented." Subsection 3 of this same exemption section exempts from the sales and use tax "transportation charges separately stated." Generally, installation and transportation charges must be separately stated in order for the exemption to apply. However, in this instance, I will allow for the charges to be lumped together as one charge. Further, the charge should be identified as installation and transportation on the invoice. Company A should issue a resale exemption certificate to Company B for any equipment it purchases from Company B for lease by Company A to Virginia customers.

Issue 3

Is Company A's purchase of Internet connectivity relating to its leased equipment subject to sales and use tax and/or telecommunications tax when it absorbs the cost as part of the lease of the equipment?

Virginia Code § 58.1-609.5.1 provides a retail sales and use tax exemption for "services not involving an exchange of tangible personal property which provides access to or use of the Internet and any other electronic communication service." With regard to the communications sales and use tax, Va. Code § 58.1-648 provides that communications on which the communication sales tax shall not apply includes Internet access services.

In this case, Company A is purchasing Internet access from an Internet Service Provider (ISP). There is no exchange of tangible personal property; therefore the transaction is exempt for both retail sales and use tax and communication sales and use tax purposes. When Company A leases equipment to Virginia customers that contains an Internet connection, the cost of which is bundled into the monthly lease price of the equipment paid by the Virginia customer, the charge is subject to the retail sales and use tax.

Issue 4

Can a third party (Company C in this case) get authorization to remit tax collected by the lessor (Company A in this case) on its lease stream under the agent's (Company C) taxpayer identification number?

Title 23 VAC 10-210-340 addresses the collection of the retail sales tax by dealers and provides that "the tax must be paid to the state by the dealer, but the dealer must separately state the amount of the tax and add the tax to the sales price or charge." (Emphasis added.) Due to the fact that Company A is required to register with the Department of Taxation for the collection and remittance of the sales tax on taxable leases to Virginia customers, I am unable to authorize the remittance of sales tax by a third party, i.e. Company C. As an out-of-state registered dealer, Company A will be required to allocate the 1% local portion of the sales tax collected to the proper locality in which the leased equipment is located. Allowing an in-state third party to collect and remit the sales tax on behalf of an out-of-state dealer may allow for the misallocation of local tax revenues.

I trust that the foregoing responds to of your inquiries. This response is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulations cited in this letter are available on­line at www.tax.virginia.gov in the Laws, Rules, and Decisions section if the Department's website. If you should have any questions concerning this ruling, please contact * Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5627409992.Q