Did Virginia sales tax remain due on the remaining payments under a noncancellable equipment lease after the customer returned the equipment early?

Subject

Early equipment return did not end tax on lease payments

Plain-English summary

Virginia found sales tax still due on the remaining lease payments after the customer returned the equipment early. The four-year lease was noncancellable and required payment despite dissatisfaction with the property.

The customer voluntarily returned the equipment after one year, and the vendor billed the cumulative remaining three years of payments plus tax and fees. Because those amounts remained gross proceeds under the lease, the equipment's later location outside Virginia did not change the result.

What this means for you

• Read the termination and payment provisions before assuming an early return ends sales tax.
• A noncancellable lease can produce taxable gross proceeds even after possession ends.
• Out-of-state lessors leasing to Virginia customers generally must register and collect tax.
• A negotiated cancellation or different contract could produce a different result.

Citations and references

• 23 VAC 10-210-840 A.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-127

Original ruling text

August 7, 2014

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your correspondence in which you request a ruling on the retail sales and use tax application to an equipment lease when such equipment is no longer located in Virginia. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a Virginia corporation, entered into a lease agreement with an out-of-state vendor (the "Vendor") for the lease of tangible personal property. After numerous billing problems with the Vendor, the Taxpayer returned the tangible personal property to the Vendor after one year into a four year lease. Upon returning the tangible personal property three years short of the completion of the lease, the Vendor billed the Taxpayer for the cumulative total of the remaining lease payments, plus applicable sales taxes and fees. The Taxpayer has paid the Vendor all cumulative lease payments, including sales taxes and fees.

The Taxpayer is seeking clarification as to whether it is required to pay the sales taxes associated with the remaining lease payments in light of the fact it no longer has possession of the property, and the property is no longer located in Virginia.

RULING

Title 23 of the Virginia Administrative Code 10-210-840 A addresses the retail sales and use tax application to leases and rentals and provides that, "any person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay the tax on the gross proceeds."

This regulation goes further on to state that a lessor of tangible personal property whose place of business is outside Virginia and who leases to Virginia customers is required to register as a dealer in Virginia and collect and pay the tax on the gross proceeds.

The lease agreement furnished by the Taxpayer provides under Section 2, (Effective Date, Terms and Interim Rent), subsection (b) that it is a non-cancellable lease for the term indicated in the lease. Furthermore, under Section 4, (Payment of Amounts Due) subsection (c), lease payments will be due despite dissatisfaction with the equipment for any reason.

Based on the regulatory requirements set forth above regarding the responsibilities of an out-of-state lessor with Virginia customers, and the specific terms of the lease set out in Section 2(b) and Section 4(c), I find that the Vendor correctly collected the Virginia sales tax on the Taxpayer's unfulfilled portion of the lease agreement. The Vendor is bound by Virginia law to collect the sales tax on the gross proceeds of the lease, regardless of the fact the Taxpayer voluntarily returned the equipment to the Vendor before the terms of the lease were complete.

I trust that the foregoing responds to your inquiry. The regulation section cited in this letter is available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's website. If you have any questions concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5412362690.T