Virginia Tax Commissioner, James J. Alex, (Commissioner) ruled on the taxability of leases for HVAC equipment by a Virginia HVAC company (Company). The Company requested a letter ruling to clarify how sales and use tax applies to HVAC units that it installs and leases to residential customers.
“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.”
equipment leases
The Company provides and installs HVAC systems in residential homes in Virginia. To expand its service offerings, the Company started offering a “long-term lease option” for customers who ultimately wanted a full HVAC replacement. The Company engages a commonly controlled affiliate to install an HVAC unit once a lease agreement is established between the affiliate and the homeowner. The Company invoices the affiliate for the cost of equipment and installation, and pays sales tax on the equipment regardless of whether it is sold or leased.
Based on the lease agreement, the affiliate has title to the equipment that is installed in the residential home. The homeowner does not have any title to the equipment, but does have the option to purchase the equipment at any time during the period of the lease. Once the lease ends, the Company removes the HVAC equipment from the home unless it is purchased or the lease is renewed.
questions to consider
The Company presented three questions to the Commissioner in its ruling request. First, the Company questioned the taxability of the HVAC units as they become real property fixtures. However, according to the Commissioner, the Company is a “consuming contractor” as set forth in Virginia law - a contractor who, in the course of performing services, furnishes tangible personal property that is incorporated into real property, “thereby causing it to lose its identity as tangible personal property by becoming real property.” Thus, a consuming contractor “consumes” the tangible personal property that it installs for its customers. As a consuming contractor, the Company has a responsibility to pay sales tax at the time of purchase or remit consumer’s use tax.
Having established that the HVAC units are taxable, the Commissioner then addressed whether the receipts from the affiliate company for the lease of the HVAC equipment to the homeowners are subject to tax. Virginia law provides that a lease or rental includes “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.” Because the HVAC units are leased to the homeowners for their use without any title transfer, the HVAC unit leases are subject to tax in Virginia.
The Commissioner also addressed whether the taxability of the leases would change if the leases were entered into directly by the Company and the homeowner, instead of by the affiliate company and the homeowner. The Commissioner responded that because of the Company’s status as a “consuming contractor,” the Company would still be required to pay sales tax or remit use tax for the lease transactions. Additionally, if the homeowner chooses to purchase the HVAC unit during the lease agreement, this is a separate and distinct taxable transaction based on Virginia law.
Strategic Letter ruling requests
Taxability determinations can be intricate and challenging to navigate in any industry, including when leasing and selling equipment. Obtaining a letter ruling from your state tax authority can be a strategic way to ensure compliance. However, it is crucial to make a strong argument rooted in the law and facts to receive a favorable decision.
Don’t leave your business compliance up to chance. Consult with our team today to get the answers you need and to protect your business from avoidable costs.