95-089
Response
December 19, 1995
Request
Utah
State Tax Commission
Attn:
XXXXX
210
North 1950 West
Salt
Lake City, UTAH 84134
RE: Opinion
on Sale and Use Tax transaction
Dear
XXXXX
I
am requesting an opinion on a sales and use tax transaction involving a sale
and lease-back of manufacturing equipment. The transaction is as follows:
XXXXX
owns manufacturing equipment that is less than six months old. XXXXX would like to sell the manufacturing
equipment to a lease company then lease them back from the lease company. The lease is a true lease and not a
financing arrangement. There will be no
minimal buy out nor will title pass at the end of the lease to XXXXX. XXXXX will have the option to purchase the
assets at fair market value at the end of the term.
Our
questions to this transaction are as follows:
1 )
Will the sale to the lease company be exempt from sales tax?
2)
Will the lease payments to the lessor be exempt from sales and use tax?
It is our opinion that the sale to the lease company
is an exempt sale for resale. It is
also our opinion that the lease of machinery and equipment by a manufacturer
for use in new or expanding operations are exempt. XXXXX is a manufacturer of wafers.
I would like to thank you in advance for your prompt
attention to this matter and I am hopeful of an expeditious response. Please
call me if you any questions.
Cordially,
XXXXX
XXXXX
RE: Advisory Opinion - Applicability of sales
tax to sale-lease back arrangement
Dear XXXXX
We
have received your request for an advisory opinion regarding the taxability of
a transaction in which your company intends to sell a piece of manufacturing
equipment to a leasing company, then lease it back. We offer the following guidance on this issue:
As
to XXXXX sale of equipment to the lease company, we agree that the transaction is
exempt from sales tax as a purchase for purchase for resale.
Turning
to the taxability of the lease payments, Utah law imposes sales and use tax on
leases of personal tangible property unless a statutory exemption applies. However, the state legislature recently
amended the definition of taxable retail sale to address sale-leaseback
arrangements. Section 59-12-102 (13)
(c) of the Utah Code now provides that as of July 1, 1995, lease payments made
under a sale-leaseback agreement are exempt from sales tax if:
(1)
the lessee pays sales tax on its initial purchase and then enters into a sale
lease back transaction which transfers title to the property to the lessor,
(2)
the transaction is intended as a form of financing for the property to the
purchaser-lessee, and
(3)
the purchaser-lessee capitalizes the subject property for financial reporting
purposes, and accounts for the lease payments as payment made under a financing
arrangement.
From
your description of the transaction, XXXXX is precluded from this provision for
two reasons. First, if, on its initial
purchase, your company took advantage of the sales tax exemption on purchases
of manufacturing equipment, the transaction fails to meet the first condition
set out in (1) above. Second, you state
that this is not a financing arrangement.
Therefore, the transaction fails to meet the condition set out in (2)
above. Because the transaction that you
describe does not fit within the sale-leaseback provision, we review it in
light of other statutory provisions.
XXXXX
lease of that equipment is entitled to exemption only if the transaction
qualifies under the provisions for a manufacturing equipment exemption. You have not described the equipment
involved, but the following information will help you determine whether the
equipment qualifies:
(1) The
manufacturing equipment exemption applies only to tangible personal property,
not real property or tangible property that is purchased and becomes an
improvement to real property.
(2). Machinery
or equipment with a useful economic or accounting life of less than three years
is not eligible for the exemption.
(3)
Machinery or equipment used for an activity that is not part of the
manufacturing process, such as equipment used to transport or ship the final
product, does not qualify for the exemption .
(4) Manufacturing
machinery or equipment which is purchased as a normal operating replacement is
currently subject to sales tax.
Replacement equipment is defined as equipment which serves the same
purpose as existing equipment. If the
existing equipment is retired from service within 12 months before or after the
purchase of new equipment, the new equipment is considered replacement
equipment.
Although
normal operating replacements purchased before July 1, 1996 are fully taxable,
the state legislature recently passed a bill which phases in an exemption for
manufacturing replacement equipment over the next few years. The exemption
rates which will apply to replacement equipment are set out below.
a.
For tax years beginning July 1,
1996, 30% of the exemption is allowed.
b.
For tax years beginning July 1,
1997, 60% of the exemption is allowed.
c.
For tax years beginning July 1,
1998, 100% of the exemption is allowed.
(5) Finally,
the lease must be made for a new or expanding manufacturing in Utah. To qualify as a new or expanding operation,
the manufacturing, processing or assembling activities must be:
a.
substantially different in nature,
character or purpose from prior activities;
b.
begun in a new physical location
in Utah; or
c.
increase production or capacity.
This
last condition is problematic for your company because this leaseback
transaction does not appear to meet any of the qualifications set out in (5)
above because the machine will perform the same process after the
sale-leaseback that it did before. In
that case, your lease arrangement fails as a lease of equipment for a "new
or expanding operation."
If
you have additional questions or additional facts that would change the outcome
of this opinion, please let us know.
For the Commission,
Alice
Shearer
Commissioner