If my commercial lease bundles rent for both the building and the furniture/equipment inside it, how is the taxable tangible personal property portion determined?

Plain-English summary

A Virginia restaurant leased its space along with the furniture, equipment, and fixtures inside it under one bundled lease. During an audit, the Department found the restaurant hadn't paid sales tax on the tangible-personal-property portion of its lease payments and, lacking a clear breakdown in the lease itself, allocated the payments 50% to real property (not taxable) and 50% to tangible personal property (taxable). The restaurant appealed, arguing that flat 50/50 split overstated the value of the personal property because it didn't account for how those assets depreciate over time.

The Department agreed. Virginia taxes the lease or rental of tangible personal property but not the lease of real property or fixtures attached to it; when a lease bundles both without a clear breakdown, the Department will use the best available evidence to allocate value between the two. Here, the restaurant produced its landlord's 2019 Depreciation and Amortization Report, which separately valued the real and personal property covered by the lease — much more precise evidence than an across-the-board 50/50 estimate. The audit was sent back to recalculate the taxable personal-property share using the percentages shown in that depreciation report.

What this means for you

Commercial tenants with a bundled lease

If your lease covers both real estate and furniture/fixtures/equipment without a line-item breakdown of value, don't assume an auditor's flat percentage allocation is final. A landlord's depreciation schedule, appraisal, or other documented valuation of the personal property included in the lease can be strong evidence for a more accurate (and often more taxpayer-favorable) split.

Landlords and property managers

If your commercial leases bundle real and personal property, keeping (and being willing to share) a depreciation schedule or similar breakdown protects your tenants from being taxed on an inflated tangible-personal-property allocation during an audit.

Accountants and tax professionals

This ruling reinforces the evidentiary hierarchy from P.D. 93-188 and P.D. 94-142: a formal lease breakdown controls if one exists; absent that, the "best information available" standard lets a taxpayer introduce independent valuation evidence (like a depreciation report) to displace a rough estimate the auditor otherwise had to use.

Common questions

Q: Is rent for the building itself subject to Virginia sales tax?
A: No. Only the lease or rental of tangible personal property is taxable; leasing real property and fixtures attached to it is not.

Q: What if my lease doesn't separate real property value from personal property value?
A: The Department will look for the best available evidence to make that allocation. If none exists, the tax may apply to the full lease payment.

Q: Can a depreciation report change an auditor's allocation?
A: In this case, yes — a landlord's depreciation and amortization report with separate real and personal property valuations was accepted as better evidence than a flat percentage estimate.

Q: Does this ruling apply to my lease?
A: Not automatically. This is a published ruling based on this taxpayer's specific facts and the evidence it provided; your outcome depends on what documentation is available for your own lease.

Citations and references

• Va. Code § 58.1-603 (tax on sale, lease, or rental of tangible personal property)
• Va. Code § 58.1-602 (definitions of "sale" and "lease or rental")
• P.D. 95-223 (real property/fixture leases not taxable; personal property leases taxable)
• P.D. 93-188 (tax on entire payment absent a breakdown)
• P.D. 94-142 (best information available standard)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-15

Original ruling text

February 12, 2025

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

Dear *:

This is in response to your letter in which you contest the retail sales and use tax assessment issued to * (the “Taxpayer”) as a result of an audit for the periods from February 2019 through July 2019.

FACTS

An audit was conducted on the books and records of the Taxpayer, a restaurant in Virginia, for the period at issue. As a result of the audit, untaxed rental payments for the restaurant space and certain assets were adjusted to reflect an allocation of 50% to real property and 50% to tangible personal property. An assessment was issued based on the tangible personal property allocation of the lease. The Taxpayer filed an application for correction contending the property allocation overstates the value of the allocation for the rental of tangible personal property by failing to consider the annual depreciation for such assets.

DETERMINATION

Virginia Code § 58.1-603 imposes the sales tax on every person who sells, 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.”

While the lease of real property and fixtures attached thereto is not subject to the sales tax, the lease of the tangible personal property included in the lease is taxable. See Public Document (P.D.) 95-223 (8/29/1995). The lessor must provide a breakdown of the value of tangible personal property versus the value of the real property included in the lease. If the lessor is not able to provide such a breakdown and no other evidence is available, the tax will apply to the entire lease payment. See P.D. 93-188 (8/26/1993). Alternatively, in the absence of a formal lease for tangible personal property, or a breakdown of the value of the real property versus tangible property included in the lease, the auditor may rely on the best information available. See P.D. 94-142 (4/29/1994).

The Taxpayer has provided an executed lease agreement, which indicates that the lease includes the building, land and all “furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith…” The Taxpayer has also provided a copy of the Landlord’s 2019 Depreciation and Amortization Report, which includes valuations for both the real and personal property. The Taxpayer argues that the depreciation report evidences a more suitable allocation between the personal and real property included in the lease.

Based on the evidence provided, the Department agrees with the Taxpayer’s contentions regarding the lease allocation. Accordingly, the audit will be returned to the auditor to reduce the allocation for tangible personal property to the percentage indicated by the depreciation report. Once the revisions are complete, the auditor will issue a new audit report, explanation of specific changes, and an updated bill with interest accrued to date. The Taxpayer should remit payment of the balance due within 30 days of the date on the updated bill to avoid the accrual of additional interest or possible collection action.

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 there are any questions regarding this determination, please contact * in the Department’s Office of Tax Policy and Legislative Affairs, Tax Adjudication and Resolution Division, at , or via email at **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3574.F

Related Documents

93-188

94-142

95-223