Is a $1-option equipment agreement a purchase, and may unstated interest and installation costs be excluded from Georgia sales tax?

Plain-English summary

Georgia treated the agreement as a financed purchase, not a lease. It required title transfer after the payment term and offered a $1 purchase option, so the transaction fell within the statutory exclusion from the lease definition.

The lessor correctly taxed the entire 24-month payment stream because the agreement and invoice showed only one base monthly amount. Interest and installation charges could be excluded only when separately stated. Mandatory miscellaneous labor necessary to complete the sale was also taxable.

Common questions

Q: Why was the full monthly payment taxable?

A: The embedded interest and installation amounts were not separately stated on the agreement or invoice.

Q: Did calling the transaction a lease control?

A: No. Required title transfer and the nominal option made its substance a purchase.

Citations and references

• O.C.G.A. § 48-8-2(17) -- lease exclusions for required title transfer
• O.C.G.A. § 48-8-2(10), (34)(A)-(B) -- sales price and separately stated exclusions
• Footpress Corp. v. Strickland, 242 Ga. 686 (1978) -- substance over form

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2013-19

Original ruling text

Date Issued:
Georgia Letter Ruling:
Topic:

January 29, 2013
LR SUT-2013-19
Service Providers

This letter is in response to your request for guidance on the application of Georgia sales and use tax to the total
amount of consideration constituting sales price.
Facts
Lessor entered into a lease agreement (the “Agreement”) with Lessee. Lessor’s position is that the Agreement does
not meet the definition of a lease and must be treated as a sale because the purchase option at the end of the initial
term is $1.00. Lessor’s position is based on the following:
The term “lease or rental” means any transfer of possession or control of tangible personal property for a
fixed or indeterminate term for consideration. A lease or rental may include future options to purchase or
extend. Effective May 1, 2012, “lease or rental” includes agreements covering motor vehicles and trailers
where the amount of consideration may be increased or decreased by reference to the amount realized upon
sale or disposition of the property (defined in IRC 7701(h)(3)(A) as a terminal rental adjustment clause).
The term “lease or rental” does not include:
-

-

A transfer of possession or control of property under a security agreement or deferred payment plan
that requires the transfer of title upon completion of the required payments;
A transfer of possession or control of property under an agreement that requires the transfer of
title upon completion of required payments and payment of an option price does not exceed the
greater of $100.00 or 1 percent of the total required payments;
Providing tangible personal property along with an operator for a fixed or indeterminate period of
time; a condition of this exclusion is that the operator is necessary for the equipment to perform as
designed. An operator must do more than maintain, inspect, or install the tangible personal property. 1
(emphasis added)

Because Lessor considers the Agreement to be a purchase, rather than a lease, Lessor determined that Georgia sales
tax is due on this transaction when the agreement commences. In calculating the Georgia sales tax due, Lessor
determined the taxable amount to be the total amount received from the lessee under the agreement, or $X ($Y
monthly payment x 24 months). Lessor did not exclude interest or installation costs from the taxable amount
because neither the Agreement nor the monthly invoice separately states these amounts. Lessor’s position is based
on the following:
Effective January 1, 2011, Georgia adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”)
definition of “sales price”. Effective April 27, 2011, the term “sales price” applies to the measure subject to
sales tax and means the total amount of consideration, including cash, credit, property and services for
which personal property or services are sold, leased, or rented, valued in money, whether received in
money or otherwise, without any deduction for the following:
-

1
2

The seller’s cost of the property sold;
The cost of materials used, labor, or service cost, interest, losses, all costs of transportation to the
seller, all taxes imposed on the seller, and any other expense of the seller;
Charges by the seller for any services necessary to complete the sale;
Delivery charges.2

O.C.G.A. § 48-8-2(17).
O.C.G.A. § 48-8-2(34)(A).

January 29, 2013
LR SUT-2013-19
Service Providers
Page 2 of 3

Effective April 27, 2011, the term “sales price” does not include the following:

-

Discounts, including cash, term, or coupons that are not reimbursed by a third party that are allowed by
a seller and taken by a purchaser on a sale;
Interest, financing, and carrying charges from credit extended on the sale of personal property or
services, if the amount is separately stated on the invoice, bill of sale, or similar document given to the
purchaser;
Any taxes legally imposed directly on the consumer that are separately stated on the invoice, bill of
sale, or similar document given to the purchaser;
Installation charges if they are separately stated on the invoice, billing, or similar document given to
the purchaser;
Telecommunications and nonrecurring charges if they are separately stated on the invoice, billing or
similar document; and
Credit for any trade in.3

Issue
Is Lessor correct in calculating Georgia sales tax on the total amount received under the Agreement without
deduction for interest and installation costs?
Analysis
As stated above, “lease or rental” does not include “[a] transfer of possession or control of property under an
agreement that requires the transfer of title upon completion of required payments and payment of an option price
does not exceed the greater of $100.00 or 1 percent of the total required payments . . .” This statutory provision is
consistent with the Supreme Court of Georgia’s statement in Footpress Corporation v. Strickland4 that “[t]he
substance of a transaction controls its tax treatment rather than the appellation chosen by the parties.” Consequently,
the Department considers the transaction at issue to be a purchase and not a lease.
Georgia imposes sales tax on the retail purchase of tangible personal property. 5 Tax is imposed on the “sales price”
of the particular purchase.6 “Sales price” means the total amount of consideration for which personal property or
services are sold without any deduction for charges by the seller for a) any services necessary to complete the sale or
b) delivery charges.7 Thus, charges mandatory for completion of the sale and charges for delivery are included in the
taxable sales price. “Delivery charges” means charges by the seller of personal property or services for preparation
and delivery to a location designated by the purchaser of personal property or services including, but not limited to,
transportation, shipping, postage, handling, crating, and packing. 8 The taxable sales price does not include separately
stated interest and financing charges and separately stated installation charges. 9
Lessor states that it has determined the taxable amount to be the total amount received from the lessee under the
agreement, or $X ($Y monthly payment x 24 months), and lessor did not exclude interest or installation costs from
the taxable amount because neither the lease agreement nor the monthly invoice separately states these amounts. An
invoice provided by Lessor shows one nonitemized charge of $Y as “Base Monthly Rental”.

3

O.C.G.A. § 48-8-2(34)(B).
242 Ga. 686 (1978).
5
O.C.G.A. § 48-8-30(a).
6
O.C.G.A. § 48-8-30(b)(1).
7
O.C.G.A. § 48-8-2(34)(A)(iii) and (iv).
8
O.C.G.A. § 48-8-2(10).
9
O.C.G.A. § 48-8-2(34)(B).
4

January 29, 2013
LR SUT-2013-19
Service Providers
Page 3 of 3

Ruling
Lessor is correct in treating the transaction as a purchase rather than a lease and is correct in calculating Georgia
sales tax on the total amount received under the Agreement without deduction for interest and installation costs
because these costs are not separately stated. Finally, charges for “Misc. Labor” are mandatory charges that are
necessary to complete the sale and are, thus, also included in the taxable sales price.
The opinions expressed in this ruling are based upon the information contained in your request and limited to the
specific transactions and taxpayer in question. Should the circumstances regarding the transactions change, or differ
materially from those represented, then this ruling may become invalid. In addition, please be advised that
subsequent statutory or administrative rule changes or judicial interpretations of the Statutes or Rules upon which
this advice is based may subject similar future transactions to a different tax treatment than that expressed in this
response.