96-098
Response
June 26, 1996
Request
Utah
State Tax Commission
Auditing
210
1950 West
Salt
Lake City, UT 84134
Dear
Sir/Madam:
We
are in need of an official opinion on the sales/use or rental tax ramifications
of lease assignments. Depending on the transaction we may be the original
lessor or the subsequent lessor. I am inquiring primarily about “true leases”
where the lessor is the owner of the equipment.
The
lessor will purchase assets and then immediately enter into lease arrangements.
Our leases are commonly for 4 to 6 years. At the end of the lease term the
lessees have an option to either purchase the equipment or return it, in some
cases the lessee may have the option to extent his lease term.
There
are many different types of assignments:
Type
1: Full Access. Transactions purchased that involve full notification to
the lessee. The new lessor takes over all administrative functions such as
billing and collection. The new lessor is now the owner of the equipment and is
entitled to the depreciation benefits.
Type
2: Limited Access. This covers several potential situations where the
original lessor may have sold a transaction or an interest in a transaction.
One typical type of transaction would be a lease discounting, the rental stream
is sold, but not the residual. In most of these cases the original lessor would
still bill with directions to remit payment to lessor two. In transactions
involving numerous participants the original lessor would act as an
“administrative agent” and bills the lessee, receives payment and then
distributes the payments to the various participants.
Type
3: No Access - tax reported by new lessor. The customer is never notified
that the lease was transferred. The originating lessor bills and collects all
receipts and then forwards the payment and related taxes to the second lessor.
The second lessor remits all appropriate tax to the State on their tax
returns.
Type
4: No Access - tax reported by original lessor. The customer is never
notified that the lease was transferred. The original lessor bills and collects
all receipts and then forwards the payment to the second lessor. The original
lessor remits all appropriate tax to the State on their tax returns.
Type
5: Private Label - transaction transferred immediately. The transfer
occurs immediately following the original lease commencement. The customer is
never notified that the lease was transferred. The second lessor bills and
collects in the name of the original lessor. The second lessor remits all
appropriate tax to the State on their tax returns.
I
am concerned with who has the tax reporting responsibility as well as the
liability for sales taxes. Please write me back specifically addressing the
following points, in addition to whatever tax ramifications you foresee.
1.
For the transactions described above when/or is the original lessor still
liable for the tax?
2.
Is there a taxable transaction at the time the lease assignment is entered
into? Assume that a resale certificate was obtained from lessor two.
3.
Is the original lessor liable for sales tax only for the portion of time they
owned the transaction?
4.
Is the original lessor still liable for the tax if they have forwarded it to
the second lessor for final remission to the State?
5.
Will the original lessor be liable if an agreement exists allowing the second
lessor to bill and collect in the original lessor’s name?
6.
What will be the tax implications to the lessee, if any?
7.
Will the lessee have any tax acceleration or will tax still be collected on the
scheduled lease payments?
8.
What are the ramification for those instances where the lessee has given the
original lessor an exemption certificate?
Please
list the appropriate regulations and citations you are basing your response on.
Please
call me if you need additional information to process this request at XXXXX.
Thank you for your assistance in this matter.
Sincerely,
XXXXX
XXXXX
Advisory
Opinion - Sales tax on equipment leases
Dear
XXXXX,
We
have received your request for an opinion as to the taxability of the various
lease arrangements entered by your company.
We offer the following guidance:
1. A company may purchase items of
tangible personal property for resale or lease tax free. §59-12-104 (26) Utah Code Ann. However, sales tax is due on the transaction
between the lessor/owner and the lessee.
§59-12-103 (1) (m) Utah Code Ann.
If the lease transaction is a
transaction between two Utah taxpayers, the lessor must collect and remit sales
tax on every lease payment.
Additionally, if the lessor is an out-of-state business that leases
equipment to a Utah lessee, the lessor’s ownership of property in Utah is
sufficient to create nexus for sales tax purposes. §59-12-107 (1) (a) (v) Utah Code Ann. Again, the lessor is responsible for collecting and remitting
sales tax in Utah.
2. Where the original lessor/owner sells
the equipment subject to the outstanding lease arrangement, sales tax does not
apply to the transaction because the new lessor/owner may purchase the
equipment tax free under the resale exemption so long as the item is used as
leased property. §59-12-104 Utah Code
Ann. However, if the new lessor/owner
is leasing the property to a Utah taxpayer, the new lessor/owner assumes
responsibility for collecting and remitting Utah sales tax.
3. If the original lessor/owner sells its
total interest in the rental property, it is no longer liable for sales tax
reporting with regard to that property.
However, you have described a variety of transactions in which the
original lessor/owner remains involved in the rental transactions after
transferring the property or an interest in the property to a subsequent
owner.
Generally, the party receiving the
rental payments is responsible for collecting and reporting sales tax, but one
party may act as an agent for the other with regard to sales tax
reporting. For instance, in the situation
where the original lessor/owner sells the rental stream, the rental stream
owner is entitled to rental payments.
However, by terms of their contract, the lessor/owner may agree to
collect the payments and report the sales tax.
In such a case, the lessor/owner is acting as a agent for the rental
stream owner and the rental stream owner is ultimately responsible for
reporting sales tax.
In any transaction in which your
company retains some interest or participation, we suggest that you identify
the vendor (the party entitled to rental payments) and clearly delineate each
party’s responsibilities for collecting and reporting sales tax. A breach by the party who is acting as an
agent for the vendor may give rise to a cause of action between the two
parties, but from our perspective the vendor is ultimately responsible for
collecting and remitting the tax.
4. From the foregoing discussion, you will
note that the lessee is responsible for paying and the vendor is responsible for
collecting sales tax on each rental payment.
However, if the vendor fails to collect sales tax on a taxable
transaction, we will look to the vendor for payment of the tax. An exception to this rule applies with the
vendor, in good faith, accepts an exemption certificate from a purchaser or
lessee. For instance, if the equipment
at issue qualifies for the exemption on manufacturing equipment, the lessee
must complete an exemption certificate for the lessor’s tax records. So long as the lessor reasonably believed
the exemption applied, we will look to the purchaser for payment of the sale
tax if we later discover that tax was due.
The manufacturing equipment
exemption is somewhat complex. If you
would like more information about this or any other exemption, please let us
know.
5. Finally, with regard to accelerated
lease payments, sales tax is calculated on each payment. That is, each lease payment is treated as a
separate transaction. Therefore, the sales
tax due depends upon the payment made, not on the scheduled lease payments.
Please let us know if you have any
other questions.
For
the Commission,
Alice
Shearer,
Commissioner