Did Florida treat the aircraft synthetic lease as a taxable operating lease or a conditional sale?

Plain-English summary

Florida treated the ten-year aircraft agreement as a conditional sale, not an operating lease. The lessor held title as security, while the lessee bore the ownership risks and costs and had to make the principal-and-interest payments regardless of possession.

The result was conditional: the agreement qualified so long as its implicit interest rate was similar to the lessor's regular loan rates and the lessor received no ownership benefits. Tax was due when the agreement was entered into. The later payments under the agreement were not separately taxable as rent.

What this means for you

Calling an aircraft-financing document a lease does not control Florida sales-tax treatment. The Department examined who bore the risks, who received the benefits, whether title merely secured payment, and whether the lessor's return resembled ordinary loan interest.

Common questions

Q: Were the monthly and balloon payments taxable lease payments? No, on these facts. They were principal-and-interest payments under a conditional sale.

Q: Could a similar synthetic lease be treated differently? Yes. The ruling warns that rent would be taxable if the lessor retained ownership benefits or received a return unlike its regular financing terms.

Citations and references

• Fla. Stat. § 212.02(10)(g), (15)(a) and (e) — lease and conditional-sale definitions
• Fla. Stat. § 212.05(1) — tax on sales and tangible-property leases
• Fla. Admin. Code r. 12A-1.071 — operating leases and conditional sales
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-008

Original ruling text

SUMMARY

QUESTION: Whether an aircraft lease agreement between a

lessee and lessor was a conditional-sale lease agreement.

ANSWER - Based on Facts Below: Yes. The tax was due at the

moment the agreement was entered into. The lessor was not
entitled to any benefits associated with ownership of the
aircraft. The lease payments were for the cost of

obtaining the aircraft and related interest. The agreement
requires the lessee to make all payments associated with

the aircraft cost and the related interest. The lessor is
required to transfer the title to the lessee after the

final payment.

Feb 27, 2003

Subject: Technical Assistance Advisement 03A-008
Aircraft Synthetic Lease Agreement
Sales and Use Tax
Section 212.05(1), F.S.
Rule 12A-1.071, F.A.C.
XXX, Petitioner ("Lessee")
XXX ("Lessor")

Taxpayer Identification Number: XX
Dear :
This is in response to your letter dated December 11, 2001,
requesting a Technical Assistance Advisement regarding the

taxability of an aircraft lease.

ISSUE

Whether payments made by Lessee to Lessor are subject to the tax

imposed on the lease of tangible personal property.

FACTS

Lessee obtained an aircraft from Lessor pursuant to an Aircraft
Lease Agreement for a term of ten years. Lessor purchased the
aircraft for $15,000,000, for which the lessee has paid the

sales tax. Unadjusted Basic Term Rent is due on the first of
each month during the Basic Term (first five years) and is equal
to the product of the Basic Lease Rate Factor times the
Capitalized Lessor's Cost of the Aircraft. Lessee is also
obligated to pay "Interim Rent" for the period from and

including the Lease Commencement Date to the Basic Term
Commencement Date. Interim Rent is equal to the product of the
Daily Lease Rate Factor times the capitalized Lessor's Cost
times the number of days in the Interim Period. In other words,
Lessee is required to pay Lessor over 120 installments of
$109,575.35 for the first five years, and $133,925.43 for the
next five years, with a balloon payment of $7,500,000 at the end
of the lease. The implicit interest rate in the Aircraft Lease

Agreement is 5.99%.

The Lessee has an early purchase option after the first five

years for the termination value of $12,392,700, which is the
remaining principal balance at that time. Lessee may elect to
purchase the Aircraft from Lessor on an “as is, where is" basis
on the Early Purchase Date indicated in the Lease Agreement for
a purchase price equal to the Termination Value for the

Aircraft, and all Rent and other sums due and unpaid as of the

Early Purchase Date, plus all applicable sales tax.

At the end of the Lease Term, if Lessee has not elected the
Early Purchase Option, Lessee must either return the Aircraft to
Lessor and pay a return fee of $7,500,000; or purchase the
Aircraft on an as is basis for $7,500,000, which is the amount
equal to the fixed purchase price equal to the return percentage
shown in the Lease times the Capitalized Lessor's Cost of the
Aircraft, together with all Rent and other sums due on such
date. In the event that the return fee paid, the aircraft is
required to be sold by Lessor. The Lessor is entitled to
proceeds which are applied first to the Lessor's cost, then the
remaining amounts due Lessor by Lessee. Lessor then pays the
Lessee a guaranteed residual amount of 31.5 % of the cost of the

aircraft and any other excess from the net proceeds.

The Lessee has an absolute and unconditional obligation to make
the payments unless the Aircraft Lease Agreement is terminated,
regardless if the aircraft is destroyed or if the Lessee has

lost possession of the aircraft. Lessee is required to provide

full insurance of the aircraft.

To the extent legally permissible, Lessee will report and pay
other taxes, fees and assessments due, imposed, assessed or
levied against the Aircraft, the Lease, Lessor or Lessee by any
foreign, state, or local government or taxing authority during

or related to the Term of the Lease, including all license and
registration fees, and all sales, use, personal property,

excise, gross receipts, franchise, stamp or other taxes,
imposts, duties and charges. Lessee will reimburse Lessor for
any Taxes charged to or assessed against Lessor. Lessee will
show the ownership of the Aircraft as Lessee on all tax reports
or returns. Lessee will register the Aircraft in the name of
Lessor under the U.S. Federal Aviation Act and will not register

the Aircraft under the Laws of any other country.

The possession, use and operation of the Aircraft will be at the
sole risk and expense of Lessee. Lessee will maintain, inspect,
service, repair, overhaul and test the Aircraft in accordance

with maintenance manuals furnished with the Aircraft, all
recommended "Service Bulletins" issued from the manufacturer,
and all airworthiness directives issued by the FAA or similar

regulatory agency having jurisdictional authority.

Lessee bears the entire risk of any loss, theft, confiscation,
expropriation, requisition, damage to, or destruction of, the
Aircraft, any engine or part thereof from any cause whatsoever.

Lessee acquired the Aircraft in an "as-is" condition.

REQUESTED RULING

None of the payments made by Lessee to Lessor under the Lease
Agreement will be subject to the tax imposed on the lease of

tangible personal property under section 212.05, F.S.

TAXPAYER POSITION

The request provides the following:

Florida imposes an excise tax on persons who engage in
certain taxable privileges within the state. See
generally, Fla. Stat. Ch. 212 (1995). This tax is commonly
referred to as the Florida sales and use tax. One of the
privileges subject to tax under the Florida sales and use
is the "business of selling tangible personal property at
retail this state." Id. s. 212.05. Tax is assessed
against anyone "who rents or furnishes any of the things or
services taxable under this chapter, or who stores for use
or consumption in this state any item or article of
tangible personal property as defined herein and who leases
or rents such property within the state." Id.. In general,
a tax rate of 6% is applied against the lease price paid by
a lessee to the owner of the tangible personal property.
Id. s. 212.05(1)(d). The term "business" is defined
broadly to include “any activity engaged in by any person,
or caused to be engaged in by him or her, with the object
of private or public gain, benefit, or advantage, either
direct or indirect." Id. s. 212.02(2). The term "tangible
personal property” means "personal property which may be
seen, weighed, measured, or touched or is in any manner
perceptible to the senses, including electric power or
energy, boats, motor vehicles and mobile homes.,... aircraft
...[and] all other types of vehicles." Id. s. 212.02(19).

ek
The Rules provide that the statutory definition of the term
"lease" includes "any rental or license to use tangible
personal property, unless a different meaning is clearly
indicated by the context in which it is used." Rule 12A-
1.071. Rule 12A-1.071(1)(a) provides that "all leases of
tangible personal property other than conditional-sale type
leases as described in paragraph 1(d) of this Rule, are
operating leases. Whether a transaction is a'"sale" or a
"rental, lease, or license to use["]shall be determined in
accordance with provisions of the agreement.[ ] As noted
above, the Lease Agreement provides that the Lessee is

intended to be the owner for income tax purposes.

Rule 12A-1.071(1)(d) provides a safe harbor for determining when
a contract denominated as a lease amounts to a sale or financing
transaction. This Lease Agreement does not qualify for this

safe harbor[,] as title to the Aircraft does not pass

automatically to Lessee at the end of the Lease term, and there

is not a nominal purchase option. On the other hand, Rule 12A-
1.071(1)(e) provides ...that "whether a lease is a conditional
sale-type lease or an operating lease shall be determined in
accordance with the provisions of the agreement, read in the

light of the facts and circumstances existing at the time the

lease was executed."

The Department of Revenue has previously considered a synthetic

lease transaction in Bridgestone/Firestone, Inc. v. Dept. of

Revenue. Case No. 92-2483, Recommended Order reported at 1993
Fla. Tax LEXIS 204 (Aug. 10, 1993)(hereinafter the "Recommended
Order") and Final Order reported at 1993 Fla. Tax LEXIS 208

(Nov. 5, 1993). While Bridgestone/Firestone involved a real

estate lease, the findings of the Hearing Officer in that case
should apply to synthetic leases of personal tangible property

as well.

The Bridgestone/Firestone case involved a sale/leaseback

transaction between Firestone Tire & Rubber Company and
Firestone Real Estate Leasing Corporation ("FIRELCO"). FIRELCO
was a special purpose corporation created merely to engage in

the sale/leaseback transaction with Firestone.

Following the conclusion of an audit, the Department of Revenue
assessed Florida sales tax on the rent payments made by

Firestone to FIRELCO under the sale/leaseback arrangement.
Firestone challenged this assessment by filing a petition with

the Division of Administrative Hearings under chapter 120 of the
Florida Statutes. The Hearing Officer, in his Recommended

Order, found that the arrangement between Firestone and FIRELCO

was not a "lease" for Florida sales tax purposes.

The Hearing Officer conceded that the transaction was treated as
a lease for financial accounting purposes under FASB 13. See
Recommended Order at s. 21. Notwithstanding this

characterization for financial accounting purposes, the Hearing

Officer found that the substance of the transaction did not
create a lease under Florida law. Specifically, the Hearing

Officer found:

Although a document may be called a lease on its face, this
in itself is not dispositive of the issue. Rather, in

order to properly determine the true nature of the
transaction, it is necessary to examine the intention of

the parties and the substance of the agreement. In this
case, the more credible and persuasive evidence supports a
finding that the sale/leaseback agreement between Firestone
and FIRELCO was a financing transaction rather than a

lease.

Initially, it is noted that a taxpayer can treat an item one way

for financial reporting purposes and another way for tax
purposes.... Similarly, in cases such as this a taxpayer can
report a transaction as a lease in its financial statements but

as a financing transaction for tax purposes. Thus, in
accordance with FASB 13, Firestone was obligated to use such
terms as "operating lease" and "rental payments” in its Form 10-
Ks filed with the SEC and to characterize the transaction as a
lease in the footnotes to its financial statements. It could,

however, treat the matter differently for tax purposes.

Recommended Order at ss. 23 and 24. In substance, the Final
Order adopted the Hearing Officer's recommendations as contained

in the Recommended Order.

The transaction described above should not be treated as an
operating lease of tangible personal property for Florida sales
tax purposes. The Lease Agreement was structured specifically
so the transaction would be treated as a lease for accounting
purposes, yet still have the overall economic substance of the
transaction treated as a financing for tax purposes.

Accordingly, under the authority of Bridgestone/Firestone, the

transaction between Lessee and Lessor with respect to the

Aircraft, involves a financing arrangement, in substance.

APPLICABLE STATUTES AND RULES

Section 212.05(1)(a)1.a. and (c), F.S., provides:

It is hereby declared to be the legislative intent that

every person is exercising a taxable privilege who engages
in the business of selling tangible personal property at

retail in this state, including the business of making mail
order sales, or who rents or furnishes any of the things or
services taxable under this chapter, or who stores for use

or consumption in this state any item or article of

tangible personal property as defined herein and who leases

or rents such property within the state.

(1) For the exercise of such privilege, a tax is levied on
each taxable transaction or incident, which tax is due and

payable as follows:

(a)1.a. At the rate of 6 percent of the sales price of
each item or article of tangible personal property when
sold at retail in this state, computed on each taxable sale
for the purpose of remitting the amount of tax due the
state, and including each and every retail sale.

tee
(c) At the rate of 6 percent of the gross proceeds derived
from the lease or rental of tangible personal property, as

defined herein ....

Section 212.02(10)(g) and (15)(a) and (e), F.S., provides:

(10)(g) "Lease," “let,” or "rental" also means the leasing
or rental of tangible personal property and the possession
or use thereof by the lessee or rentee for a consideration,
without transfer of the title of such property, except as
expressly provided to the contrary herein.

KKK

(15) "Sale" means and includes:

(a) Any transfer of title or possession, or both, exchange,
barter, license, lease, or rental, conditional or
otherwise, in any manner or by any means whatsoever, of

tangible personal property for a consideration.

KKK

(e) A transaction whereby the possession of property is
transferred but the seller retains title as security for

the payment of the price.

Rule 12A-1.071, F.A.C., provides in part:

(1)(a) For the purpose of this rule, the term "lease"
includes any rental or license to use tangible personal
property, unless a different meaning is clearly indicated
by the context in which it is used.... All leases of

tangible personal property other than conditional-sale type
leases as described in paragraph (1)(d) of this rule, are
operating leases. Whether a transaction is a "sale" or a
"rental, lease, or license to use" shall be determined in

accordance with the provisions of the agreement...

(c) For an operating lease, tax applies to the gross
proceeds derived from the lease of tangible personal
property for the entire term of the lease when the lessor

of such property is an established business, part of an
established business, or leasing tangible personal property

is incidental or germane to the lessor's business.

1. The "gross proceeds derived" means the total
   consideration agreed by the parties for the lease of the
   tangible personal property. Sales tax is due and payable by
   the lessee to the lessor when the lessee's obligation

arises to pay to the lessor each agreed payment,
irrespective of whether the lessee has complied with the

obligation to pay the agreed payment(s) to the lessor.

2. Gross proceeds for purposes of this rule include, in
   addition to the amount attributable to the rental of

tangible personal property:

a. Any interest charges whether or not separately stated,
unless the interest charges are clearly imposed for late

payment or other defaults under the lease....

(d) Where a contract designated as a lease transfers

substantially all the benefits, including depreciation, and

risks inherent in the ownership of tangible personal

property to the lessee, and ownership of the property
transfers to the lessee at the end of the lease term, or

the contract contains a purchase option for a nominal
amount, the contract shall be regarded as a sale of

tangible personal property under a security agreement
(commonly referred to as a conditional-sale type lease)
from its inception. The purchase option shall be regarded
as a nominal amount if it does not exceed $100 or 1 percent
of the total contract price, whichever is the lesser

amount.

(e) Whether a lease is a conditional-sale type lease or an
operating lease shall be determined in accordance with the
provisions of the agreement, read in light of the facts and
circumstances existing at the time the agreement was
executed. Taxpayers who calculated and paid taxes on
leases, entered into after January 2, 1989, pursuant to any
amendments to paragraph (1)(d) of this rule adopted after
January 2, 1989, shall be deemed to be in compliance with

the requirements of this rule.

(f) In the case of a conditional-sale type lease executed
on or after the effective date of this rule, the Executive
Director or the Executive Director's designee in the
responsible program will consider these to be sales and
purchases from their inception with tax due and payable at
the moment the contractual agreement is entered into or
when the property comes to rest in this state if at a later
date. Charges for interest or financing are taxable unless
the rate of interest or the actual amount of interest
charged is separately stated on the customer's contract.
sek
(8) Each operating lease payment due under a lease purchase
or similar agreement which also grants the lessee an option
to purchase the tangible personal property is taxable. When
the option is exercised and title to the property passes to
the lessee-purchaser, no tax is due on that part of the
purchase price upon which lease tax has been paid. Only
the balance of the purchase price required to be paid by

the purchaser upon the exercise of the option is taxable.

KKK

(21) The rental of aircraft is taxable.

ANALYSIS

Sales of tangible personal property are governed by the
provisions of section 212.05(1)(a)1.a., F.S., whereas leases of
tangible personal property are governed by section 212.05(1)(d),
F.S. As provided by section 212.02(15)(e), F.S., the term

"sale" includes transfers of possession of tangible personal
property where the seller retains title as security for payment

of the sales price. Section 212.02(15)(a), F.S., also includes
transfers that are conditional. Rule 12A-1.071(1), F.A.C.,
distinguishes sales of tangible personal property from leases of
tangible personal property. Rule 12A-1.071(1)(d), F.A.C.,
provides that certain leases without nominal purchase options
may actually be conditional sales if certain factors, such as

the transfer of risk of loss and substantially all of the

benefits of ownership, occur. In such case, the lease is
considered a sale of tangible personal property and not a lease
of tangible personal from the inception and the tax is due and
payable at the moment that the contractual agreement is entered
into. See Rule 12A-1.071(1)(f), F.A.C. As provided by Rule
12A-1.071(1)(c)2., and (8), F.A.C., interest is part of the rent

if the lease agreement is not considered a conditional sales

agreement.

Generally, the Department will interpret the provisions of a
transaction as it is cast in the agreements if there are some
factors such that the substance is consistent to the form. When
a person voluntarily sets up his affairs in a certain way to

enjoy business advantages, he is then treated for tax purposes
consistent to the form of his own choosing. See Marks v. Green,
122 So. 2d 491, 494 (Fla. 1st DCA 1960). Therefore, taxpayers
who choose to cast agreements as a lease, and take on some of
the benefits allowed by the lease form, are held to such
arrangements. As such, the Department may look to the manner
that a taxpayer records the transaction for accounting purposes,
the manner the transaction is reported to other authorities, and
reporting or other conditions that may be imposed upon the

parties as a matter of law.

The final order in Bridgestone/Firestone, supra, provided that,

in determining whether a real property contract was in substance
a lease of real property or a mortgage, the Department would
look to Chapter 697, F.S. The fact that the transaction was a
financing arrangement would not exclude a lease of real property
from the provisions of section 212.031, F.S., since the lease
documents might not be construed as a mortgage. Despite the
fact that Chapter 697, F.S., may address transactions involving
personal property, the final order addressed the examination of

leases of real property. Since Bridgestone/Firestone, supra,

addressed transactions pursuant to section 212.031, F.S., it is
not controlling for transactions governed by section 212.05,
F.S., especially since the term "sale" is specifically defined

by statute. Even so, one should note that the substantive
factors provided by Rule 12A-1.071(1)(d), F.A.C., are consistent

with conditional sales cases provided for by Chapter 697, F.S.

As provided by Rule 12A-1.071(1)(d), F.A.C., leases that are
conditional sales would not permit lessors to charge a higher
rate of interest than otherwise normally done by the lessor,
share in the leased asset's appreciation in value, or receive
other aspects that allow a lender aspects typical of a
substantial benefit of ownership. Receipt of such benefits is
also inconsistent with the benefits received by a typical
mortgagee for purposes of Chapter 697. See Markell v. Hilpert,
140 Fla. 842, 192 So. 392 (Fla. 1939). Therefore, Lessor's rate

of interest for the Aircraft Lease would be required to be the
same as for other loans by Lessor, and there could be no other
aspects of equity contribution taken on by the Lessor in the
Aircraft Lease. In the event that the Aircraft Agreement
permits Lessor to obtain benefits of ownership, then the tax is
due on all rental payments even though they may include

interest, as provided by Rule 12A-1.071(1)(c)2. and (8), F.A.C.

RESPONSE

In this case, so long as the implicit interest rate is similar
to that charged for Lessor's other financial products on regular
loans, the Lease Agreement is a conditional sale with Lessor

holding title for security until payment is made. As such, the

Aircraft Lease Agreement is a sale, as provided by section
212.02(15)(e), F.S., and the tax was due when the lease was
entered into as provided by Rule 12A-1.071(1)(f), F.A.C. Tax is
not due on the payments made pursuant to the Lease Agreement.
The documents provided do not permit Lessor to retain any
benefits of ownership, including the reversionary interest, or
otherwise; and Lessor only receives the principal and interest

on the sale of the aircraft. Lessee is required to make all
payments of principal and interest regardless if Lessee

maintains the possession of the aircraft.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice as specified in Section 213.22, F.S. Our

response is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the
statutes or rules, upon which this advise is based, may subject
similar future transactions to a different treatment than

expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department

within 15 days of the date of this letter.

Sincerely,

Charles Wallace

Senior Attorney

Technical Assistance and Dispute Resolution
(850) 922-4734

CW!
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