98-056

Response January 20, 1999

REQUEST LETTER

January 15,1998

Dear Commissioners.

Regarding: Changes in the law during the period of a lease.

As recently as July 1995 (see the attached advisory opinion dated July 12, 1995, regarding the sales tax exemption for authorized motor carrier vehicles) the commission viewed leases as new transactions only at the point of initiation or renegotiation. Although we are not certain when that position changed, we have been advised in more than one instance that the commission's current interpretation is that for sales or use tax applications, each lease payment is treated as a separate transaction.

This position has caused us to reevaluate our application of the sales and use tax laws.

A few of our interpretations follow:

1- If there is a change in a law affecting taxation of a lease, the lease payment

becomes taxable or exempt, as the case may be, with the first lease payment

following the statute change.

2- If a lease is initiated out of state on equipment that is subsequently brought to Utah for use, the first lease payment after the equipment reaches Utah would be taxable or exempt as determined by Utah law.

3‑ All lease payments on machinery or equipment qualifying for the exemption available to new or expanding manufacturing operations would qualify for the full exemption. Allowing only the first lease payment the full exemption and restricting subsequent lease payments to the partial exemption for replacement equipment is not the intent of the month‑to-month application.

4- Leases payments on equipment initially leased as replacement equipment would be taxable to the point of the change in the law. Thereafter, lease payments on the same equipment would be allowed the exemption rate for replacement equipment that is in place at the time of each lease payment.

We would appreciate your written evaluation of our interpretations. Thank you for the

time and effort you invest in these matters.

Sincerely,

RESPONSE LETTER

January 20, 1999

RE: Advisory Opinion - Sales Tax Applicability for Individual Lease Payments

Dear NAME,

We have received your request for an advisory opinion concerning the application of sales tax on lease payments. You refer to a situation where, after a lease transaction is made for a taxable item of tangible personal property, a law is passed that exempts that item from taxation. For such a situation, you ask if each lease payment should be considered a Aseparate transaction,@ in the sense that each separate payment is exempt or taxable depending upon the state of the law at the time each payment is made.

In Utah Code Ann. '59-12-102(21)(e), a Asale@ is defined for purposes of sales and use tax to include Aany transaction under which right to possession, operation, or use of any article of tangible personal property is granted under a lease or contract and the transfer of possession would be taxable if an outright sale were made.@ The words Awould be taxable if an outright sale were made@ suggest an attempt to equate the taxation of a lease with that of a regular sale where title passes to the purchaser.

When a sale is made, sales tax is due on the entire purchase price at the time of the transaction. Should that sold property on which sales tax was paid subsequently become exempt from taxation, the owner of that property may not ask for a refund of a portion of the sales tax he or she has paid. The tax was due at the time of the transaction. This is true even if the purchaser has financed the item and is still making payments on it.

Just as a sale is one method by which a person may obtain possession of personal property, a lease is another. Section 59-12-102 provides that both methods of obtaining personal property are taxable events. If the entire lease payment (purchase price) is paid at the time the transaction occurs (signing the lease), sales tax is due at that time on the entire payment. When the lease purchase price is instead paid over a period of time in lease payments, the sales tax is collected at the time each lease payment is made. But the payment of a liability (the individual lease payment) is not a sales transaction, whereas the act of purchasing or signing a lease is.

Accordingly, the sales transaction for a lease occurs at the time a lease is signed, when the lessee obtains legal possession to that personal property for a definite period of time. Sales tax liability is determined at the time the transaction takes place, not at the time ones financial liability becomes due. To do otherwise would impose a different tax liability on lessees with extended lease payments than that imposed on purchasers and lessees who pay the entire lease purchase price at the time the lease is signed.

Thus, each lease payment is not a separate transaction in the sense that a separate sale has occurred. There is only one sale transaction, and that occurs at the time the lease is signed. However, the sales tax due on each lease payment is calculated with the sales tax rate in place on the date of the payment. So for tax calculation purposes only, each lease payment must be looked at as a separate transaction to determine the correct tax rate. This opinion reinforces the Commission=s previous response in the July 12, 1995, Advisory Opinion 95-017DJ, which provided that a newly enacted statutory exemption did not apply retroactively to lease agreements entered prior to the effective date of the new exemption.

Let us apply this policy to the four situations you present.

1. No. The entire lease is taxable or nontaxable depending upon the law at the time the lease is transacted.

2. No. While sales tax is not due until the leased personal property has situs in Utah, taxability would be determined by the law in effect on the date the lease was transacted. Utah Admin. Code R865-19S-32 clarifies that Utah sales tax is applicable once situs exists in Utah.

3. Yes. If personal property qualifies for the sales tax exemption for Anew or expandingA manufacturing equipment on the date of the lease transaction for that equipment, then each lease payment made on that lease is subject to the same exemption.

4. Whether there is tax liability for Anormal operating replacements@ is determined by the law in effect on the date the lease for those replacements is transacted. Utah Code Ann. '59-12-104(14)(a) establishes a sales tax exemption for normal operating replacements purchased or leased on or after July 1, 1995. Should a lease for normal operating replacement equipment occur before that date, there is no exemption from sales tax on lease payments, even on those payments made after July 1, 1995.

For a lease of normal operating replacement equipment that is transacted on or after July 1, 1995, an exemption from sales tax does exist under Section 104. Subsection 104(14)(b) provides the rate of the exemption for the individual lease payments made under such a lease. For example, if the lease is signed on August 1, 1995, the lease payments are subject to whatever exemption is provided on the date the lease payment is made. Accordingly, lease payments made on or before June 30, 1996, would receive a 0% exemption, lease payments made between July 1, 1996, and June 30, 1997, would receive a 30% exemption, and so forth.