My HVAC company wants to offer long-term equipment leases through an affiliate -- does the installer pay tax as a contractor, does the affiliate collect sales tax on the lease payments, and is that double taxation?

Plain-English summary

An HVAC company that furnishes and installs heating/cooling systems for Virginia homeowners asked the Department for an advance ruling before rolling out a new long-term lease program. Under the program, a commonly controlled affiliate ("Company A") signs the lease with the homeowner; Company A then hires the HVAC company to furnish and install the unit, paying it for the equipment and installation labor. Company A retains title to the unit throughout the lease, and the homeowner can buy it at any point, with removal if the lease isn't renewed. The taxpayer asked three questions.

Question 1 -- the installer's own tax obligation doesn't change. Whether a unit is sold directly to a homeowner or bought by Company A for leasing, the HVAC company that furnishes and installs it is a consuming contractor under Va. Code § 58.1-610, and must pay sales tax at purchase (or accrue and remit use tax if untaxed). Installing HVAC equipment as part of a real property improvement doesn't change this baseline rule.

Question 2 -- the lease itself is taxable, because the parties' own agreement controls. Va. Code § 58.1-602 defines a taxable "lease or rental" as possessing or using tangible personal property for consideration without transfer of title. Company A's lease keeps title with Company A and addresses removing the unit if the homeowner doesn't buy or renew -- textbook lease terms. The Department also addressed a potential complication: under Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941), the Virginia Supreme Court laid out three general tests for whether an installed item becomes a real property fixture (which would take it outside "tangible personal property" for lease-tax purposes). But that case itself says those general tests apply only "in the absence of any specific agreement between the parties as to the character of a chattel." Here, the lease agreement between Company A and the homeowner IS that specific agreement -- it explicitly treats the HVAC unit as leased personal property. So the general fixture tests don't even come into play: the specific agreement controls, the unit is tangible personal property, and Company A's lease receipts are subject to Virginia sales tax.

Question 3 -- same result if the installer leases directly, plus a genuinely separate sale-on-buyout wrinkle. If the HVAC company cut out the affiliate and leased directly to the homeowner, it would simply hold both roles at once: consuming contractor for the installation (pay/accrue tax on its own purchase) and retailer for the lease (collect and remit sales tax on lease payments from the homeowner). The ruling request also flagged that homeowners can buy the unit during or after the lease. The Department confirmed that buyout is a completely separate taxable transaction, taxed on the purchase price, regardless of whether it happens mid-lease or at the lease's end (P.D. 89-240).

Why none of this is double taxation. Va. Code § 58.1-604 bars taxing the same transaction twice under both sales and use tax. But the Department has repeatedly held (P.D. 82-205, 95-287, 00-67, 09-82) that separate, distinct transactions involving the same physical property can each be independently taxable. Here, the contractor's own consumption of the HVAC system (taxed once, on its purchase cost) is legally separate from the lease of that same system to a homeowner (taxed separately, on lease payments) -- and any later purchase by the homeowner would be separate again. Three distinct transactions, three distinct tax events, no double taxation.

What this means for you

HVAC (or similar equipment) installers setting up an affiliate-leasing structure

You remain a consuming contractor for your own installation work no matter who ultimately owns or leases the unit -- that tax cost doesn't disappear or shift just because a leasing affiliate is involved. Budget for it as a real, separate cost alongside the lease-side sales tax your affiliate will collect.

Anyone drafting an equipment lease that will be physically attached to a customer's real property

Make the lease's own language explicit about title retention and the equipment's character as personal property (not a fixture) -- this ruling shows that an explicit agreement between the parties can control over the general common-law fixture tests, keeping the arrangement taxed as a lease rather than falling into a different (and potentially non-taxable-as-a-lease) real property category.

Businesses offering lease-to-own or buyout options

Structure your thinking around each event separately: the contractor's purchase/installation, the ongoing lease payments, and any eventual buyout are each their own taxable transaction. None of them "double counts" the others under Virginia law.

Common questions

Q: If my leasing affiliate leases equipment I installed, do I still owe use tax on my own purchase of the equipment?
A: Yes. As the installing contractor, you're taxed on your own purchase cost regardless of who buys or leases the finished installation.

Q: Does attaching equipment to a home turn it into tax-free real property instead of a taxable leased item?
A: Not if your lease agreement specifically addresses the equipment's character as personal property with title retained by the lessor -- that specific agreement controls over the general fixture tests from Danville Holding Corp. v. Clement.

Q: If a homeowner eventually buys the leased HVAC unit, is that separately taxable, or does it double-tax the same property?
A: It's separately taxable, on the purchase price -- and it's not double taxation, because the contractor's original consumption, the lease, and the later sale are all legally distinct transactions.

Citations and references

Statutes:

• Va. Code § 58.1-610 -- a contractor who installs tangible personal property as part of real property construction/improvement is a consuming contractor, taxed on its own purchase cost
• Va. Code § 58.1-602 -- "lease or rental" means possession/use of tangible personal property for consideration, without transfer of title
• Va. Code § 58.1-604 -- prohibits imposing both sales and use tax on the same transaction

Case law: Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941) (general tests for whether installed property is a real property fixture apply only absent a specific agreement between the parties as to the chattel's character).

Authorities the Department relied on (described here, not linked): P.D. 89-240 (9/11/1989) (a sale of leased equipment, during or at the lease's end, is a completely separate taxable transaction); P.D. 82-205 (12/27/1982), P.D. 95-287 (11/8/1995), P.D. 00-67 (5/4/2000), and P.D. 09-82 (5/28/2009) (separate and distinct transactions on the same tangible personal property can each be independently taxable without violating the bar on double taxation).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-110

Original ruling text

November 14, 2024

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the “Taxpayer”) requesting a ruling on the application of the retail sales and use tax on the lease of heating, ventilation, and air conditioning (HVAC) units that are installed for residential customers in Virginia.

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.

FACTS

The Taxpayer furnishes and installs HVAC systems to residential customers in Virginia. The Taxpayer pays consumer use tax on untaxed purchases of tangible personal property used or consumed in its operations as a contractor respecting real property.

As part of their business, the Taxpayer has begun offering a long-term lease option to its customers interested in HVAC replacement. A commonly controlled affiliate (Company A) enters into a lease agreement with the homeowner. Once the lease is secured between Company A and the homeowner, Company A will engage the Taxpayer to furnish and install the HVAC unit. The Taxpayer will invoice Company A for the price of the equipment and installation labor. The Taxpayer pays sales tax on the purchase of the HVAC systems, regardless of whether the unit is sold directly to the homeowner or to Company A for lease to the same.

Under terms of the lease agreement, Company A retains title to the HVAC equipment installed at the homeowner’s residence. The homeowner has the option to purchase the equipment at any time during the lease period. At the lease’s termination, if the homeowner does not renew the lease, the HVAC unit is removed from the home.

The Taxpayer poses three questions regarding its compliance with the retail sales and use tax for the transactions at issue. The Department’s response to each question posed by the Taxpayer is addressed below.

RULING

Question 1

Are the HVAC units furnished and installed by the Taxpayer considered real property fixtures and, therefore, subject to sales or use tax on the cost price of such units?

Regarding the installment of HVAC units, the Taxpayer would generally be considered to be a consuming contractor and must either pay the tax at the time of purchase or accrue and remit consumer use tax on untaxed purchases. See Virginia Code § 58.1-610.

Question 2

Are Company A’s receipts from the lease of HVAC units to residential customers subject to Virginia sales tax?

Company A engages in a lease which stipulates that title of the HVAC unit does not transfer to the homeowner. In addition, at the conclusion of the lease, there are provisions addressing the removal of the HVAC unit if the homeowner declines to purchase the unit.

Virginia Code § 58.1-602 provides, in part, that “‘[l]ease 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.”

In Danville Holding Corp. v. Clement , 178 Va. 223, 16 S.E.2d 345 (1941), the Virginia Supreme Court set forth three general tests to determine if an item of tangible personal property should be considered as a fixture. However, the case stipulates that the three general tests are only used “in the absence of any specific agreement between the parties as to the character of a chattel placed upon the freehold.”

In this case, the lease between Company A and the homeowner satisfies the specific agreement portion of the court decision, classifying the HVAC unit as tangible personal property. As such, the separate lease transactions between Company A and the homeowner are taxable leases, subject to Virginia sales tax.

Question 3

Would the answer to questions 1 and 2 above change if the Taxpayer furnished and installed the HVAC units and contracted directly with the homeowner for the lease of the equipment?

If the Taxpayer leases HVAC equipment directly with the homeowner, it would still be deemed to be a consuming contractor for the installation of the systems and a retailer regarding the leases. As such, it would be required to pay or accrue sales and use tax on purchase of the HVAC equipment and collect and remit the sales tax on the lease transactions with the homeowner.

The ruling request also states that the homeowner has the option to buy the HVAC unit, during the lease or at the lease’s conclusion. This separate transaction would also be a taxable event. Public Document (P.D.) 89-240 (9/11/1989) provides that any sale of the leased equipment, either during or at the conclusion of the lease, would be considered a completely separate transaction and would be subject to the sales and use tax based on the purchase price.

With regard to double taxation, Virginia Code § 58.1-604 prohibits the imposition of both sales and use tax on the same transaction. The Department, however, has addressed the taxation of separate and distinct transactions on the same tangible personal property on multiple occasions. See P.D. 82-205 (12/27/1982), P.D. 95-287 (11/08/1995), P.D. 00-67 (5/4/2000), and P.D. 09-82 (5/28/2009). Based on the facts presented, the consumption of the HVAC system by the Taxpayer is separate and distinct from the lease, and possible sale, of the same system to a homeowner.

The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

Related Documents

82-205

89-240

95-287

00-67

09-82