98-073
Response
October 20, 1998
RE: STATE
RULING ON PROPERTY TAX LIABILITY (DIRECT PAYS AND
CONDITIONAL SALE AGREEMENTS)
Dear Sir or Madam:
COMPANY ., a Michigan Corporation, leases various
types of tangible personal property to businesses within your state. Our
corporate headquarters are located in CITY,
New York. Currently we are in the process of updating our lease booking
procedure.
We are in need of an official ruling regarding the
reporting of Conditional Sales Agreement Leases on our personal property tax
returns. We also need an official ruling on the legality of granting a direct
pay status to a lessee
Please issue a ruling on the following points:
1.
Are
Conditional Sale Agreements reportable in your state on the Lessors' personal property
tax return? Our definition of a “Conditional Sale Agreement” is that the Lessee
holds title on the equipment with the obligation to purchase at the end of the
leased term, with no right of return. The lessee records and depreciates the
asset on their tax books, while the lessor recognizes income on the interest
portion of the lease payments.
2. Can
a lessor grant a"Direct Pay Status" to a lessee of a True lease? Our
Definition of a ”True lease" is that the lessor holds title of the leased
equipment, and the lessee has the right to use the equipment in exchange for
lease payments. The lessor has the right to take the tax benefits associated
with ownership. By granting a ~Direct Pay Status", indicated in the
contract, the lessee is responsible for the reporting and paying of all
property tax on the equipment.
Enclosed is self-addressed stamped envelope in which
to return your response. Please call me if you need additional information to
process this request at#####. Thank you for your assistance in this matter.
NAME
Tax Analyst
November
30, 1998
NAME
COMPANY
RE: Advisory
Opinion - Property Tax Affidavits Requirements
Dear NAME,
We
have received your request for an advisory opinion concerning property tax affidavits
that must be filed in the State of Utah.
First, you request a ruling regarding the reporting of conditional sales
agreement leases on the lessor’s personal property tax affidavit. Second, you request a ruling on the legality
of granting a direct pay status to a lessee.
Let us address each request separately.
Conditional
Sales Agreement. Section
59-2-303(1) requires county assessors to assess personal property tax to
"the owner, claimant of record, or occupant in possession or control"
of property. However, the term
"owner" as it is used in Section 59-2-303(1) is not defined in the
Code.
To determine the owner of leased personal property,
the Utah Supreme Court in Board of Equalization of Salt Lake County v. First
Security Leasing Co., 881 P.2d 877 (Utah 1994), stated that the Utah State
Tax Commission “was entitled to look to the essence of the transaction,
irrespective of the legal form in which the parties to a transaction cast it.”
Under
the conditional sales agreement you describe, the lessee holds title to the
property and is obligated to purchase
the property at the end of the lease period, with no right of return. Looking at the essence of this lease, as
allowed under First Security Leasing,
it is apparent that the lessor has relinquished ownership of the property to
the lessee. Thus, as owner, the lessee
is responsible for the property taxes due on the property.
Accordingly,
the lessor is not responsible for payment of the property taxes on personal
property leased in this manner.
Nevertheless, the lessor is responsible for reporting on its personal
property affidavit all property subject to a lease to which the affiant is a
party. For each item of leased personal
property, the lessor will list the following information:
1) the name and address of the other
party;
2) whether the other party is the lessor
or lessee;
3) the lease contract number;
4) the type and quantity of property;
5) the date of the lease;
6) the terms of the lease;
7) the selling price, if applicable; and
8) the annual lease payments.
From
this information, the county assessor can determine the party responsible for
the property taxes and bill them accordingly.
Thus, for personal property subject to your conditional sale agreements,
you would supply the above information on the personal property affidavits you
file.
Direct
Pay Status. You next ask about a
traditional lease where you, as lessor, retain title and ownership of the
personal property. As owner, you are
ultimately responsible for payment of the property taxes on the property. However, you are permitted to contractually
require the lessee to directly pay the property taxes to the county assessor.
In
this situation, you would still be required to supply the same information on
your own affidavit that is listed above.
The assessor would determine from the information you supplied that the
lessee should be billed for the taxes and would do so. However, should the lessee not pay the taxes
due, the assessor would then collect the taxes from you, who as the owner of
the property has the ultimate responsibility for the taxes.
Please
contact us if you have any other questions.
For
the Commission,
Joe
B. Pacheco, CPA
^^ Commissioner