04-006
NAME
ADDRESS
PHONE
Dear Ms, Hendrickson,
COMPANY is a small ticket leasing company that leases a variety of equipment under two forms of lease; one with a fair market option and one with a $$$$$$ option. Our current $$$$$$ option lease does not require the lessee to acquire the equipment at the end of term. Under the terms of the COMPANY, the lessee has the option but not the obligation to acquire the equipment at lease term. Therefore COMPANY believes under the new Streamline Sales Tax Project definition both forms of leases originated by COMPANY are leases for sales tax purpose and the sales tax would be applied to the monthly payment rather than upfront at commencement.
COMPANY would like to insure that it is in compliance with the sales/excise tax of Utah and therefore requires that you provide COMPANY with a written explanation of how Utah would tax our lease transactions under the Streamline Sales tax. In addition, what would be the effective date of the preferred method of sales tax collection?
Enclosed for your reference is a copy of our equipment purchase option schedule of our Master lease.
Should you have questions or need additional information please call me.
RESPONSE LETTER
April 16, 2004
NAME
ADDRESS
PHONE
RE: Private Letter Ruling Request – Streamline Sales Tax Legislation and its Effect on the Taxation of Leases
Dear NAME,
You have requested the Commission to issue a ruling on how COMPANY should charge Utah sales tax on its leases now that the Utah Legislature has enacted certain portions of the Streamline Sales Tax Project. The statutory changes take effect on DATE. When leasing tangible personal property, COMPANY uses two different lease forms, one in which the lessee has the option to purchase the item when lease ends for a nominal amount ($$$$$$), which the Commission considers a “conditional sale lease” as defined below, and one in which the option price is the item's fair market value. Under either lease, the lessee is not required to purchase the property when the lease ends, but COMPANY is required to sell the property at the option price if the lessee so requests. Given these criteria, we will contrast the tax treatment for the two lease forms both under the current law that should apply to leases signed through until DATE, and under the new law for leases signed on or after DATE.
The authority to impose a sales tax on leases or rentals of tangible personal property was not changed by the recent legislation. Under both the current law and the new law, Utah Code Ann. §59-12-103(1)(k) imposes a sales or use tax on amounts paid or charged for certain leases or rentals of tangible personal property. For discussion purposes, we assume that COMPANY lease transactions are taxable, regardless of which lease form is used. At issue, however, is whether COMPANY should collect the entire amount of sales tax due under each lease “upfront,” when the lease agreement is signed, or whether COMPANY should collect sales tax at the time each lease payment is made.
I. Treatment under Current Law (For Leases Signed Through DATE).
Under Section (A) of Utah Admin. Rule R865-19S-32 (“Rule 32”) (copy enclosed), a lessor is required to compute sales or use tax on all amounts received or charged in connection with a lease. The general rule is that sales tax is charged and collected at the time each lease payment is made. Rule 32, however, provides an alternative treatment for leases that qualify as “conditional sale leases.” Under Section (F) of the rule, a lessee may, at its option, treat a conditional sale lease as either a sale or lease for sales or use tax purposes. If the conditional sale lease is treated as a sale, the lessor collects and remits the entirety of the sales tax due at the time the lease is signed. In this case, pursuant to Sections (G) and (H) of Rule 32, the tax would be based on either the average sales price of similar property sold by the lessor or on the lessor's full purchase price of the property. If the conditional sale lease is treated as a lease, however, the lessor collects and remits the sales tax on each lease payment as it is made.
To qualify as a “conditional sale lease,” Section (F) of Rule 32 requires that the lease meet the following requirements:
1. the consideration the lessee is to pay the lessor for the right to possession and use of the property is an obligation for the term of the lease not subject to termination by the lessee, and
2. the total consideration to be paid by the lessee is fixed at the time the lease is executed and cannot be modified by use, condition, or market value, and either:
a. the lessee is bound to become the owner of the property; or
b. the lessee has an option to become the owner of the property for no additional consideration or nominal additional consideration upon compliance with the lease agreement. Nominal consideration in this sense means ten percent or less of the original lease amount.
One of COMPANY lease forms contains an option where the lessee may exercise an option to purchase the property at the end of the lease for its fair market value. The option price, i.e., the property's fair market value, is not fixed at the time the lease is executed and will be modified based on the fair market value at the end of the lease. Section (F)(2) is not met and the lease does not qualify as a “conditional sale lease.” Accordingly, for COMPANY leases that provide the lessee an option to purchase the property for a fair market value and are signed through DATE, COMPANY should collect sales tax on each lease payment made.
COMPANY other lease form contains an option where the lessee has the option to purchase the property for $$$$$$ at the end of the lease term. We assume that the lessee may not terminate the lease, the total consideration to be paid by the lessee is fixed at the time the lease is executed, ad that $$$$$$ is ten percent or less of the original lease amount. If so, such a lease would qualify as a “conditional sales lease” under the current rule. Accordingly, for these types of leases signed through DATE, COMPANY may either treat the transaction as a sale and collect and remit the entirety of the sales tax due at the time the lease is signed, in accordance with Sections (G) and (H) of Rule 32, or it may treat the transaction as a lease and collect and remit the sales tax as each lease payment is made.
II. Treatment Under New Law (For Leases Signed On or After DATE).
Beginning DATE, Utah Code Ann. §59-12-102(32) defines the terms “lease” or “rental” for purposes of taxation under Section §59-12-103(1)(k), pertinent parts as follows:
(a) "Lease" or "rental" means a transfer of possession or control of tangible personal property for:
(i) (A) a fixed term; or
(B) an indeterminate term; and
(ii) consideration.
Under both of COMPANY lease forms, the possession or control of tangible personal property is transferred to the lessee for either a fixed or indeterminate term and for consideration. However, Section 59-12-102(32)(c)(ii) was intended to remove from the definition of “lease” or “rental” certain option lease transactions that would otherwise be deemed a lease or rental, specifically those previously identified as “conditional sale leases” under Rule 32. The statutory language of Section 102(32)(c)(ii) that excludes such transactions from the definition of “lease” or “rental” is as follows:
(c) "Lease" or "rental" does not include:
. . .
(ii) a transfer of possession or control of property under an agreement:
(A) that requires the transfer of title upon completion of required payments; and
(B) in which the payment of an option price does not exceed the greater of:
(I) $100; or
(II) 1% of the total required payments; . . . .
Both of COMPANY leases contain a provision that provides the lessee an option to purchase the leased property at the end of the lease term. You have stated in your letter that because both of COMPANY lease forms contain such an option, neither lease form requires a transfer of title upon completion of the lease terms, a requirement stated in Section 59-12-102(32)(c)(ii)(A) of the new law to disqualify a lease from treatment as a “lease” or “rental.” Because neither lease meets the requirement found in Section 102(32)(c)(ii)(A), you conclude that both of COMPANY lease forms create transactions that remain “leases” or “rentals” under the new law. Under the presumption that both lease forms result in “lease” or “rental” transactions under the new law, you assert that COMPANY should consider all of its transactions as leases for sales tax collection purposes; i.e., under either lease form, COMPANY should collect sales tax on each lease payment as that payment is due.
The Commission disagrees. Section 59-12-102(32)(c)(ii) excludes from the definition of “lease” or “rental” certain lease transactions in which the lessee has an option to purchase the property when the lease ends. You are correct that the new statute, when subparagraph (A) is read in isolation, does not exclude any “option” lease transaction from the definition of “lease” or “rental,” because no option lease “requires the transfer of title upon completion of required payments.” However, such a reading would leave the entirety of Section 102(32)(c)(ii) without any effect or meaning, because no option lease would meet the requirements for exclusion from the definition of “lease” or “rental.” If possible, the Commission must avoid an interpretation that renders statutory language without effect or meaning. For this reason, the Commission finds the language of Section 102(32)(c)(ii) to be ambiguous. When statutory language is ambiguous, we are forced to look to other sources to ascertain Legislative intent.
The Commission is aware that the Utah Legislature intended to enact the provisions of the “Streamlined Sale and Use Tax Agreement,” adopted November 12, 2002 (and amended November 19, 2003) (“Agreement”) by various states, including Utah. Included in Appendix C, Part I of this Agreement is a definition for “lease or rental,” pertinent parts as follows:
3. “Lease or rental” means any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration. A lease or rental may include future options to purchase or extend.
A. Lease or rental does not include:
. . .
2. A transfer or possession or control of property under a agreement that requires the transfer of title upon completion of required payments and payment of an option price does not exceed the greater of one hundred dollars or one percent of the total required payments;
. . . .
In the Agreement, Appendix C, Part I , Provision (3)(A)(2) (“Provision (3)(A)(2)”) contains the language that the Legislature attempted to codify in Section 59-12-102(32)(c)(ii). A close reading of Provision (3)(A)(2) shows that the codification in Section 102(32)(c)(ii) did not accurately reflect this Agreement provision. While the statutory language required the transaction to be both an option lease and a lease that requires a title transfer without an option (a logical impossibility), the language in Provision (3)(A)(2) does not. The provision language merely requires a transfer of title once all lease payments are made and once the lessee has exercised its option to obtain title. The provision language is clear that the requirement to transfer title is dependent upon the option exercise, not independent of it as indicated by the ambiguous statutory language. For this reason, the Commission finds that the Legislature's intent is best served by an interpretation consistent with the language found in Provision (3)(A)(2) of the Agreement.
In order to give meaning to the statute and resolve the conflict in it between an option price and the requirement for transfer of title, the Commission interprets Section 59-12-102(32)(c)(ii) as follows: a transaction is not a “lease” or “rental” if a transfer of title is required upon a completion of: (1) required payments; and (2) payment of an option price that does not exceed the greater of: (a) $$$$$; or (b) 1% of the total required payments. Under this interpretation, COMPANY lease that gives the lessee an option to purchase the leased property for $$$$$$ qualifies as a transaction defined in Section 102(32)(c)(ii) that is excluded from the definition of “lease” or “rental.” Accordingly, beginning DATE, any such lease transaction will be excluded from the definition of “lease” or “rental” and will be treated as a sale for sales tax purposes. The previous option of treating such a lease as a sale or a lease, as provided in Section (F) of Rule 32, has been eliminated by the passage of the new statute, which does not provide for such an election. Thus, for such leases signed on or after DATE, COMPANY should collect and remit sales tax on the “purchase price” of the leased equipment.
Please note, however, that with the enactment of the Streamlined Sales And Use Tax provisions, a new definition of “purchase price” and “sales price” becomes effective DATE. (Section 59-12-102(55).) Accordingly, for a lease that is considered a sale for sales tax purposes and is signed on or after DATE, the lessor should collect sales tax up front on the total amount of consideration due under the lease. Under the new definition, any imputed interest that is part of the lease payments could only be removed from the tax base “if the amount is separately stated on the invoice, bill of sale or similar document given to the purchaser.” (Subsection 102(55)(c)(ii).) Unless the imputed interest is separately stated on a document given to the lessee at the time of signing, COMPANY should collect and remit sale tax up front on the entire amount of the lease payments due under the lease. If and when the lessee should elect to purchase the property for the $$$$$$ option amount, the lessor would at that time collect and remit sales tax on the option price.
On the other hand, COMPANY other lease form that provides a purchase option at fair market value would still be regarded as a “lease” or “rental” under the new statute, under the following assumptions. We assume that the fair market value of the property is both greater than $$$$$ and 1% of the total required payments under the lease. Such an option lease does not meet the Section 59-12-102(32)(c)(ii) requirements for exclusion and, as a result, is still considered a “lease” or “rental.” For this lease form then, COMPANY would continue to collect and remit sales tax on each lease payment when due and paid by the lessee, even on those leases signed on or after DATE.
In summary, COMPANY should treat its “fair market value” option lease as a lease for sales and use tax collection purposes both now and after DATE. Under both the current and new laws, COMPANY should collect and remit sales tax on each lease payment due under such a lease. For its “$$$$$” option leases, however, COMPANY collection duties will change for those leases signed on or after DATE. Until that date, such leases are considered “conditional sale leases,” as defined in Rule 32, and COMPANY is allowed to treat such a transaction either as a lease or as a sale for sales tax collecting and remitting purposes. If treated as a sale, the sales tax collected up front is based on COMPANY full purchase price of the property at the time of the purchase, in accordance with Section (H) of Rule 32. If treated as a lease, the sales tax should be collected and remitted on each lease payment due under the lease. However, beginning on DATE, any such transaction must be treated as a sale for sales tax purposes. As such, COMPANY should collect and remit sale tax up front on the entire amount of the lease payments due under the lease, unless the imputed interest is separately stated on a document given to the lessee at the time of signing.
If you have any other questions, please contact us.
For the Commission,
Marc B. Johnson
Commissioner
MBJ/KC
04-006