SALT Report 1845 – The Virginia Tax Commissioner upheld a use tax assessment imposed on the owner of a Virginia bowling alley. The use tax was assessed on payments made to an affiliate of the Taxpayer. In the course of business, the affiliate would purchase equipment on behalf of the Taxpayer who would use it in the bowling alley. The affiliate would make monthly loan payments for the purchased equipment and would charge the Taxpayer a monthly payment for the same amount.
During an audit, it was discovered that the Taxpayer recorded the payments made to its affiliate as “lease payments.” The auditor assessed use tax on the lease payments as required by Virginia Code §58.1-602 which states that, “payments to an affiliated company for the use of equipment constitute lease payments subject to Virginia sales and use tax.” The Taxpayer filed an appeal arguing that the payments were actually loan reimbursements between related companies and that the lack of profit in the payments supported its claim.
After review, the Commissioner determined that the Taxpayer’s argument was not persuasive. Further, Virginia law mandates that payments to an affiliate for the use of equipment owned by the affiliate without the transfer of title for the equipment constitutes a taxable lease. Simply excluding profit from the payment does not change the taxability of the payment.
Therefore, the Commissioner ruled that the use tax was correctly assessed in the audit and there was no basis for adjustment to the assessment.
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