Is the fee to cancel a computer-equipment lease subject to New York sales tax, and does a later reimbursement of that fee change the answer?

Plain-English summary

Omori & Associates leased computer equipment from IBM (financed through IBM Credit Corporation) on a five-year lease. Half a year in, IBM offered to upgrade the equipment. Omori signed a new lease in December 1990, the old lease was terminated, and Omori paid a termination fee to switch. IBM then reimbursed roughly the same amount as a promotional credit. Later, Omori was billed sales tax on the termination fee and asked whether that tax was properly due.

The Department said yes:

• Leasing equipment is a taxable "sale." A lease or rental of tangible personal property is a "sale" under Tax Law § 1101(b)(5), and receipts from it are taxable under § 1105(a).
• A cancellation fee is part of the taxable receipts. Regulation § 541.9(c)(1)(c) provides that when a lessee cancels an equipment lease and the lessor charges a cancellation fee, that fee is included as part of the total receipts on which tax is based. The Department applied the same rule to a computer-equipment lease.
• The reimbursement doesn't matter. IBM's later reimbursement of the fee as a promotional credit does not affect the taxability of the cancellation transaction.

So sales tax on the termination fee was properly due.

What this means for you

Lease charges — including exit charges — are part of the taxable rental

When you lease equipment, New York taxes the lease receipts. That reaches not just the periodic rent but also a cancellation/termination fee the lessor charges when you end the lease early. Treat an early-termination fee on a taxable lease as a taxable charge.

A rebate or promotional credit doesn't undo the tax

Even if the lessor turns around and gives you a credit or reimbursement roughly equal to the fee, the underlying charge was still a taxable receipt. Side promotions don't retroactively make a taxable charge nontaxable.

Upgrades often mean a new lease plus a taxable exit from the old one

Swapping into newer equipment can involve terminating the existing lease (with a taxable termination fee) and starting a new taxable lease. Budget for tax on both the exit fee and the new lease stream.

Common questions

Q: Is a fee to cancel an equipment lease taxable in New York?
A: Yes. Under § 541.9(c)(1)(c), a lessor's cancellation fee is part of the total lease receipts on which sales tax is based.

Q: Does it matter that it's computer equipment?
A: No. The Department applied the same cancellation-fee rule to a computer-equipment lease as to other equipment leases.

Q: The lessor reimbursed my termination fee — do I still owe the tax?
A: Yes. A later promotional reimbursement doesn't affect the taxability of the cancellation.

Q: Why is a lease a taxable "sale"?
A: Because Tax Law § 1101(b)(5) defines "sale" to include a lease or rental of tangible personal property, which is taxed under § 1105(a).

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1105(a) (tax on receipts from every retail sale of tangible personal property)
• Tax Law § 1101(b)(5) (definition of "sale," including any rental, lease, or license to use for consideration)
• 20 NYCRR § 541.9(c)(1)(c) (a lessor's cancellation fee on a cancelled equipment lease is included in the total receipts on which tax is based)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_73s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (73) S
Sales Tax
December 2, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S911023B

On October 23, 1991 a Petition for Advisory Opinion was received from Omori &
Associates, 106 East 19th Street, 9th Floor, New York, New York 10003.
The issue raised by Petitioner, Omori & Associates, is whether it is required to pay sales tax
on a termination fee charged on the cancellation of a lease for computer equipment.
Petitioner entered into a computer equipment lease agreement with IBM through IBM Credit
Corporation which provided the financing. The lease term was for five years. A half year later,
Petitioner received an offer from IBM to upgrade old equipment to new equipment. Petitioner signed
a new lease in December 1990 and the old lease was terminated. Petitioner paid a termination fee
to IBM Credit Corporation as directed in order to switch the old lease to a new one. The salesperson
at IBM did not give Petitioner all the information about possible expenses for switching the lease.
IBM reimbursed Petitioner approximately the same amount of the termination fee as a promotional
offering credit. Later, Petitioner received a bill for the sales tax on the termination fee it had paid.
Section 1105(a) of the Tax Law imposes sales tax upon "The receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1101(b)(5) of the Tax Law defines a sale as "Any transfer of title or possession or
both, exchange or barter, rental, lease or license to use or consume, conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor, including the
rendering of any service, taxable under this article, for a consideration or any agreement therefor."
In interpreting the application of Sections 1105(a) and 1101(b)(5) of the Tax Law in
connection with the lease of equipment by a contractor, Section 541.9(c)(1)(c) of the Sales and Use
Tax Regulations provides that "If a contractor cancels a lease on equipment and the lessor charges
a cancellation fee, such fee is included as a part of the total receipts upon which the tax is based."
It follows that the same rule would apply to a cancellation fee in connection with the
termination of a lease of computer equipment.

TP-9 (9/88)

-2­
TSB-A-91 (73) S
Sales Tax
December 2, 1991

Therefore Petitioner was required in accordance with Sections l105(a) and 1101(b)(5) of the
Tax Law to pay sales tax on the termination fee charged by IBM Credit Corporation on the
termination of its lease of computer equipment. The fact that IBM subsequently reimbursed the
Petitioner for the amount of the termination fee as a promotional offering credit does not effect the
taxability of the cancellation transaction.

DATED: December 2, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.