When a customer's leased equipment is totaled and they pay us a settlement under the lease's total-loss clause, does Virginia sales tax apply to that payment?

Plain-English summary

An equipment leasing company leases out various assets, including vehicles and railcars, under agreements that typically end with the customer either returning the equipment or buying it at fair market value. The lease agreements also include a total-loss clause, spelling out what happens if the leased equipment is destroyed due to the customer's own error or misconduct. The company asked the Department whether Virginia sales tax applies to the proceeds it collects from a customer under that total-loss clause.

The answer turns on how broadly Virginia defines the taxable "gross proceeds" of a lease. The sales tax applies to gross proceeds from leasing tangible personal property, and the statute defining gross proceeds/sales price is intentionally expansive: it includes any amount credited to a customer "without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." Because a total-loss payment under the lease agreement is, by its contractual terms, still part of the amount charged under the lease, the Department ruled the entire total-loss payment is taxable -- there's no carve-out for a payment tied to a loss event rather than ordinary lease payments.

There's one significant exception, though: motor vehicles, trailers, semitrailers, mobile homes, and travel trailers are expressly excluded from Virginia's regular retail sales and use tax. Instead, those categories fall under a separate motor vehicle sales and use tax administered by the Department of Motor Vehicles (DMV), not the Department of Taxation. So for any leased vehicles specifically (as opposed to, say, railcars), the company needed to check with the DMV directly about how that separate tax treats a total-loss settlement.

What this means for you

Equipment leasing companies with total-loss or casualty clauses in their lease agreements

Don't assume a total-loss settlement is treated differently from ordinary lease payments just because it compensates for a loss rather than ongoing use. Virginia's gross-proceeds definition is broad enough to sweep in a total-loss payment as fully taxable, unless a specific exemption (like the motor vehicle carve-out) applies.

Anyone leasing motor vehicles, trailers, or mobile homes specifically

Remember that these categories sit outside Virginia's regular retail sales and use tax entirely -- they're governed by a separate motor vehicle sales and use tax administered by the DMV. If you're unsure how a transaction involving these assets is taxed, the DMV (not the Department of Taxation) is the right place to ask.

Businesses drafting or reviewing equipment lease agreements with casualty/total-loss provisions

Build the sales tax cost of a potential total-loss payment into your lease pricing and customer communications up front, since the full settlement amount -- not just the resulting profit or loss on the asset -- is what's taxable.

Common questions

Q: Is a total-loss settlement payment under an equipment lease taxed the same as regular lease payments in Virginia?
A: Yes, based on this ruling -- Virginia's gross proceeds/sales price definition includes amounts credited to a customer with no deduction for losses or other expenses, so a total-loss payment is fully taxable just like ordinary rental charges.

Q: Does this apply to leased motor vehicles too?
A: No -- motor vehicles, trailers, semitrailers, mobile homes, and travel trailers are excluded from the regular retail sales and use tax and instead fall under a separate motor vehicle sales and use tax administered by the Virginia DMV, which should be consulted directly for those assets.

Q: What kind of document is this ruling, and can I rely on it for my own leasing business?
A: This is a Ruling of the Tax Commissioner issued in response to one company's request, based on the specific facts it presented. It's a useful guide to the Department's reasoning, but it officially binds only that company on those facts -- confirm your own situation with the Department or a tax professional if the facts differ.

Citations and references

• Va. Code § 58.1-603 (2) (sales tax on gross proceeds from the lease or rental of tangible personal property)
• Va. Code § 58.1-602 (defines gross proceeds/sales price, including amounts with no deduction for cost, loss, or expense)
• Va. Code § 58.1-609.1 (2) (retail sales and use tax does not apply to motor vehicles, trailers, semitrailers, mobile homes, and travel trailers)

Subject

Sales Price : Leases - Proceeds from total loss rented property; Motor Vehicle Sales & Use Tax - Administered by Department of Motor Vehicles

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-5

Original ruling text

January 11, 2022

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) requesting a ruling regarding the application of the Virginia retail sales and use tax to the total loss transaction outlined in the equipment lease agreement provided to the Department. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an equipment leasing company in the business of leasing various assets including vehicles and railcars. The Taxpayer enters into lease agreements with customers for a set amount of time at the end of which the customer either returns the assets or purchases the assets at fair market value. In the lease agreement, the Taxpayer includes a section regarding total loss of equipment and the necessary steps a customer must take should the asset leased be considered a total loss due to operator error or misconduct. The Taxpayer questions whether the tax applies to proceeds received from the customer with regard to this transaction.

RULING

Virginia Code § 58.1-603 2 imposes the sales tax on “the gross proceeds derived from the lease or rental of tangible personal property, where the lease or rental of such property is an established business, or part of an established business, or the same is incidental or germane to such business.” Virginia Code § 58.1-602 defines gross proceeds as “the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section over the term of the lease, rental, service, or use, but not less frequently than monthly.” The same section explains that sales price includes “any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever .” [Emphasis added.]

Pursuant to these authorities, the transaction that occurs as a result of total loss as defined in the contractual language of the Taxpayer’s lease agreement would be taxable in its entirety.

With regard to the sale and lease of motor vehicles, pursuant to Virginia Code § 58.1-609.1 2 the retail sales and use tax “shall not apply to “motor vehicles, trailers, semitrailers, mobile homes and travel trailers.” The Virginia motor vehicle sales and use tax, however, may apply and is administered by the Virginia Department of Motor Vehicles (DMV). The Taxpayer should contact the DMV for guidance regarding the application of the motor vehicle sales and use tax to the total loss transaction.

I hope this responds 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.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1877L