Could a hotel lower the use-tax value of used furniture acquired with the property below the cost basis used on its books and tax returns?

Subject

Hotel could not use a lower value for used furniture than its recorded cost basis

Plain-English summary

Virginia upheld use tax using the hotel's own $2,062,500 cost basis for used furniture, fixtures, and equipment acquired with the hotel. The purchase agreement did not allocate a separate furniture price, but the hotel placed that amount on its depreciation schedule and federal partnership return and used it to obtain income-tax depreciation benefits.

The hotel proposed a lower replacement-cost estimate because the items were old and in poor condition. Virginia rejected that approach: use tax applied to the actual cost when title or possession passed, and the taxpayer could not use one cost for income-tax reporting and another for sales and use tax without correcting the underlying returns.

The Department allowed a possible reconsideration path if the hotel amended all affected federal and Virginia returns, proved IRS acceptance, and submitted the evidence within the stated timing rules. It also rejected the double-tax argument because the 2005 used furniture and 2007 replacement furniture were separate purchases, both used by the hotel rather than bought for resale.

What this means for you

• Allocate tangible personal property expressly when buying a business or real estate with furnishings.
• Keep purchase, appraisal, depreciation, partnership-return, and fixed-asset values consistent and supportable.
• A lower tax value may require corresponding corrections to income-tax basis and depreciation.
• Replacing previously taxed equipment creates a new purchase; tax on both transactions is not necessarily double taxation.

Common questions

Why did $2,062,500 control?

The hotel had used it as the unadjusted cost or basis in its records and federal return.

Did the locality's real-property assessment prove a lower furniture value?

No. Virginia said the tangible property's actual cost price controlled.

Was the occasional-sale exemption decided?

No. The hotel did not claim the transaction fell within it, so the ruling did not consider it.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-604, and 58.1-609.10(2).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-82

Original ruling text

May 28, 2009

Re: § 58.1-1821 Appeal: Sales and Use Tax

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period September 2005 through December 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a hotel. An audit showed that the Taxpayer was deficient on the remittance of sales tax collected on retail sales and use tax owed on purchases of tangible personal property.

The only issue involves the purchase of used furniture in connection with the purchase of a hotel. The Department's auditor assessed use tax based on the value of the furniture, fixtures and equipment ("FFE") as shown in the hotel records as the actual cost. The Taxpayer asks the Department to accept a lower estimated value for the FFE. The Taxpayer asserts that the FFE was old and in poor condition and no detailed listing of the purchased assets was made because the hotel property was intended to be renovated. Thus, the Taxpayer contends the original value assigned the FFE was inflated. The Taxpayer also asserts the FFE has a low implied value because the locality-assessed value of the hotel's real property exceeds the purchase price of the hotel's real and personal property. For these reasons, the Taxpayer requests a lower value for the FFE using a replacement cost valuation method that takes into account inflation to derive an estimated historical cost.

If the assessment is upheld, the Taxpayer believes it will be paying the sales tax twice, once on the inflated value of the old FFE and again on its replacement value.

It is my understanding that the auditor discussed the occasional sale exemption under Va. Code § 58.1-609.10 2 with the Taxpayer, but the Taxpayer does not believe the transaction at issue falls within the scope of the exemption. Therefore, the occasional sale exemption will not be considered as part of this determination.

DETERMINATION

The retail sales tax is imposed upon the sales price of each item of tangible personal property sold at retail in Virginia. If the sales tax is not paid, then the use tax is imposed upon the cost price of the tangible personal property used or consumed in Virginia. See Va. Code §§ 58.1-603 and -604. Pursuant to Va. Code § 58.1-602, the term "cost price" means "the actual cost of an item of tangible personal property computed in the same manner as the sales price as defined in this section without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation costs, or any expenses whatsoever."

The purchase of tangible personal property occurs when title or possession to the property passes to the purchaser for a consideration. Thus, when title to the used FFE passed to the Taxpayer in 2005, the tax applied to the actual cost price paid for the FFE at that time. The purchase and sale agreement of the hotel (including furnishings) provides no breakdown of the cost associated with the used FFE. Notwithstanding, the Taxpayer determined the cost price of the used FFE was $2,062,500 and listed that amount in its 2006 depreciation schedule as the unadjusted cost or basis of the property. The same FFE amount was used for income tax depreciation purposes in the Taxpayer's federal partnership return filed for fiscal year 2005 (and presumably for subsequent filings). The depreciation taken for federal income tax purposes directly impacts the income amounts reported on the Virginia pass-through entity returns filed by the Taxpayer.

The Taxpayer has not shown how it arrived at the FFE amount stated in its 2006 depreciation schedule; however, the Taxpayer has used that amount as the actual cost price of the property for income tax and financial reporting purposes. Furthermore, the Taxpayer's partners and owners realized tax benefits by claiming the stated amount. Moreover, it is irrelevant that the locality has assessed a higher value for the real property than what was actually paid for the real property with furnishings. The actual cost price of the tangible personal property controls for retail sales and use tax purposes. Thus, under these circumstances, I find no basis to revise the FFE amount used in the audit.

Furthermore, if the stated amount is inflated as claimed for sales tax purposes, then it is also inflated for income tax purposes. In this regard, the Taxpayer cannot arbitrarily use one FFE amount as the cost price for income tax purposes and use a different FFE amount as the cost price for sales and use tax purposes when the same FFE items are involved. If the FFE amount used for income tax purposes is wrong, no adjustment can be made to the sales and use tax audit unless the Taxpayer amends all of its affected federal and Virginia returns to state the corrected FFE amount. If the Taxpayer were to amend its federal and Virginia income tax returns for 2005 and subsequent filings, it must provide proof of such amendments and dated proof of acceptance by the Internal Revenue Service (IRS) of the amended federal returns. For reconsideration of this FFE issue, such proof must be submitted to the Department as a request for reconsideration within 45 days of receipt from the IRS, as well as within three years of the original date of assessment in this case.

Of final importance, I find no basis in your claim of double taxation. In this case, the purchase of used FFE in 2005 is totally separate and distinct from the purchase of new FFE in 2007. Accordingly, both transactions are taxable based on the sales price paid for the FFE. Furthermore, the used FFE was not purchased for resale purposes. Rather, it was purchased for use by the Taxpayer in its operations until replacement FFE could be acquired. Because the used and new FFE transactions are separate and distinct, the retail sales and use tax is imposed on both transactions. There is no double taxation of the same property.

CONCLUSION

Based on this determination, the assessment is correct. An updated 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 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/1-2416189812.R