95-093
Response
December 23, 1995
Request
Director,
State Tax Commission
State
of Utah
160
East Third South
Salt
Lake City, UT 84134
Subject:
Secured Financing Documentation
Dear
Sir/Madam:
We
are sending this letter to request your opinion regarding the taxability of certain
finance transactions in your state for sales and use tax purposes. We engage in a variety of transactions; a
substantial portion of our portfolio is comprised of financings secured by
equipment, vehicles and other tangible personal property.
We
have documented the above types of transactions using the attached lease and
amendments. The substance of the
transaction, even though written on lease documentation, is that of a loan and
security agreement. The transaction is
treated as a note receivable for financial accounting and federal and state tax
purposes. We use this documentation
because it is more marketable than a straight note and may provide more
security for the creditor.
XXXXX
acts as a source of financing for the end user. Typically, the end user has entered into an agreement to purchase
the equipment from a vendor and has either fully paid for the equipment or
assigns the invoice to our firm for final payment. Once credit has been granted and the equipment is fully installed
and operational we transfer the funds equal to the equipment cost or the
agreed-upon amount (sometimes less than the original cost) to the customer or
vendor.
To
summarize: normally the customer purchases equipment from an instate vendor and
pays the required sales tax; the customer pledges the equipment as
security and transfers legal title back to the customer in consideration of the
payments required under the contract.
Enclosed
you will find a copy of our standard lease and the amended purchase agreement
which we use to document secured financings.
XXXXX is shown as the secured party on the UCC-I filing. Our position is that since sales tax was
paid on the sale of equipment from the vendor, the subsequent transfers of
legal title are only pledges of equipment for the purposes of obtaining
financing and do not constitute an additional sale or lease of equipment. Therefore no additional sales or use tax is
due. We ask that you review these
articles and provide a letter concurring that the financing transaction would
be tax exempt.
Sincerely,
XXXXX
XXXXX
RE: Advisory Opinion - Applicability of sales
tax to transactions constituting financial arrangements.
Dear
XXXXX,
We have received your request for an
opinion on the taxability of financing arrangements between XXXXX and it
clients. We find as follows:
Utah law imposes sales and use tax
on retail sales and 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 59-12-02 (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.
As noted above, this provision
requires title to pass from the lessee to the lessor An apparent conflict in
the documents that accompanied your request raise questions in our minds as to
whether your arrangements meet this qualification. The document entitled "Indenture and Bill of Sale"
appears to create a sale from your client to XXXXX, then a leaseback by the
client. It states, for instance, that
possession of the equipment is retained by the seller (your client) because it
is the intention of the parties that the seller lease the equipment from
XXXXX. However, the "aster Lease
Agreement" states in paragraph 24 (as amended by Exhibit Y) that ownership
of the property remains with the lessee.
If your client retains title to the property, we assume that the transaction
is not a sale-leaseback arrangement, but that XXXXX has merely entered a
secured financing arrangement with the client.
In that case, the client must pay sales tax on the original purchase
(unless otherwise exempt), but the client's payments to XXXXX are not taxable
lease payments. They are non-taxable
installment payments pursuant to a security agreement.
Let me emphasize that if XXXXX
actually acquires title to the property from the client in these transactions,
the client may rely on the sale-leaseback provision only if the equipment is capitalized. If the lease payments are shown as an
expense on the client's accounts, the arrangement fails to meet (3) above and
tax is due on the lease.
Your letter states that occasionally
your client orders equipment and assigns the invoice to XXXXX. If XXXXX, and not the client, makes the
original purchase, XXXXX is entitled to purchase the equipment tax-free as a
purchase for resale. However, XXXXX's
client must pay sales tax on its lease of the equipment.
XXXXX's agreements apparently cover
all types of equipment. It is important
that you understand the special issues surrounding exemptions on sales and
leases of certain manufacturing and agricultural equipment. For example, if your client purchases
manufacturing equipment tax-free by claiming the manufacturing exemption, the
sale lease back provision cited above does not apply. (See 1 above.) However, your client's subsequent leaseback may
qualify for the manufacturer's exemption.
If XXXXX has entered agreements that raise questions about these
exemptions, please let us know. We will
be happy to review the transactions and advise you as to the sales tax
consequences.
Please let us know if you have
additional questions.
For
the Commission,
Alice
Shearer
Commissioner