Did Virginia's railroad-rolling-stock exemption apply when a bank bought rail cars from the manufacturer and leased them to the user?

Subject

Bank-lessor rail-car lease did not qualify for manufacturer exemption

Plain-English summary

Virginia denied the railroad-rolling-stock exemption after a financial institution replaced the manufacturer as lessor. The waste-removal company used the rail cars to carry Maryland waste to a Virginia landfill. It had formerly leased the cars directly from the manufacturer, but the manufacturer then sold them to a financial institution that leased them to the company.

The new agreement involved the same rail cars and was substantially equivalent in substance. That did not satisfy the statute. Section 58.1-609.3(16) required the rolling stock to be sold or leased by the manufacturer, and the Department said it had no authority to treat the bank as a mere intermediary.

Virginia also applied the rule that tax exemptions are strictly construed, with doubts resolved against the exemption claimant.

What this means for you

• Equipment identity and equivalent economics did not substitute for the statute's required lessor identity.
• Financing a purchase through a bank can change sales-tax treatment when an exemption is limited to manufacturer sales or leases.
• Review title and lease counterparties before restructuring an exempt equipment arrangement.

Common questions

Q: Did the cars stop being railroad rolling stock?
A: No. The problem was that the financial institution, rather than the manufacturer, leased them.

Q: Did keeping substantially the same lease terms preserve exemption?
A: No. The statutory manufacturer requirement controlled.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.3(16).
• Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-38

Original ruling text

March 19, 2014

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek a ruling on behalf of your client (the "Taxpayer") regarding a lease transaction. I apologize for the delay in responding to your request.

FACTS

The Taxpayer provides waste removal services to customers in Maryland. The waste is collected in Maryland and transported to a landfill in Virginia. The Taxpayer uses locomotive railroad cars (the "rail cars") in the collection, removal and transport of waste products. In the past, the Taxpayer leased the rail cars directly from the manufacturer. The leasing arrangement has changed such that the manufacturer no longer leases the rail cars. The rail cars are sold by the manufacturer to a financial institution. The financial institution then leases the rail cars to the Taxpayer.

The Taxpayer provides copies of the lease agreements for both leasing arrangements. The Taxpayer seeks a ruling that the exemption provided in Va. Code § 58.1-609.3 16 applies to the lease of the rail cars by the financial institution to the Taxpayer.

RULING

Virginia Code § 58.1-609.3 16 provides an exemption from the Virginia retail sales and use tax for "[r]ailroad rolling stock when sold or leased by the manufacturer thereof." "Railroad rolling stock" as defined in Va. Code § 58.1-602 means locomotives, of whatever motive power, autocars, railroad cars of every kind and description, and all other equipment determined by the Tax Commissioner to constitute railroad rolling stock.

The Taxpayer acknowledges that the structure of the leasing transaction has changed such that the Taxpayer no longer enters into a lease agreement directly with the manufacturer of the rail cars. However, the Taxpayer believes that the exemption is applicable to the new lease arrangement for two reasons. First, the Taxpayer maintains that the rail cars previously leased from the manufacturer are the same cars leased under the new agreement. Second, the Taxpayer asserts that the terms of the lease between itself and the financial institution are substantially equivalent to the terms that existed between itself and the manufacturer. As such, the Taxpayer contends that the financial institution is simply an intermediary in the lease transaction, and the exemption should continue to apply to the new lease agreement.

A review of the leases provided does support that the terms of the leases are essentially the same in substance and that the purpose of the leases is to provide rail cars. However, the exemption statute is quite clear in its requirement that the seller or lessor must be the manufacturer of the rail cars. While I understand the position of the Taxpayer, I have no basis or authority to grant the Taxpayer's request and rule that the exemption applies to the lease agreement when the financial institution acts as the lessor of the rail cars.

The Department's policy with respect to exemptions from the retail sales and use tax is dictated by the rule of strict construction established by the Virginia courts. The Virginia Supreme Court has consistently held that "exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." See Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1973).

I trust I have responded to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

If you have any questions regarding this ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5226342735.J