Was a lump-sum payment equal to remaining rent taxable when Hurricane Katrina destroyed the leased equipment and triggered an indemnity obligation?

Plain-English summary

The lessee's payment for destruction of the leased asset was not subject to Louisiana sales or lease tax, but any portion covering rent before the destruction was taxable.

The equipment lease required monthly rent and, if the asset was destroyed, terminated the lease and required a lump-sum payment equal to the remaining rental obligations. Hurricane Katrina destroyed the asset in August 2005.

The Department treated the post-destruction amount as indemnification for the lessor's loss, not consideration for a sale, lease, rental, title transfer, or possession. The property no longer existed, so none of those taxable transfers could occur.

The required allocation

The ruling separated two parts of the final payment:

• Amounts solely attributable to the lessee's obligation to indemnify destruction of the asset were not taxable.
• Amounts attributable to lease or rental periods before Hurricane Katrina destroyed the asset remained taxable.

Common questions

Q: Was the entire remaining-rent payment taxable merely because it equaled future rent?

A: No. Its substance after destruction was indemnity, not payment for possession or use.

Q: Why was the indemnity portion nontaxable?

A: The destroyed asset could no longer be sold, leased, possessed, or transferred.

Q: Was pre-destruction rent forgiven from tax?

A: No. Any final-payment portion attributable to earlier rental periods was taxable.

Q: Did the lessee receive title through the payment?

A: No. The agreement had only given the lessee a future option to purchase at or near expected market value, and the destroyed asset could not be transferred.

Citations and references

• La. R.S. 47:301(7), (12), 47:302(B), 47:321(B), and 47:331(B)
• LAC 61:III.101 — Private Letter Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 06-005

Original ruling text

Private Letter Ruling No. 06-005
Redacted Version
Sales Tax
Is the State Sales Tax Due on the Payment that a Lessee Is Required to Make to a
Lessor Following the Destruction of the Lessor’s Leased Assets by Hurricane?
April 26, 2006
Facts
A lessor and a lessee entered into an agreement for the true lease of tangible personal
property. Under the agreement, the lessee made monthly payments to the lessor for the use
of the property. The lease agreement was to have continued for several years, and was to
have concluded with the lessee having the right, but not the obligation, to purchase the
property for a price at or near the expected market value of the property.
Under the terms of the lease, if the leased asset were destroyed, the lease would terminate
and the lessee would be obligated to pay to the lessor a lump-sum amount equal to the
lessee’s remaining rental obligations under the lease. In August 2005, the asset was
destroyed as the result of Hurricane Katrina, and the lessee was required to make the
payment to the lessor equal to the remaining rental obligations under the lease.
Issue
Whether a payment required to be made by the lessee pursuant to the terms of an
equipment lease agreement, as a result of the destruction of the leased property in a
hurricane, is a payment for the lease or rental of tangible personal property that is subject
to lease tax in Louisiana?
Department Analysis
La. Rev. Stat. Ann. § 47:302(B), 321(B), 331(B), and the sales tax ordinance of the
Louisiana Tourism Promotion District levy a total four percent sales tax on certain types of
transactions, including, but not limited to, the following:
•

The sale at retail, the use, the consumption, the distribution, and the storage for use
or consumption in this state, of each item or article of tangible personal property;
and

•

The lease or rental within this state of each item or article of tangible personal
property.

La. Rev. Stat. Ann. § 47:301(12) defines the term “sale”, in pertinent part, as “any transfer
of title or possession, or both, exchange, barter, conditional or otherwise, in any manner or
by any means whatsoever, of tangible personal property, for a consideration . . .” La. Rev.
Stat. Ann. § 47:301(7) defines the term “lease or rental”, in pertinent part, as “the leasing
or renting of tangible personal property and the possession or use thereof by the lessee or
renter, for a consideration, without transfer of the title of such property”.

Private Letter Ruling No. 06-005
Page 2 of 2

In the facts associated with this request for Private Letter Ruling, the required payment
after the destruction of the leased asset is not tendered to the lessor as consideration for the
transfer of title to or temporary or permanent possession of the leased asset. Because it was
destroyed by Hurricane Katrina and does not exist, transfer of title to or possession of the
asset is not possible. The payment that was required to be made under the agreement after
the destruction of the asset was made to carry out the lessee’s obligations under the
original agreement with the lessor to indemnify any loss of or destruction of the leased
asset, and not as consideration for the lease, rental, or sale of the leased asset.
Ruling
The department ruled that the sales tax or lease/rental tax is not due on the payment that is
made after the destruction of the asset that is attributable solely to the lessee’s obligation to
indemnify the destruction of the lessor’s asset. The department further ruled that the state
sales tax was due on any portion of the final payment that was attributable to the
lease/rental of the asset for periods before its destruction by Hurricane Katrina
Sincerely,
Cynthia Bridges
Secretary
By:

Raymond E. Tangney
Senior Policy Consultant
Policy Services Division
(225) 219-2780

This correspondence constitutes a private letter ruling (PLR) by the Louisiana Department of Revenue, as provided for by
section 61:III.101 of the Louisiana Administrative Code. A PLR provides guidance to a specific taxpayer at the taxpayer's
request. It is a written statement that applies principles of law to a specific set of facts or a particular tax situation. A PLR
does not have the force and effect of law, and is not binding on the person who requested it or on any other taxpayer. This
PLR is binding on the department only as to the taxpayer to whom it is addressed, and only if the facts presented were
truthful and complete and the transaction was carried out as proposed. It continues as authority for the department’s
position unless a subsequent declaratory ruling, rule, court case, or statute supersedes it.