Are purchases and leases of computer equipment between affiliated Virginia companies exempt as internal transfers when the entities charge each other?

Plain-English summary

An automotive dealership bought and leased computer equipment from an affiliated company under the same parent. The affiliate added a markup and billed the dealership without sales tax. The dealership argued that both companies were merely locations of one legal entity using one federal employer identification number (FEIN), making the transactions nontaxable internal transfers.

The Department upheld use tax: its records treated the dealership as a separate entity, the taxpayer did not prove a shared FEIN, and sales or leases for consideration between affiliates are taxable.

Why affiliation did not create an exemption

Va. Code § 58.1-602 defines a sale broadly to include transfers of title or possession, exchanges, leases, and rentals of tangible personal property. Va. Code § 58.1-603 taxes sales, leases, and rentals in Virginia.

The dealership had reported under its own separate FEIN since 1987. Although it claimed the affiliate used the same FEIN, it did not provide the requested supporting documentation. Prior Virginia rulings treat affiliated corporations as separate entities and hold that transactions for consideration — including rentals — are not exempt merely because the companies share ownership.

The affiliate's purchase-tax evidence did not solve it

Invoices shown to the auditor indicated that the affiliate paid tax on purchases for other car dealerships connected with related entities. That evidence did not show tax was paid on the computer equipment sold and leased to this taxpayer.

Here, the affiliate marked up the equipment, transferred it for consideration, and failed to charge sales tax. Va. Code § 58.1-612 required the selling affiliate to collect the tax, but Va. Code § 58.1-625 made the tax the purchaser's legal debt. The dealership therefore owed use tax on the total price of each sale and lease.

What this means for you

• Common ownership does not erase entity boundaries. Separate affiliates generally remain separate sales-tax persons.
• Intercompany consideration creates a taxable transaction. Markups, sale prices, and lease payments fit the broad statutory definitions.
• Document any claim that locations share one legal entity. FEIN and registration records can control how the Department views the parties.
• Seller noncollection does not eliminate buyer liability. The purchaser may owe use tax when an affiliate fails to collect sales tax.
• Match tax-paid proof to the exact property and taxpayer. Invoices for other related dealerships did not establish payment here.

Common questions

Q: Are transfers between subsidiaries automatically exempt?

A: No. Virginia treats affiliated corporations as separate entities, and transfers for consideration can be taxable sales or leases.

Q: What if both locations really use one FEIN?

A: Document it. This taxpayer failed to provide requested proof, while Department records showed its own FEIN and separate registration history.

Q: Who owes tax if the affiliate seller fails to collect it?

A: The seller has a collection duty, but the tax is also the purchaser's legal debt; the buyer can owe use tax on the transaction.

Citations and references

• Va. Code § 58.1-602 — sale and lease/rental definitions
• Va. Code § 58.1-603 — tax on sales, leases, and rentals
• Va. Code § 58.1-612 — dealer collection duty
• Va. Code § 58.1-625 — purchaser's legal debt
• Va. Code § 58.1-205 — assessment presumed correct
• Related Virginia rulings cited: P.D. 16-84, P.D. 10-124, P.D. 94-271

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-82

Original ruling text

August 2, 2019

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

Dear *:

This replies to your letter in which you seek correction of the retail sales and use tax assessments issued to * (the “Taxpayer”) for the period October 2011 through September 2014. I note that the assessments have been paid. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates an automotive dealership and is one of two affiliated entities operating as subsidiaries under a parent company. As a result of the Department's audit, the Taxpayer was held liable for the use tax on computer equipment purchased and leased from its affiliate. The Taxpayer contests the tax assessments and contends that it and its affiliate are two locations operating under the same legal entity with a single Federal Employer Identification Number (FEIN). Based on this organizational structure, the Taxpayer believes that the purchase and lease of the computer equipment are internal intercompany transactions between affiliated entities and are not subject to the sales or use tax. In addition, the Taxpayer claims that its affiliate properly paid the sales tax to its vendor on the purchase of the contested computer equipment.

DETERMINATION

Intercompany Transfers

Virginia Code § 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines the term "sale" to mean "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 . . . ." This same section also provides that the term "lease or rental" "means 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."

According to the Department’s records, the Taxpayer has reported under its own separate FEIN since it registered with the Department in 1987. The Tax Commissioner has previously ruled that affiliated corporations must be treated as separate entities and leases of tangible personal property between them are not exempt intracompany transfers. See Public Documents (P.D.) 16-84 (5/17/16), 10-124 (7/7/10) and 94-271 (8/30/94). These public documents state that virtually any transaction involving a consideration, including rentals between two affiliated companies, is subject to the sales and use tax.

It is my understanding that invoices provided to the auditor indicated tax paid by the affiliate regarding purchases made for other car dealerships associated with related entities in the organizational structure. Therefore, this documentation has no bearing on the tax assessments at issue. The auditor requested from the Taxpayer, but was not provided, documentation that would support the position that the Taxpayer and its affiliate operate using the same FEIN. Based on the cited statutes and public documents, the Taxpayer is considered a separate entity for sales and use tax purposes, and is subject to the sales and use tax on transactions involving a consideration between the Taxpayer and its affiliate.

Purchases and Leases

In this instance, the affiliate sold and leased computer equipment to the Taxpayer. The affiliate applied a markup to the computer equipment and billed the Taxpayer for the total price and did not charge the sales tax.

Based on the cited authorities, the transactions involving the purchase and lease of the computer equipment for a consideration between the Taxpayer and its affiliate constitute a “sale” and are subject to the tax assessed in the audit. While Virginia Code § 58.1-612 legally requires dealers to collect and remit the sales tax on all sales or leases of tangible personal property, Virginia Code § 58.1-625 makes the tax the legal debt of the purchaser. Because the affiliate failed to collect and remit the sales tax from the Taxpayer on the sale and lease of the computer equipment, the Taxpayer is liable for the use tax on the total price of each transaction.

CONCLUSION

Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is deemed prima facie correct. The burden is upon the taxpayer to prove otherwise. Lacking supporting documentation that the transactions between the Taxpayer and its affiliate represent exempt intracompany transfers, the Taxpayer has not met the burden of proof that the assessments are erroneous. Accordingly, I find that the audit assessments are correct and the Taxpayer is not due a refund from the Department.

The Code of Virginia sections and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department’s website located at www.tax.virginia.gov . If you have any questions regarding this determination, please contact * of the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/634.T

Related Documents

16-84

10-124

94-271