How is Kansas sales tax applied to leases of tangible personal property, and when is a lease taxed as a sale instead?

Plain-English summary

A company (setting up a new subsidiary to lease vehicles) asked how Kansas sales tax applies to renting or leasing tangible personal property. The Department distinguished true leases from leases that are really sales.

True leases are taxed payment by payment. K.S.A. 79-3603(h) imposes tax on "the gross receipts from the service of renting or leasing of tangible personal property." The Department confirmed that "sales tax is imposed on the total amount of each lease payment which the lessee is obligated under the contract to pay to the lessor for continued use of the tangible personal property."

A lease that is really a sale is taxed as a sale. "The Kansas Department of Revenue has ruled that K.S.A. 79-3603(h) does not apply to any transaction which is required under the federal income tax law to be reported as a sale and purchase by the lessor and lessee." In that case, the deal "would be considered a sale of such property, subject to the tax imposed by K.S.A. 79-3603(a), with the total amount of the tax due at the point of sale."

No prepayment election for true leases. "The sales and use tax statutes in the state of Kansas do not contain a provision that would allow the lessor to make an election to remit the appropriate Kansas sales/use tax upfront on true lease transactions."

The subsidiary's obligations. "In either of the situations that you have described … the newly formed subsidiary would be required to be registered, collect and remit the Kansas sales/use tax, since the tangible personal property transferred is inventory held for resale." And it "would be obligated to collect and remit the appropriate Kansas sales/use tax(es) on any operating leases, where the vehicles are garaged in the state of Kansas."

What this means for you

The federal characterization drives the Kansas result

Whether a transaction is a "true lease" or a sale for federal income tax purposes determines how Kansas taxes it. A finance-type arrangement that federal law treats as a sale/purchase is a sale in Kansas — full tax at the point of sale — not a stream of taxed lease payments.

True leases: tax each payment

For a genuine lease, tax is collected on the total of each lease payment as the lessee is obligated to pay it. There is no option to collect all the tax up front on a true lease.

Inventory-for-resale means you register and collect

A leasing subsidiary that holds vehicles as inventory for resale (i.e., to lease out) must register for Kansas sales/use tax and collect and remit it. It cannot treat itself as the end consumer of that inventory.

Operating leases follow where the vehicle is garaged

For operating leases, the subsidiary must collect and remit Kansas tax on vehicles garaged in Kansas. Location of garaging, not just where the paperwork is signed, drives the Kansas obligation.

Common questions

How is a normal vehicle lease taxed in Kansas?
As a true lease under K.S.A. 79-3603(h): sales tax is due on the total amount of each lease payment as it comes due.

Can we just pay all the tax up front on a true lease?
No. Kansas has no provision allowing a lessor to elect to remit the tax up front on true lease transactions.

When is a lease taxed as a sale instead?
When federal income tax law requires the transaction to be reported as a sale and purchase. Then it is a sale under K.S.A. 79-3603(a), with all the tax due at the point of sale.

Does the leasing subsidiary have to register?
Yes. Because the property it transfers is inventory held for resale, the subsidiary must register and collect and remit Kansas sales/use tax, including on operating leases of vehicles garaged in Kansas.

Citations and references

• K.S.A. 79-3603(h) — imposes Kansas sales tax on the gross receipts from the service of renting or leasing tangible personal property; tax is due on the total of each lease payment.
• K.S.A. 79-3603(a) — the general retail-sales imposition; a lease that federal income tax law requires to be reported as a sale/purchase is taxed here as a sale, with all tax due at the point of sale.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued September 4, 1998 by Thomas P. Browne, Jr., Tax Specialist, Office of Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-149

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 4, 1998

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Dear Ms. TTTTTTTT:

We wish to acknowledge receipt of your letter dated April 28, 1998, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3603(h) imposes a sales tax upon: “the gross receipts from the service of renting or leasing of tangible personal property. . .”

Please be advised that sales tax is imposed on the total amount of each lease payment which the lessee is obligated under the contract to pay to the lessor for continued use of the tangible personal property. However, the Kansas Department of Revenue has ruled that K.S.A. 79-3603(h) does not apply to any transaction which is required under the federal income tax law to be reported as a sale and purchase by the lessor and lessee. In this case, if the subject of the transaction is tangible personal property, the transaction would be considered a sale of such property, subject to the tax imposed by K.S.A. 79-3603(a), with the total amount of the tax due at the point of sale. Further, the sales and use tax statutes in the state of Kansas do not contain a provision that would allow the lessor to make an election to remit the appropriate Kansas sales/use tax upfront on true lease transactions.

In either of the situations that you have described in the above referenced letter, the newly formed subsidiary would be required to be registered, collect and remit the Kansas sales/use tax, since the tangible personal property transferred is inventory held for resale. The newly formed subsidiary would be obligated to collect and remit the appropriate Kansas sales/use tax(es) on any operating leases, where the vehicles are garaged in the state of Kansas.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 10/05/1998 Date Modified: 10/10/2001

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