96-105
Response July 10, 1996
Request
Val
Oveson, Chairman
Utah
State Tax Commission
210
North 1950 West
Salt
Lake City, UT 84134
RE: Request for Advisory Opinion
Dear
Commissioner Oveson,
The
Salt Lake County Assessor's Office is requesting an advisory opinion from the
Tax Commission regarding personal property tax assessments on firms engaged in
the “Rent-to-Own” industry. It has come to light that firms involved in this
type of transaction are reporting their taxable property using various
methodologies, resulting in unequal assessments for similarly situated
taxpayers. There are also pending appeals on this issue for 1994 at the state
level and for 1995 at the local level.
The
businesses in question rent electronics, furniture, appliances, and other
household items to individuals on a month-to-month or week-to-week basis. The
renter can become the owner of the property upon completion of a specified
number of payments, but title to the property remains with the business until
all purchase options have been completed. The renter can return the property at
the end of any rental period without further obligation as long as rental
payments are up to date. No interest is charged, but the total price to the
customer if he completes the full agreement is much higher than a regular
retail purchase to account for the extra risk involved in the transaction. A
copy of an agreement used by a local firm is attached. It is representative of
the contract used by other businesses in this industry.
The
argument has been made by the taxpayer that the property subject to this type
of agreement is exempt as inventory because the intent of the parties is that
the renter eventually becomes the owner. However, Rule 884-24P-33, paragraph
”D,” states:
“D.
Other taxable personal property that is not included in the listed classes
includes:
1. Supplies on hand as of January 1 at 12:00
noon, including office supplies, shipping supplies, maintenance supplies,
replacement parts, lubricating oils, fuel and consumable items not held for
sale in the ordinary course of business. Supplies are assessed at total cost,
including freight-in.
2. Equipment leased or rented from inventory is
subject to ad valorem tax. Refer to the appropriate property class schedule to
determine taxable value.
3. Property held for rent or lease is taxable
and is not exempt as inventory. Entities engaged in a combination of direct
sales, leases or rental, or rent-to-own may establish an exemption for
inventory by filing form TC-595 with the county assessor in the county where
the property has situs by February 1.” (Emphasis added)
In
light of the above administrative rule, we would appreciate an advisory opinion
regarding the following questions:
1. Is the personal property which is in a customer's possession
but still owned by the business and subject to a rent-to-own contract, taxable
or exempt from ad valorem personal property tax in Utah? Are there any
distinctions to be made for property subject to a “rent-to-own” agreement
versus property subject to purely a rental or lease agreement?
2. If taxable, at what level of trade should the property be
reported to the assessor; the historical cost to the merchant, the value placed
on the property pursuant to the rent-to-own contract, or the normal retail
price of the item if purchased through conventional means?
3. In establishing an exemption for “inventory” the taxpayer may
file form TC-595 with the county assessor. We would appreciate an explanation
of each line item of the form and what values from the taxpayer's financial
statements should be used for each. A copy of the TC-595 form is attached.
1. Merchandise on Hand January 1, 19 _
2. Total Utah Sales 19 _
3. Total line 1 and line 2
4. Total Utah leased or rentals 19 _
5. Taxable Inventory (divide line 4 by line 3)
A. Does “merchandise on hand” only include that
property which is not subject to a rental agreement, or does it have a broader
meaning to include all “inventory” the merchant owns, including that subject to
rental agreements?
B. What does the word “Sales” mean in this
context? Is this just the revenue from outright sales, or does it include
rental revenue from those contracts “paying off” within a certain period of
time, or all rental income from each contract which pays off within the past
calendar year?
C. Why are lines 1 and 2 added together?
D. What does “Total Utah leased or rentals”
mean?
E. Upon calculation of the exemption
percentage, to what amount or line does it apply?
4. Paragraph
three of the Administrative Rule states, “Property held for rent or lease is
taxable, and is not exempt as inventory.” Please explain what is meant by “held
for rent or lease.”
5. For
those customers who complete the required number of payments to assume ownership
during any year, or have rented for some period and then pay a lump sum to
become the owner of the property, is this counted as “rental income” or “sales
income” on the TC-595 form?
6.
According to the TC-595 form, if a firm receives more revenue from rental than
from direct sales, as is the case with the rent-to-own industry, the taxable
percent of inventory is greater than 100%. Applying this percentage to the
inventory figure would result in more than 100% of the inventory being taxable.
See Example A.
7. What
is the proper classification for rent-to-own property; the class based on the
description of the property, Class 3 (small equipment rentals), or Class 1(or
some other value) based on the higher abuse the taxpayer's claims the equipment
receives?
Since the Salt Lake County Assessor's Office has had
to deal with this issue with several rent-to-own companies, we have interpreted
the administrative rule and TC-595 form as follows:
The rule specifically states that property leased or
rented from inventory is subject to ad valorem tax. We take this to include
“rent-to-own” property as well, and do not differentiate from short term
rentals (one or two days) versus the longer term “rent-to-own” agreements. It
is our opinion that form TC-595 form is used to establish an exemption from
taxation based on the percent of total revenue attributed to outright sale of
product for the previous calendar year. This calculation needs four components:
the total inventory of the merchant (this would include all property on hand as
of Jan 1 and would include property on rent, since that property has not yet
been sold), gross revenue from the prior year derived from the outright sale of
merchandise (should not include any rental income in any form), the gross revenue
from all forms of rental for the prior year, and the total of the sales and
rental revenue. Dividing the sales revenue and rental revenues by the total
revenue will give a percent, which when applied back against the inventory
figure will result in the amount of inventory exempt and taxable.
The amount of property exempted will differ greatly
if “merchandise on hand” is interpreted to exclude property subject to rental
agreements. Including property subject to rental contracts will allow the
exemption calculation to apply to inventory out on rent to account for the
eventual sale of this property. It is our opinion that the TC-595 form in its
present format does not yield a result which is accurate, logical, or
mathematically correct.
In the alternative to a confusing and easily
misinterpreted TC-595 form, might we suggest an easier and more understandable
methodology for both parties. Exempt property for a rent-to-own establishment
would be property on the floor or warehoused which is awaiting sale or rental
as of Jan 1 of any year. Taxable property would then only be that property
subject to a rental agreement as of the same date. This information is readily
available from the firm's financial records as of the year end. However, this
methodology would treat rent-to-own firms differently from the short-term
equipment rental firms where all the inventory is taxable because it is all
“held for rent.”
An advisory opinion on this issue would assist this office
and other assessors statewide to uniformly assess this property. Taxpayers and
assessing personnel have interpreted the rule and the form quite differently
since no instructions or definitions have been set forth for their
implementation and the TC-595 form in its present format yields incorrect
results. A revised TC 595 form is attached, which yields what we believe to be
the correct exemption percentage.
Sincerely,
XXXXX
XXXXX
Re: Advisory opinion request
Dear XXXXX
We
have received your request for an advisory opinion on the taxation of property
leased under a “rent to own agreement.”
Although you raise an interesting issue, you also mention that this
issue is being raised in two appeals; one that is before the Commission and one
that may come to us in the future on appeal from the county’s decision. If we accepted your advisory opinion
request, we would, in effect, be allowing you to argue your case outside the
appeals process while denying the petitioner an opportunity to respond. Therefore, it is our policy to decline to
issue an advisory opinion on any matter that is pending before the Commission
on appeal. We think you will agree that
the appeal process is a much better forum for addressing these matters and for
allowing all parties in interest an opportunity to be heard.
We
regret that we are unable to fulfill this request. We hope the appeal decisions in question will be helpful to you.
For the Commission,
Alice
Shearer,
Commissioner