When a third-party financer buys property from a dealer and leases it to the dealer's customer, who owes Virginia sales tax -- and does the dealer's tax on the purchase satisfy it?

Plain-English summary

The taxpayer is an out-of-state third-party financer. It provides financing to customers (often those who can't get conventional credit) who want to buy tangible personal property from dealers. Under its "Lease Agreement with Option to Purchase," the financer pays the dealer for the property, takes ownership, and then leases the property to the customer, collecting monthly payments. The financer asked whether the sales tax the dealer collects when the financer buys the property satisfies Virginia's collection requirement — so that the financer need not also collect tax from the customer.

The Commissioner said the financer must collect the tax on the lease:

• Virginia imposes sales tax on sales and on leases/rentals of tangible personal property (Va. Code § 58.1-603), and taxes the "gross proceeds" from a lease that is part of an established business. Va. Code § 58.1-602 defines "sale," "lease or rental," and "gross proceeds."
• The Department's longstanding policy is that the underlying document governs the tax treatment. The Agreement is a conditional lease: the customer chooses to lease for a minimum 90-day term that renews, can acquire ownership if it meets the terms, and can terminate at any time. Ownership transfer is optional, not automatic.
• Because the financer takes title to the property (and no dealer-financer contract was provided showing otherwise), the financer is the lessor. Two distinct taxable transactions occur: the financer's purchase from the dealer (on which the financer paid tax), and the financer's lease to the customer. Paying tax on the purchase does not excuse collecting tax on the lease, so the financer must collect Virginia sales tax on the gross proceeds from the customer/lessee.

The ruling notes that "gross proceeds" excludes separately stated finance charges, carrying charges, service charges, and interest on conditional lease/rental contracts.

What this means for you

If you finance customer purchases by buying the goods and leasing them back to the customer, Virginia treats you as a lessor running a lease business — and you must register and collect sales tax on the lease payments (gross proceeds), even though you already paid tax to the dealer when you acquired the property. The dealer's tax and your lease tax are separate. The key is the paperwork: because "the underlying document governs," a lease-to-own or lease-with-option-to-purchase agreement in which you take title puts the collection duty on you. You can exclude separately stated finance, carrying, service, and interest charges from the taxable gross proceeds, so break those out on your invoices.

Common questions

Q: The dealer already charged me sales tax. Do I still collect tax from my customer?
A: Yes. Your purchase from the dealer and your lease to the customer are two separate transactions; tax on the first does not satisfy the tax due on the lease's gross proceeds.

Q: Why is this a lease rather than a financed sale?
A: The underlying agreement is a conditional lease — the customer leases for renewing 90-day terms, can terminate at any time, and only optionally acquires ownership — so Virginia taxes it as a lease (§ 58.1-603, § 58.1-602).

Q: Is the whole monthly payment taxable?
A: No. Gross proceeds exclude separately identified finance charges, carrying charges, service charges, and interest on conditional lease contracts.

Citations and references

• Va. Code § 58.1-603 — imposes the retail sales and use tax on sales and on the gross proceeds from leases/rentals of tangible personal property
• Va. Code § 58.1-602 — defines "sale," "lease or rental," and "gross proceeds" (excluding separately stated finance, carrying, service, and interest charges)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-123

Original ruling text

July 14, 2020

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax to a lease-to-own agreement. I apologize for the delay in responding to your correspondence.

FACTS

You represent that the Taxpayer is a financer based in another state that provides third-party financing to customers for purchases of tangible personal property from dealers throughout the country. The Taxpayer provides this financing to customers who would not otherwise qualify for loans or financing due to credit issues and similar problems.

The Taxpayer contends that other states treat the agreement between the Taxpayer and the dealer’s customer as a finance lease and do not require the Taxpayer to collect sales tax on the sales price of the tangible personal property financed. The Taxpayer requests a ruling as to the sales tax treatment of this agreement in Virginia, particularly with regard to whether the sales tax collected by the dealer on the sales price of the tangible personal property satisfies the tax collection requirements.

RULING

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” 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.] The statute also 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."

Virginia Code § 58.1-603 2 imposes the retail sales and use 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 sale 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…over the term of the lease, rental, service, or use, but not less frequently than monthly." The statute goes on to explain:

“Gross proceeds” does not include finance charges, carrying charges, service charges, or interest from credit extended on the lease or rental of tangible personal property under conditional lease or rental contracts providing for the deferred payment of the lease or rental price.

It is the Department’s longstanding policy regarding the retail sales and use tax that the underlying document governs the tax treatment of the transaction. Based on the above statutes and regulations, and a review of the Lease Agreement with Option to Purchase (the “Agreement”), the transaction addressed in the Agreement constitutes a conditional lease agreement. The language in the Agreement expressly states transfer of ownership and rights to the property is optional and not incidental to the contract. Within the Agreement, the Taxpayer is referred to as the Lease Company or lessor and the Agreement states that the customer, referred to as the lessee, chooses “to lease the property” for a minimum or 90 days, after which the agreement renews for a subsequent 90 days. Customers can elect to acquire ownership of the property, provided they meet the lease terms, but are able to terminate the lease at any time.

The Taxpayer requests the Department rule on the responsibility of the Taxpayer in these transactions. The Taxpayer argues that the dealer to which the customer went to acquire the tangible personal property collects tax on the transaction, and this should satisfy the Department’s sales tax collection requirement. The Agreement entered into by the customer/lessee is administered by the Taxpayer as lessor, thus transferring ownership of the property to the Taxpayer as it finances the transaction for the customer, and paying the dealer for the property. In this transaction, the Taxpayer pays the sales tax to the dealer on the property at the time of sale and acquires ownership of the property. The Taxpayer then leases this property to the customer/lessee and collects monthly payments for the sales price and any additional fees.

Because the Taxpayer takes ownership of the property according to the Agreement, and no contract between the Taxpayer and dealer was provided to indicate otherwise, the Taxpayer must collect the sales tax from the customer/lessee on the gross proceeds derived from these transactions.

I hope the foregoing 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, along with other reference documents, 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/1435L