United States: Virginia Tax Commissioner Holds Purchases Of Repair Parts By Lessor Of Trucks Ineligible For Resale Exemption

On June 5, the Virginia Tax Commissioner ruled that a lessor of tractors and trailers did not qualify for the resale exemption on its purchases of repair and replacement parts used for repairs to the leased motor vehicles.¹ The ruling was based on the fact that the taxpayer did not present any evidence showing that the lessee paid tax on the lease.

Background

The taxpayer leased motor vehicles (tractors and trailers) to a lessee in one-year increments, and was contractually obligated to make repairs to the leased equipment. The taxpayer purchased repair and replacement parts tax-free and there was no evidence that the taxpayer collected tax from the lessee upon the lease payments or upon the use of the repair or replacement parts.

The taxpayer was audited by the Virginia Department of Taxation for the period August 2007 through July 2010. The Department subsequently issued a consumer use tax assessment against the taxpayer for the repair and replacement parts that were purchased from the taxpayer's supplier without the payment of any sales or use tax. In response, the taxpayer requested a correction to the assessment based on the claim that the purchases were exempt sales for resale.

Resale Exemption Did Not Apply to Lessor's Purchases

Based on the particular facts of the case, the Tax Commissioner rejected the taxpayer's argument that its purchases of parts qualified for the resale exemption. Instead, it concluded that the taxpayer was indeed the consumer of the repair and replacement parts, and that the use tax assessment was appropriate.

In reaching its determination, the Tax Commissioner began by citing a 1994 ruling, which addressed a similar fact pattern.² In that decision, the Tax Commissioner held that the resale exemption did not apply to repair and replacement parts installed in motor vehicles by a taxpayer that leased those motor vehicles on a long-term basis. The underlying rationale was based on the state's regulation regarding the treatment of repair and replacement parts installed in motor vehicles that are sold, leased or rented.

The regulation, which is still in effect, provides that "retail sales and use tax does not apply to repair and replacement parts and accessories and oil and grease installed in a motor vehicle before or at the time of sale, lease or rental that are included in the sales price for measuring the motor vehicle sales and use tax or the retail sales and use tax. Such items may be purchased exempt ... under a Resale Exemption Certificate ...."³ In 1994, the Tax Commissioner interpreted this regulation to mean that the resale exemption did not apply to parts where the lease payments charged to lessees were not subject to the motor vehicle sales and use tax. Rather, the exemption only applied if the parts "are included in" the sale of a lease for which tax was paid.

The Tax Commissioner noted that the taxpayer, like the lessor in the 1994 decision, did not charge motor vehicle sales and use tax on the lease payments.⁴ Therefore, the Tax Commissioner reached the same conclusion as it did in its prior ruling, concluding that the taxpayer owed use tax on its purchase of the parts.

In addition, the Tax Commissioner pointed out that payment of the motor vehicle sales tax by the lessor on the purchase price of the motor vehicle did not change the result. The payment of tax on the purchase price of the vehicle was separate from any tax due on the lease payments.

The Tax Commissioner rejected the taxpayer's contention that three prior rulings supported application of the resale exemption. The first ruling pertained to a crane rental,⁵ the second to a leased aircraft⁶ and the third to a maintenance contract.⁷ In each of these rulings, the Commissioner concluded that the resale exemption applied because the parts were deemed to be included in the price of the lease or maintenance contract. Tax was paid on the parts when tax was charged on the lease or maintenance contract. In contrast, the taxpayer did not provide any evidence to show that tax was charged on the lease of the tractors and trailers. Therefore, the three prior rulings and the resale exemption did not apply.

Finally, the Tax Commissioner continued by noting that the applicable consumer use tax applied to the federal tire excise tax, which was not originally included in the taxable base. The excise tax was charged in connection with the sale of the tires and pursuant to the Virginia Tax Code, the "cost price" of the tires meant the actual cost of the tires "without any deduction therefrom on account of ... any expenses whatsoever." As a result, the Tax Commissioner authorized the Department to issue an additional assessment to take into account the appropriate increase in the tax base.

Commentary

On the surface, this ruling only appears intuitive because it reiterates a long'standing policy that repair parts must be taxed at some point, either when the underlying property is first leased, or when the repair parts are incorporated into the leased property. The ruling turned upon the fact that the lessee did not already pay tax on the lease, and therefore, did not already pay tax on any repair parts under the lease. Since tax was not paid by the lessee, the lessor was deemed the consumer of the parts used in performing its repair services.

While this analysis might be sound with respect to property that is situated in a single state, it can be problematic for trucking companies that purchase trucks that often are used across state borders. The problem lies in the fact that the state sales tax treatment of trucks and repair parts is inconsistent. Some states afford an exemption for trucks and repair parts, while others do not. If a trucking company purchases and leases tractors and trailers that are titled or registered under the International Registration Plan in a state that exempts the tractors and trailers, then the lease stream is not subject to tax. In this home state, the trucking company's purchases of repair parts for the leases are also exempt. However, where the trucking company repairs the equipment in an outside state that subjects tractors and trailers and their repair parts to that state's sales tax, the outside state can either honor the home state's resale exemption, or it can adopt Virginia's position and impose use tax on the lessor as the consumer of the parts.

Few states have addressed this particular issue. Absent published guidance, planning for and being able to utilize the resale exemption in the context of interstate transportation can become complex.

Footnotes

1 Ruling of Commissioner, P.D. 12_90, Virginia Department of Taxation, June 5, 2012.

2 Ruling of Commissioner, P.D. 94_6, Virginia Department of Taxation, Jan. 7, 1994.

3 The 1994 ruling cited 23 VA. ADMIN. CODE § 630'10'67(C), which is now 23 VA. ADMIN. CODE § 10'210' 990(C).

4 No evidence was presented to show that the lessor charged tax on the leased property.

5 Ruling of Commissioner, P.D. 91_19, Virginia Department of Taxation, Feb. 21, 1991.

6 Ruling of Commissioner, P.D. 01_170, Virginia Department of Taxation, Oct. 26, 2001.

7 Ruling of Commissioner, P.D. 99_62, Virginia Department of Taxation, Apr. 12, 1999.

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