88-1681 - Sales





Petitioner, : ORDER

v. :




Respondent. :



This matter came before the Utah State Tax Commission pursuant to oral arguments on the Petitioner's Motion for Summary Judgment, which was held on XXXXX. Paul F. Iwasaki, Presiding Officer; G. Blaine Davis, Commissioner; and Joe B. Pacheco, Commissioner, heard the matter for and on behalf of the Commission. Present and representing the Petitioner were XXXXX and XXXXX, attorneys at law. Present and representing the Respondent was XXXXX, Assistant Attorney General.

Based upon the Memoranda submitted and oral arguments of the parties, the Tax Commission hereby makes its:


1. The tax in question is sales tax.

2. The audit period in question is XXXXX through XXXXX.

3. The Petitioner is a XXXXX Corporation which principal place of business is in XXXXX.

4. XXXXX is a XXXXX Corporation whose principal place of business is located in XXXXX.

5. On or about XXXXX, XXXXX constructed a XXXXX in XXXXX, Utah. Construction of the XXXXX was substantially complete by XXXXX.

6. On XXXXX, XXXXX entered into an agreement with the Petitioner whereby XXXXX sold the tax benefits, the right to claim depreciation deductions and investment tax credits, attributable to the "qualified property" that was part of the XXXXX to the Petitioner in a safe harbor lease transaction pursuant to the requirements of Section 168 of the Internal Revenue Code.

7. Pursuant to Section 168, the transaction was cast in the form of a sale of the property to Petitioner and a lease back of the same property to XXXXX to XXXXX.

8. The agreement was structured so no principal, interest or rent payments would ever be made. Pursuant to the agreement, each installment payment on the loan was contingent upon and payable from and solely from the basic rent paid under the lease. Because the loan and rent payments were contingent upon each other and were not binding obligations upon each party other than for income tax reporting purposes, no rent or loan payments were ever exchanged.

9. Pursuant to the agreement, XXXXX retained title to and benefits and burdens of ownership of the property. At no time did XXXXX transfer any title or possession of the property to the Petitioner. At no time did XXXXX transfer any right to possession, operation, or use of the property to the Petitioner.

10. At no time did the Petitioner transfer any title, possession or right to possession, operation or use of the property to XXXXX.

11. On XXXXX, the Division issued an amended statutory notice of deficiency.


There is levied a sales and use tax on the purchaser for the amount paid or charged for leases and rentals of tangible personal property if the property site is in the state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state. (Utah Code Ann. 59-12-103(k), formerly Utah Code Ann. 59-15-4(h).)

When a lessee has a right to possession, operation, or use of tangible personal property, the tax applies to the amount paid pursuant to the lease agreement regardless of the duration of the agreement. (Utah State Tax Commission Administrative Rule R86519-32S.)


In the present case, the issue before the Commission is whether a "safe harbor lease" pursuant to 168 of the Internal Revenue Code constitutes a taxable transaction for purposes of the sales tax statutes.

The Commission notes at the outset that a "safe harbor lease" such as the one in question is not a true lease within the traditional meaning of the term. Websters II New Riverside Dictionary defines "lease" as "a contract granting occupation or use of property during a certain period in exchange for a specified rent." That definition is in accord with Black's Law Dictionary which defines "lease" as "When used with reference to tangible personal property, the word 'lease' means a contract by which one owning such a property grants to another the right to possess, use, and enjoy it for a specified period of time in exchange for periodic payments of a stipulated price, referred to as rent."

Indeed, even Utah State Tax Commission Administrative RuleR865-19S-32(b) (Rule 32S) contemplates such a traditional notion of leases when sales tax on leases apply. Rule 32S states, "when a lessee has a right to possession, operation, or use of tangible personal property, the tax applies to the amount paid pursuant to the lease agreement, regardless of the duration of the agreement."

In the present case, the "lease" in question transfers none of the typical rights of possession or use as in a traditional lease. The only transfer that occurs is the transference of intangible tax benefits as provided for by the Internal Revenue Code. In essence, a legal fiction is created whereby the Petitioner becomes a "lessor" of property it has no right to use or possess and XXXXX becomes the "lessee." This legal fiction, however, is recognized only for income tax purposes so that the parties may take advantage of the tax benefits of the statutory scheme.

It should be noted that aside from the tax benefit, no consideration beyond the amount paid by the Petitioner to purchase the tax benefits is exchanged. That is, under the terms of the contract, loan payments on the mortgage and rent payments under the lease were contingent upon each other and were structured so no rent or loan payments were ever exchanged.

The Respondent argued that the Petitioner should be estopped from having its motion granted. In support of that argument, the Respondent made reference to a letter, dated XXXXX, written by then Tax Commission Vice Chairman XXXXX wherein it was stated, "Utah has taken the position that the lease payments will be taxable for sales tax purposes." That letter was in response to a XXXXX inquiry into Utah's treatment of safe harbor lease transactions.

Based upon that letter, the Respondent argues that the Petitioner was on notice of the Tax Commission's policy regarding such transactions.

The Commission does not accept the Respondent's argument for two reasons: (1) The transaction entered into by the Petitioner preceded the letter in question by several months. Therefore, the Petitioner could not have known about such "policy" when it entered into the transaction. Additionally, there was no showing that XXXXX even published or otherwise made known the contents of the letter; and (2) Nothing is known about the circumstances or discussion process that went into its drafting. Without such information the Commission is not prepared to find that the letter was intended to be more than a general response to a general question and that it was intended to establish Tax Commission policy for any and all situations involving safe harbor leases.

Based upon the foregoing, the Tax Commission finds that under the facts of the present case, the lease agreement entered into by the Petitioner and XXXXX constitutes a safe harbor lease under the provisions of Section 168(f) of the Internal Revenue Code and as such is not subject to Utah sales and use tax. This finding is based upon the fact that no right to use, possess, or enjoy the tangible personal property in question was transferred from one party to another. Therefore, no taxable transaction occurred.

The Petitioner's Motion for Summary Judgment with respect to the issue of whether the lease in question constitutes a taxable transaction for sales tax purposes is granted. The Auditing Division is ordered to amend its audit in accordance with this decision. It is so ordered.

DATED this 13 day of February, 1991.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner