96-062
Response
April 9, 1996
Request
Attn:
XXXXX
Ref: Request for Advisory Opinion regarding XXXXX
Dear
Commissioner(s),
I
need a clarification pertaining to sales taxation on lease payments for
manufacturing equipment.
In
1995, XXXXX (a proprietorship by XXXXX) was threatened with a law suit relating
to product liability. Under advice from
legal counsel, I formed a XXXXX company (XXXXX) with the intent of transferring
the mfg. equipment ownership into the LLC to reduce my ownership fraction (each
member of my family owns a part). I
assumed that because the equipment originally fell under “new/expanding mfg.
operations,” the lease payments would not be subject to sales taxation. After researching this with one of your
auditors (XXXXX) it was suggested I seek a clarification.
If
these payments are taxable, I have only a couple of choices:
Reduce
the payments to some very low value (which may negate the validity of the
lease/ownership in a law suit).
or,
restructure XXXXX to be the LLC
Thank
you for your time in clarifying this matter.
Sincerely,
XXXXX
XXXXX
Re: Manufacturing sales tax exemption
Dear
XXXXX
We
have received your request for an advisory opinion as to whether your lease
payments are eligible for exemption as purchases of manufacturing equipment in
a new or expanding business.
Although
you have indicated that the equipment involved qualifies for a manufacturing
exemption, we cannot verify that from the information provided in your
request. Therefore, we start by
outlining the requirements for the manufacturing exemption so you can be sure
that your initial purchase was eligible for exemption.
Machinery
Purchased for New or Expanding Operations
Sales
or leases of machinery and equipment by a manufacturer for use in a new or
expanding operations related to the manufacturing process in a Utah
manufacturing facility are exempt from sales tax. To be eligible, the manufacturing operation must fit within the
classifications of manufacturer described in SIC codes 2000 - 3999 of the 1987
Standard Industrial Classification Manual.
The exemption is further limited or qualified as follows:
1. The 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.
Replacement
Equipment
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.
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.
1. For tax years beginning July 1, 1996, 30% of
the exemption is allowed.
2. For tax years beginning July 1, 1997, 60% of
the exemption is allowed.
3. For tax years beginning July 1, 1998, 100%
of the exemption is allowed.
Normal
operating replacements purchased before July 1, 1996 are fully taxable.
Transfer
and Leaseback Arrangement
Assuming
that your equipment qualified for the manufacturing exemption, we turn to your
question regarding the sale and leaseback arrangement. Utah law imposes sales and use tax on retail
sales and leases of personal tangible property unless a statutory exemption
applies. However, 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-leaseback 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.
If
your company purchased manufacturing equipment tax-free by claiming the
manufacturing exemption and the leaseback arrangement is entered for some
purpose other than financing, the sale-leaseback provision cited cannot apply
because it fails to meet conditions 1 and 2 above.
If
the LLC purchases the equipment for the purpose of leasing it back to you, the
LLC’s purchase is tax exempt as a purchase for resale. However, your lease from the LLC constitutes
a separate taxable transaction.
Unfortunately, the manufacturing exemption is of no use to you here
because you did not enter the lease to expand your manufacturing operations. You are using the same equipment to perform
the same functions that it has performed since it was put into service.
Unfortunately,
the sales tax laws seem to present an obstacle for you so long as the
transaction is structured as you’ve described it in your letter. As you consider other alternatives, please
feel free to call upon us for information or advice.
For the Commission,
Alice Shearer,
Commissioner