99-024

Response May 12, 1999

REQUEST LETTER

RE: Advisory Opinion

Attention: Irene Rees

COMPANY A was registered 1‑25‑99. It has the same ownership as COMPANY B. Its purpose is to buy on lease construction equipment and lease the equipment to COMPANY B. We understand that COMPANY A would buy on lease the equipment tax exempt and would then collect sales tax on the monthly lease to COMPANY B. We want to make sure this is the correct approach. If you have any questions about this situation please call at the above number. We await your Advisory Opinion.

Very Truly Yours,

NAME

RESPONSE LETTER

May 12, 1999

COMPANY

ADDRESS

RE: Sales Tax on Leased Equipment

Dear NAME,

We have received your request for an advisory opinion as to whether the lease arrangement you describe complies with Utah law. In that arrangement, COMPANY A plans to buy construction equipment and lease it to COMPANY B. COMPANY A and COMPANY B have the same ownership. The form of COMPANY A purchase is a lease, but we understand from your letter that the lease is a Aconditional sale@ type lease that will qualify as a sale for federal and state income tax purposes. You have specifically asked whether COMPANY A may buy the construction equipment tax-free, then collect sales tax on the lease payments it will receive from COMPANY B. Generally, the answer is yes. In such a situation, COMPANY A would purchase the construction equipment tax-free using the resale exemption by issuing an exemption certificate to its vendor. Then, COMPANY A would collect and remit sales tax on the lease payments made by COMPANY B.

However, Utah Admin. Code R865-19S-32 (ARule 32") provides two instances where a different result occurs. First, Section (B) provides that if the leased property is used exclusively outside of Utah and an affidavit is furnished to the lessor to this effect, then tax does not apply to the lease. Accordingly, in this situation, COMPANY A could purchase the equipment tax-free, and as long as COMPANY B used the equipment exclusively outside of Utah, no sales tax would be due on the lease. But, if COMPANY B located the property in Utah or if COMPANY B took possession of the property in Utah and did not use the property exclusively outside of Utah, COMPANY would owe sales tax on its lease payments. Second, Section (D) provides that when a lessor furnishes an operator with the leased equipment and the lessor charges for the use of both the equipment and operator, it is the lessor who is considered the consumer of the equipment. Accordingly, if this situation exists, COMPANY A must pay sales tax on its purchase of the equipment, and COMPANY B would not owe sales tax on its lease payments.

The facts you describe do not suggest a sale-leaseback arrangement, where the purchaser-lessee originally pays sales tax on its purchase of the equipment, then transfers title to a lessor for consideration. However, should such an arrangement occur, sales tax would also be due on the transfer to the lessor unless the transaction was intended as a form of financing to the purchaser-lessee and the purchaser-lessor was required to capitalize the equipment for financial reporting purposes.

Nor do the facts suggest a conditional sale lease, as described in Section (F) of Rule 32, where the lessee is bound by the lease to become the owner of the property or has the option to become the owner for no additional consideration or nominal consideration upon compliance with the lease agreement. Should such a conditional sale lease exist, however, the lessee may, at its option, either pay the sale tax up front or pay the sales tax on the stream of lease payments.

Lastly, COMPANY B lease payments, which are subject to sales tax, must represent fair market value for the equipment. Otherwise, sales tax may be due on COMPANY A=s original purchase of the equipment because donors of tangible personal property are regarded as the consumers of that property and the sale to them is a taxable sale. Utah Admin. Code R865-19S-68(A). For example, COMPANY A would not be allowed to purchase a $100,000 item of 10-year life equipment tax-free, then only collect sales tax on a $100 per month lease payment from COMPANY B. COMPANY A would be considered a donor under these circumstances. We are aware that single-member LLC=s may be disregarded for income tax purposes. We are currently evaluating the sales tax consequences of using such LLC=s and anticipate issuing further guidance to taxpayers in the future.

Please contact us if you have any other questions.

For the Commission,

R. Bruce Johnson

Commissioner