REQUEST LETTER

 

03-017

 

NAME

ADDRESS

PHONE

FAX

 

Re: Request for Opinion on sales Tax Transaction

 

We respectfully request an opinion on a sales tax issue involving a sale and lease back corporate attorney they set up a new LLC to hold the equipment for the purpose of liability protection. The Company paid sales tax on the original purchase of the equipment.

 

The Company sold the equipment to the new LLC in 2001 and transferred title. The attorney drew up a lease agreement that was not a capital lease in that it was not a financing arrangement and it did not provide for the lessee Company the ability to capitalize the property or to obtain title to the property. The nature of the lease made it such that the monthly lease payments are clearly subject to Utah sales tax.

 

In 2002, upon pointing this out to the attorney, he advised the Company to terminate the LLC and the lease agreement and return the equipment to the Company. It was apparent to all that any perceived benefits of liability protection were far overshadowed by the duplicate sales tax that would be owed due to the attorney’s error,

 

Our questions on this transaction are as follows:

 

1.                  Is there any problem in rescinding the transaction as advised above by the attorney?

2.                  Since the Company paid sales tax on the original purchase of the equipment can the transaction be rescinded back to the original transaction date in 2001?

 

We thank you in advance for your attention to this matter and hope that you will have the ability to respond in a timely manner. Please call if you have any questions.

 

NAME

 

RESPONSE LETTER

 

 

September 9, 2003

NAME

ADDRESS

 

RE: Private Letter Ruling Request – Sales Tax on Lease Payments

 

Dear NAME,

 

We have received your request for a private letter ruling concerning the application of sales tax on certain lease payments. By telephone, you informed us that your client (“Company”) purchased various pieces of equipment between five and ten years ago. The Company paid sales tax on these purchases at the time of purchase. In 2001, the Company created a limited liability company (“LLC”), which bought the Company’s equipment on an installment contract and then leased the equipment back to the Company. As you pointed out in your letter, the lease between the LLC and the Company did not qualify as a nontaxable sale-leaseback transaction, as defined in Utah Code Ann. §59-12-102(24)(c). Accordingly, the LLC should have been collecting and remitting sales tax on the lease payments paid by the Company.

 

Approximately one year after creating the LLC and entering into the lease, the Company became aware of the tax consequence of its lease. It attempted to minimize its sales and use tax liabilities by dissolving the LLC and returning ownership of the equipment to the Company. When it dissolved the LLC, it terminated its installment contract and its lease with the LLC. You ask whether these actions are sufficient to absolve the Company and the LLC of any sales and use tax liabilities under these circumstances.

 

In prior rulings, the Commission has stated that the sales transaction for a lease occurs at the time a lease is signed, that is, the time a lessee obtains legal possession to that personal property for a definite period of time. For this reason, sales tax liability is not determined by subsequent events, but by whether or not the transaction was taxable at the time the parties entered into it. Accordingly, while the termination of a taxable lease may absolve the parties of future sales and use tax payments, it does not absolve the parties of sales tax liabilities back to original transaction date.

 

Although the Company has always had possession and control of the equipment, it has done so under two forms, first as the direct owner, and second as the lessee. Each of these transactions, the original purchase and the subsequent lease back, created a distinct and separate taxable event. Allowing a retroactive lease termination back to the original transaction date for sales and use tax purposes would ignore the second transaction and the period of time the lessee had possession and use of the equipment under the lease agreement.

 

In summary, the Company does not owe sales and use tax on future lease payments that were cancelled by the lease termination. However, the lease payments relating to the period prior to the termination still pertain to a taxable lease, and sales tax is due on these payments. We note that the transfer of title back to the Company once the LLC was dissolved could be another taxable sale of the equipment. However, if the initial installment contract between the Company and the LLC contemplated the return of the equipment if the LLC defaulted on payment or was dissolved, we would not consider this transfer a taxable sales transaction.

 

Please contact us if you have any other questions.

 

For the Commission,

 

 

 

Marc B. Johnson

Commissioner

 

MBJ/KC

03-017