Rhode Island: Taxable Sales Occurred Between Related Entitles

In a recent Administrative Hearing Decision, the RI Department of Revenue addressed whether a taxpayer was required to collect and remit sales tax on transactions with an affiliate.

Podcast Transcript

In a recent Administrative Hearing Decision, the Rhode Island Department of Revenue addressed whether a taxpayer, a pass-through entity engaged in the business of repairing, leasing and selling large construction equipment, was required to collect and remit sales tax on transactions with an affiliate.  The invoices at issue were for equipment that was to be “bill[ed] to and ship[ed] to” the affiliate. The affiliate’s address was also the physical location of the taxpayer. The taxpayer did not collect sales tax on the invoiced transactions nor did the affiliate provide the taxpayer with any resale certificates. For corporate income tax purposes, the taxpayer treated the invoiced amounts as receipts. Further, it did not claim a depreciation deduction for any of the invoiced tangible personal property, rather the affiliate reflected the depreciation and amortization related to the equipment on its corporate tax returns. For Rhode Island sales and use tax purposes, a “sale” is defined as “any transfer of title or possession, exchange, lease, rental, condition or otherwise, in any manner or by any means of tangible personal property for consideration.”

The taxpayer argued that the invoiced transactions did not constitute “sales” and were therefore not taxable. Particularly, the taxpayer argued there was “no transfer of title, exchange, or barter; no transfer of possession, rental or lease in lieu thereof; and no consideration provided by either party.” The hearing officer disagreed, holding that the invoiced transactions fell within the definition of a “sale” and thus were subject to sales tax. In the hearing officer’s view, a sale of tangible personal property does not need to be delivered from one location to another. Because the taxpayer and the affiliate shared the same physical address, there was “no reason to think that no delivery was made to the Company.” Further, the hearing officer rejected taxpayer’s argument that no consideration was paid. The statute, does not require an exchange of money; rather, consideration consists of “a bargained for exchange or legal right acquired…by a promisee in consideration of such promise.” The taxpayer, the hearing officer determined,  received a legal benefit when it was able to increase gross receipts and the affiliate benefitted when it depreciated the assets for income tax purposes. The taxpayer also tried to argue that the affiliate was just a “manila folder” and essentially had no separate legal existence outside of the taxpayer so the affiliate could not have purchased the equipment. In fact, the CFO and Treasurer of the taxpayer testified that the transfer of the equipment to the affiliate was an “asset protection attempt.” Again, the hearing officer looked to the corporate income tax consequences of the equipment moving to determine that the transactions had economic significance. In an interesting twist, the taxpayer also argued that the Division was looking at the form, rather than the substance of the transactions. The hearing office again rejected this argument, pointing to all the factors showing the transactions at issue were sales. The Division had waived the imposition of penalties because the taxpayer was a regular filer, albeit late at times. The hearing officer ruled that regular filing could not be the basis for the waiver of a penalty and that penalties were only allowed to be waived when a taxpayer and the Division have entered into a settlement agreement. For more information on Administrative Hearing Decision, Dkt. No. 2019-06, please contact Joseph Senier at 617-988-1025.

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