Is an agreement with required title transfer and a $1 purchase option a lease or purchase, and are separately stated interest and installation charges taxable?

Plain-English summary

Georgia treated the master agreement as a financed purchase rather than a lease. It required title to transfer after completion of the payments, and the option price was only $1, bringing it within the statutory lease exclusion.

The parties later amended the agreement to break each payment into principal, interest, and installation. Because interest and installation were then separately stated, they were excluded from the taxable sales price and tax applied only to principal. Mandatory miscellaneous labor charges necessary to complete the sale remained taxable.

Common questions

Q: Why did the label "lease" not control?

A: Georgia looked to the transaction's substance: required title transfer and a nominal purchase option made it a purchase.

Q: Would unstated interest and installation be excluded?

A: The ruling allowed the exclusion after the addendum separately identified those amounts.

Citations and references

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

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2014-08

Original ruling text

Date Issued:
June 6, 2014
Georgia Letter Ruling: LR SUT-2014-08
Topic:
Service Providers

This letter is in response to your request for guidance on the application of Georgia sales and use tax to a lease.
Facts as presented by Taxpayer
Lessor and Lessee entered into a Master Lease Agreement (the “Agreement”). Lessor’s position is that the
Agreement does not meet the definition of a lease and must be treated as a purchase 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. 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 initial position was 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).

June 6, 2014
LR SUT-2014-08
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

A prior version of the Agreement did not separately state the amounts for installation and interest, and therefore the
Department of Revenue had ruled in LR SUT-2013-20 that sales tax was due on the entire amount designated as the
base monthly rental.
The Parties have subsequently executed an Addendum which itemizes the base monthly rental payments, setting
forth the principal, installation cost, and interest comprising each base monthly rental payment.
Issue
Since the Parties executed a subsequent Addendum, which identifies the principal, installation cost, and interest
associated with each base monthly rental payment, is Lessor correct in calculating Georgia sales tax only on the
principal amount of each payment and not on the separately stated installation cost and interest?
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. Strickland 4 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 generally
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 initially determined the taxable amount to be the total amount received from Lessee under the Agreement and
Lessor did not exclude interest or installation costs from the taxable amount because neither the Agreement nor the
monthly invoice separately stated these amounts.
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

June 6, 2014
LR SUT-2014-08
Service Providers
Page 3 of 3

However, because the Agreement has now been amended and breaks the base monthly rental into its separate
components (i.e., principal, interest, and installation cost) and because the definition of taxable sales price does not
include separately stated interest and installation charges, these amounts are not included in the sales tax base.
Ruling
Lessor is correct in treating the transaction as a purchase rather than a lease and is correct in calculating Georgia
sales tax on just the amounts noted as principal because any interest and installation charges in the transaction are
separately stated and thus are expressly excluded from the taxable sales price pursuant to O.C.G.A. § 48-8-2(34)(B).
As noted in the prior ruling, LR SUT-2013-20, charges for “Misc. Labor” are mandatory charges that are necessary
to complete the sale and are, thus, 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.