Washington Sales & Use Tax Decision Reveals Different Rules for Lessors and Lessees
A Washington Tax Determination showcases how the rules around sourcing sales and use tax for the lease of mobile property can vary based on whether the taxpayer is the lessor or the lessee.
The rental or lease of tangible property can create a challenging tax situation for both the lessor and lessee. One of the principal issues when dealing with a lease of mobile property is where sales and use tax must be paid, and those rules may be different for lessors and lessees. A recent Washington Tax Determination examined this issue. 
In that determination, the taxpayer (“taxpayer” or “lessee”) leased mobile video production studios (“mobile studios”) from its parent corporation (the “lessor”). Delivery of the mobile studios was outside Washington, and the primary property locations for the mobile units were outside Washington. The lessor did not charge sales tax on the monthly lease payments; however, the lessee paid use tax to Washington based on the daily rental rate for the days that the mobile units were in Washington. The lessee then requested a refund of all of the use tax it had previously remitted to Washington for the property while it was located in the state. The Washington Department of Revenue (the “Department”) denied the claim, and the taxpayer appealed.
Washington is a member of the Streamlined Sales and Use Tax Agreement (“SSUTA”) and has enacted laws and rules to conform to the SSUTA.  One of those laws addresses sourcing rules for leases of tangible personal property that require recurring periodic payments.  Specifically, the first payment is sourced as if it were an actual sale of the property (i.e., essentially the location where the goods are delivered to the lessee). The remaining periodic payments are sourced to the primary property location as indicated by an address for the property provided by the lessee, as long as use of that address does not constitute bad faith. In addition, the primary property location is not altered by the fact that the property may be used intermittently at other locations. For use tax, the law states that “where there is no obligation on the part of a seller to collect or remit this state’s sales or use tax, the use of tangible personal property…is sourced to the place of first use in this state.” 
The taxpayer argued that it was not subject to the use tax rules because the lessor did have an obligation to collect the tax since it knew (as the lessee’s parent company) that the mobile units would be used in Washington. The administrative law judge disagreed, concluding that knowledge of a lessee’s intended use of leased property in Washington does not actually obligate the lessor to collect sales tax per Washington’s sales tax sourcing provisions. As a result, use tax was indeed due on the recurring lease payments for the months that the lessee used the property in Washington.
This case highlights the importance of understanding the specific tax sourcing rules applicable to a business’ transactions, as the rules may be quite different between a lessor and lessee. Equally important to note is that Washington, as a signatory member of the Streamlined Sales and Use Tax Agreement, shares these sales and use tax sourcing rules with up to 23 other states, including Georgia.  Aprio’s SALT team is experienced at advising companies on their sales and use tax obligations, and we can help you identify the proper sales and use tax treatment for your transactions.
This article was featured in the May 2016 SALT Newsletter. To view the newsletter, click here.
 Washington Tax Det. No. 14-0207, 35 WTD 90 (March 31, 2016).
 SSUTA is the “result of the cooperative effort of 44 states, the District of Columbia, local governments and the business community to simplify sales and use tax collection and administration by retailers and states. The Agreement minimizes costs and administrative burdens on retailers that collect sales tax, particularly retailers operating in multiple states.” SSUTA seeks to accomplish its goal by providing uniform definitions and sourcing rules. For more information on SSUTA, click here.
 RCW 82.32.730(2)(a). This provision is similar to § 310B of the SSUTA. It is worth nothing that § 309 of the SSUTA, in explaining the application of the general sourcing rules, states that “the provisions of Section 310 only apply to determine a seller’s obligation to pay or collect and remit a sales or use tax with respect to the seller’s retail sale of a product. These provisions do not affect the obligation of a purchaser or lessee to remit tax on the use of the product to the taxing jurisdictions of that use.”
 RCW 82.32.730(10).
 For a list of states that are members of the SSUTA, click here.
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