96-082
Response
May 15, 1996
Request
Mr.
R. H. Hansen, Chairman
State
Tax Commission
Heber
M. Wells Bldg
160
East 300 South
Salt
Lake City, UT 84134
Dear
Sir/Madam:
XXXXX
is a tax software development and research company that provides tax
calculation systems and research materials to its customers. In order to provide our customers with
accurate and authoritative information, it is important that we review our
products for current and correct tax data.
This ensures that our customers are in proper compliance with all state
tax laws. Also, the state is certain
that the proper amount of sales/use tax is being remitted.
We
would like to provide our customers with guidance and assistance in making
taxability decisions of sale and leaseback transactions. We have defined a sale leaseback transaction
as a transaction whereby a company transfers title but not possession of
tangible personal property that they already own to another party. Then this
company leases the same tangible personal property back from the other
party. Therefore, we respectfully
request that a formal opinion be issued to clarify the State's position on the
following transaction:
Company A originally purchases tangible personal property
from a manufacturer. After a period of time
Company A sell's title to this tangible personal property to a bank, other
financial source, or the original manufacturer. Then Company A leases the tangible personal property back from
the bank, other financial source, or the original manufacturer.
We
are specifically asking the tax ramifications on sale and leaseback
transactions for the following items:
1. The overall taxability of sale and leaseback
transactions.
2. The taxability of the sale and leaseback
transaction when the original purchase of the tangible personal property was
exempt.
3. The taxability of the sale and leaseback
transaction when the original purchaser paid sales tax when the tangible
personal property was first bought.
4. The time period that the original purchaser
has to complete the sale and leaseback transaction.
5. The taxability of the sale and leaseback
transaction if the original purchaser uses the tangible personal property.
6. When will the state consider the sale of
tangible personal property from the original purchaser to the bank, other
financial source, or the manufacturer an occasional or casual sale.
7. The conditions necessary to consider the
sale and leaseback transaction a conditional sale.
8. The conditions necessary to consider the
sale and leaseback transaction a financial arrangement.
9. The state's interpretation of the intent of
the sale and leaseback transaction when the original purchaser used the
tangible personal property prior to the sale and leaseback.
We
are asking that you provide the proper legal cite's with your response to the
above questions.
Your
attention in this matter is greatly appreciated. I have enclosed for your convenience a self addressed stamped
envelope. If you have any further
questions, please do not hesitate to contact me at XXXXX.
Sincerely,
XXXXX
XXXXX
Re:
Advisory Opinion - Sale Leaseback Financing
Dear
XXXXX
We have received your
request for information pertaining to sale-leaseback financing. 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,
effective July 1995, section 59-12-102 (13) (c) of the Utah Code provides that
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 the initial
purchase of the tangible personal property was exempt from sales or use tax,
the sale-leaseback provision cited above does not apply. Additionally, title must pass to the bank or
other financing source. If the bank
holds only a secured lien on the property, it is not a true sale-leaseback
arrangement. Of course, if the bank
holds only a secured lien on the property, any payments made to the bank are
merely payments on a loan and not taxable rental payments.
Let me emphasize that
the equipment must be capitalized by the lessee as an asset. If the lease payments are shown as an
expense on the lessee’s accounts, the arrangement fails to meet (3) above and
tax is due on the lease or rental payments.
Utah law sets no conditions
as to the time that lapses between the purchase of the equipment and the sale
leaseback arrangement. Therefore, even
if a company purchases and uses tangible personal property for a time, then
enters a sale-leaseback arrangement, the exemption applies so long as the
transaction fulfills all of the conditions listed above.
With regard to
conditional sales, section 59-12-102 (15) of the Utah Code defines taxable
sales as “any transfer of title, exchange or barter, conditional or
otherwise, in any manner, of tangible personal property or any other
taxable item or service under Subsection 59-12-103(1), for consideration.” (Emphasis added.) We are not sure what type of transaction you have in mind, but it
is taxable if a right to possession, operation, or use of an item of tangible
personal property is granted and the transfer would be taxable if an outright
sale were made. Therefore, if the
transaction is structured as an installment sale or a lease with an option to
buy, it is still taxable.
Utah law provides a
sales tax exemption for isolated and occasional sales of items of tangible
personal property except vehicles which are required to be titled or registered
under Utah law. Under section 59-12-104
(14) of the Utah Code, isolated or occasional sales by persons not regularly
engaged in business are exempt from sales tax.
Utah Administrative Rule R865-19S-38 (D) construes the term
"business" as an enterprise engaged in selling tangible personal
property or taxable services. Read
together, these regulations exempt an isolated sale when it is made by a person
who is not pursuing his regular course of business of selling tangible personal
property. The sale by a business of its
used fixtures, machinery, and equipment is considered an isolated or occasional
sale unless the sale is one of a series of sales sufficient in number to
indicate the seller deals in the sale of such items. Utah Admin. R. R865-19S-39 (E).
Under the isolated and
occasional sale rule, a business may sell an item of tangible personal property
to a bank or other financing source tax free.
However, the leaseback is a separate transaction, and it is subject to
sales tax. Likewise, the bank or other
financing source may purchase the item tax free as a purchase for resale if it
makes the purchase with the intention of renting or leasing the item in the
regular course of business. However,
the subsequent rental or lease transaction will be subject to tax. Because these types of transactions cannot
save the leaseback from taxation, most taxpayers rely on the sale-leaseback
provisions described above.
We notice that your
letter was mailed to our old address.
Please note our new address for your records:
Utah State Tax Commission
210 North 1950 West
Salt Lake City, Utah 84134
Please let us know if
you have other questions.
For the Commission,
Alice Shearer,
Commissioner