Did placing digital projectors in theaters without charging for their possession create a taxable lease?

Subject

Leases, Tangible Personal Property, Displaying Video Content, Agreements

Plain-English summary

Virginia abated a sales-tax assessment that treated digital projectors placed in movie theaters as taxable leases.

A lease requires consideration for possession or use of the property. The theaters paid only installation and setup charges, with no monthly or scheduled payment for the projectors themselves, so the agreements did not create taxable leases.

The provider nevertheless used the projectors when it placed them in Virginia theaters. Similar future purchases would be subject to use tax on cost if the vendor did not collect Virginia sales tax; the projectors in this audit had been purchased outside the audit period.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-6030(A).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-174

Original ruling text

September 21, 2017

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period October 2007 through June 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is in the business of displaying audio and video content (movies) at movie theaters, using digital projectors (the “projectors”). The Taxpayer enters into an agreement with movie theaters and provides the projectors. Upon audit, the auditor concluded that the agreement between the Taxpayer and the movie theaters constitutes a lease of projection equipment subject to the sales tax. Accordingly, the auditor assessed sales tax on the projectors, finding that the Taxpayer leased the projectors to the movie theaters during the audit period. Using the average balance of projectors located in Virginia during the audit period, the auditor determined an average cost per month, based on the useful life of the projectors. The average cost per month was used as the taxable base by the auditor to compute the tax.

The Taxpayer contends it did not lease the projectors to the movie theaters during the audit period, and the agreement at issue is not for the lease of projection equipment. The Taxpayer states that it acted as a liaison between the movie studios and the movie theaters during the audit period to assist in transitioning from film-based projectors to digital projectors. Under the terms of the agreement between the Taxpayer and the movie theaters, the Taxpayer purchased the projectors and placed them in the movie theaters. The Taxpayer charged the movie theaters fees for installing and setting up the projectors, but did not charge the movie theaters a fee for the possession or use of the projectors. The Taxpayer also received payment from the movie studios for each different movie shown on the projectors. Based on this arrangement, the Taxpayer contends the assessment at issue is erroneous.

DETERMINATION

Lease

Virginia Code § 58.1-602 defines sale, in pertinent part, as “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ....” [Emphasis added.]

Virginia Code § 58.1-602 defines lease or rental as “the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property.”

The agreements between the Taxpayer and the movie theaters do not constitute a lease as defined in Va. Code § 58.1-602. A lease exists between two parties when there is a transfer of tangible personal property for a consideration. In this instance, the agreements do not provide for monthly payments by the movie theaters to the Taxpayer, or for any other scheduled payments that relate to the projectors. In fact, the only charges to the movie theaters related to the projectors are for installation and setup of the projectors. As such, a taxable lease event does not exist between the Taxpayer and the movie theaters because there is no consideration exchanged between the two parties related to the projectors or any other tangible personal property. Accordingly, the assessment at issue will be abated in full.

Future Purchases

Virginia Code § 58.1-602 defines use, in pertinent part as, “the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business.” Title 23 of the Virginia Administrative Code 10-210-6030 A states that “The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased.”

Based upon the agreement provided by the Taxpayer, the Taxpayer purchases and makes a taxable use of the projectors at issue, as defined in Va. Code § 58.1-602, when it places such projectors in Virginia movie theaters. Accordingly, on future purchases of similar projectors the Taxpayer would be required to accrue and remit the use tax on the cost of the projectors, provided the Virginia sales tax is not paid to the vendor at the time the purchases are made. It is my understanding that the projectors at issue in the audit were purchased outside of the audit period. Had the projectors been purchased within the audit period, the Taxpayer would have been liable for the use tax on the projectors. In future audits, if the Virginia sales tax is not paid at the time the projectors are purchased and the use tax is not accrued and remitted to the Department, the Taxpayer will be held liable in the audit for the use tax.

CONCLUSION

Based upon this determination, the assessment at issue will be abated in full. The Code of Virginia sections and regulation 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 determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/661.P