89-0006 - Sales





Petitioner )






) Account No. XXXXX

: Audit Period: XXXXX

Respondent ) to XXXXX



This matter came before the Utah State Tax Commission pursuant to the Utah Administrative Procedures Act for a formal hearing on XXXXX before XXXXX, Presiding Officer. Petitioner was represented by XXXXX, Tax Manager. Respondent was represented by XXXXX, Assistant Attorney General, XXXXX, XXXXX, and XXXXX of the Auditing Division of the Utah State Tax Commission.

After reviewing the evidence and arguments of the parties in the record and the recommendation of the presiding officer, the Tax Commission hereby makes its:


1. The tax in question is sales and use tax.

2. The period in question is XXXXX through XXXXX.

3. XXXXX XXXXX Company entered into a loan agreement with XXXXX Corporation, on XXXXX to finance an industrial development project in Salt Lake City. The financing mechanism was the issuance of Industrial Development Bonds (IDB's) by XXXXX Corporation. Proceeds from the sale of the bonds were to be used to purchase land, improvements on the land, and certain unspecified equipment in order to expand XXXXX Leasing's industrial operations in Salt Lake City. The loan was guaranteed by Petitioner, XXXXX Company, in a guarantee agreement accepted XXXXX. This agreement states that XXXXX is the record owner of the project and also that the parties to the guarantee agreement understand that XXXXX will lease the project to Petitioner.

4. Pursuant to the provision of the loan agreement that XXXXX and Petitioner would be the only principal users of the project on the date of issuance of the bonds, these two companies executed lease agreements for the real property and the equipment to be acquired for the project. These agreements were dated XXXXX. The lease term for the equipment began on XXXXX XXXXX, with rent beginning to accrue at that time and the first payment due on XXXXX. The rental amounts were determined as if the equipment had been purchased and placed in service as of the date of the lease at a projected purchase cost of $$$$$. A rent credit was provided for in the lease to rebate the rent charged for equipment not yet placed in service. This was because the equipment was to be purchased at various times during XXXXX, and this rent credit was included in the lease in fairness to the lessee. The interest earned on the funds not yet expended for purchase of equipment was determined to be a fair measure of the amount of the rent credit.

5. Subsequent to the execution of the equipment lease, the equipment was purchased and placed in service at various times during XXXXX. XXXXX determined that in XXXXX a rent credit of $$$$$ was due to the lessee to adjust for the XXXXX unearned rent. The two companies determined that the best way to apply the rent would be for XXXXX to pay Petitioner a direct rebate of the rent credit amount. XXXXX was also given credit for the interest earned on the unspent funds, which was used by XXXXX to make future principal and interest payments on the XXXXX.

6. Subsequent to the execution of the original lease, XXXXX and Petitioner amended the lease. This undated amendment provided that rent on the equipment should not begin accruing until XXXXX and that rent payments would not begin until XXXXX.

7. Under this arrangement, Petitioner received the $$$$$ rebate plus the advantage of the amended lease. All of the equipment had been purchased by XXXXX when the lease payments under the amendment were to begin.

Therefore, since Petitioner was not paying rent on the equipment until XXXXX, the rebate which they received of $$$$$ was, in effect, a rebate for rent that they did not pay. Additionally, the amount of this rebate far exceeds the amount of rent that would have been paid by Petitioner from January to August XXXXX if the lease had not been amended.

8. Petitioner contends that this so-called rebate was not a lease payment and is therefore not subject to sales tax. However, the evidence clearly indicates that this rebate was to be used by Petitioner to make lease payments in XXXXX.

This is a credit toward future lease payments, but it does not reduce the total amount of the lease. Sales tax will still be due on all lease payments, and the evidence leads to the assumption that the tax will be due on the total amount of the lease agreement. It is to Petitioner's advantage to pay the sales tax at the XXXXX rate rather than at a future higher rate.


1. Utah Code Ann. 59-12-103(1)(k) provides that a sales and use tax shall be levied on a purchaser for the amount paid or charged for leases and rentals of personal property if the situs of the property is in Utah, if the lessee takes possession in Utah or if the property is stored, used, or otherwise consumed in Utah.

2. Utah State Tax Commission Administrative Rule R865-19S-20(C) provides that sales tax credits may be applied where adjustments in sales price occur such as discounts or rebates which cannot be anticipated. Under Utah Code Ann. 59-12-102(10)(e) a "sale" as referred to in this rule would include lease transactions.

3. The application of the law to the available evidence supports Respondent's position. The rent credit was given by XXXXX to Petitioner in XXXXX and was then used to defray XXXXX lease payments. Therefore, 59-12-103(1)(k) does apply to render taxable the $$$$$ rent credit which is the subject of this case.


Based on the foregoing, it is the decision and order of the Utah State Tax Commission that the request of Petitioner be denied. Sales tax in the amount of $$$$$ plus applicable interest is due.

DATED this 12th day of April, 1990.