Was computer equipment leased to the federal government under a lease-to-own financing plan subject to South Carolina property tax?

Plain-English summary

The South Carolina Department of Revenue ruled that computer equipment leased to the federal government under its Lease to Ownership Plan was not subject to South Carolina property tax.

Although XYZ, LLC kept legal title during the lease as security, the agreement automatically transferred title to the federal government after the required payments. For federal income-tax purposes, XYZ treated the arrangement as a sale, reported the payments as interest and return of principal, and did not depreciate the equipment. The federal government was treated as the owner.

South Carolina Revenue Ruling 93-11 used income-tax ownership to assign property-tax responsibility for leased personal property that functioned as a financing arrangement. The Department therefore treated the equipment as federally owned for property-tax purposes.

Because the tax was an ad valorem tax on the property itself, federal sovereign immunity prevented South Carolina from taxing that federal property.

What this means for you

Equipment lessors

Keeping title as security did not control. The economic and income-tax treatment of the lease determined ownership under this PLR.

Federal contractors and agencies

The exemption depended on the government's ownership interest, not merely on the fact that a private company did business with the federal government.

Tax professionals

Distinguish a financing lease treated as a sale from an ordinary operating lease. The ruling stated that a lessor that properly depreciated the personal property would be treated as the owner and subject to property tax.

Common questions

Q: Why was the equipment exempt if XYZ held legal title?
A: XYZ held title only as security, while the transaction was treated as a sale and the federal government as owner for income-tax and property-tax purposes.

Q: Did title eventually transfer automatically?
A: Yes, after the required lease payments were completed.

Q: Would every lease to the federal government be exempt?
A: No. The ruling depended on this financing-lease structure and federal ownership; doing business with the government alone does not create immunity.

Q: What if the lessor depreciated the equipment?
A: The ruling said the lessor would then be treated as the owner and subject to ad valorem property tax.

Citations and references

• S.C. Code Ann. § 12-37-710 — listing and taxation of personal property
• S.C. Code Ann. § 12-37-900 — property tax returns
• S.C. Revenue Ruling 93-11 — financing leases and ownership of personal property
• United States v. Allegheny County, 322 U.S. 174 (1944) — government-owned property immunity discussed

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR04-6.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #04-6

SUBJECT:

Personal Property Leased to the Federal Government
(Property Tax)

REFERENCES:

S. C. Code Ann. Section 12-37-710 (2000)
S. C. Code Ann. Section 12-37-900 (2000)
S. C. Revenue Ruling #93-11

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2002)
SC Revenue Procedure #03-01

SCOPE:

A Private Letter Ruling is a written statement issued to a specific
taxpayer by the Department to apply principles of law to a specific set
of facts or a particular tax situation. A Private Letter Ruling does not
have the force and effect of law, and is not binding on the person
who requested it or the public. It is, however, the Department’s
opinion limited to the specific facts set forth, and is binding on agency
personnel only with respect to the person to whom it was issued and
only until superseded or modified by a change in statute, regulation,
court decision, or advisory ruling, providing the representations made in
the request reflect an accurate statement of the material facts and the
transaction was carried out as proposed.

Question:
Is the personal property leased to the federal government by XYZ, LLC (“Lessor”) through
a “lease to own” plan, as described in the facts, subject to property taxes in South Carolina?
Conclusion:
Based on the facts given below, the personal property leased to the federal government by
the Lessor through a “lease to own” plan, is not subject to property taxes in South Carolina.

1

Facts:
XYZ, LLC (“Lessor”) is a lessor of tangible personal property consisting of computer
equipment. Lessor leases this personal property to the federal government and agencies of
the federal government pursuant to the federal Lease to Ownership Plan (“LTOP”). The
most significant feature of the lease agreement is that after the required lease payments have
been made, title to the property automatically transfers to the federal government at the end
of the lease term. During the term of the lease, the legal title to the property is held by the
Lessor for security purposes although the federal government is responsible for maintaining
the equipment in good condition and working order.
For federal income tax purposes, the Lessor records the lease transaction as a sale and does
not depreciate the personal property for income tax purposes. The lease payments are
reported as interest income and return of principal by the Lessor. Under this lease
agreement, the federal government is properly treated as the income tax owner of the
equipment. At the end of the lease term, title to the property is transferred to the federal
government.
Discussion:
Generally, the business who has title to personal property lists the property for taxation,
files property tax returns and pays the property tax for such property. See, Code Section 1237-710. However, in South Carolina Revenue Ruling #93-11, the Department determined
that the liability for the property taxes imposed upon leased property runs to the lessee if the
lease is a financing arrangement for income tax purposes whereby the lessee is treated as
the owner of the property.1 In this instance, the Lessor is not treated as the owner of the
property for income tax purposes. The transaction is treated as a conditional sale by the
Lessor to the federal government. Since the LTOP agreement in question is a financing
lease where the property is treated as owned by the federal government for income tax
purposes, the property is considered owned by the federal government for property tax
purposes as well.
It is well established that the United States and its agencies, instrumentalities, and property
are immune from state and local taxation pursuant to the doctrine of sovereign immunity.
McCullough v. State of Maryland, 17 U.S. (4 Wheat.) 316 (1819). At the same time, it is
equally well settled that this constitutional immunity does not protect a private party that
does business with the United States from a state tax that is imposed on the private party
merely because part or all of the tax eventually falls on the United States. Alabama v. King
& Boozer, 314 U.S. 1 (1941). This principle was upheld in United States v. New Mexico,
455 U.S. 720 (1982) in which several taxes imposed by New Mexico on contractors doing
1

For real property, SC Revenue Ruling #93-11 is no longer applicable, as Code Section 12-37610 now provides that for real property, the person who has title to the property must pay the ad
valorem property taxes on such property. However, SC Revenue Ruling #93-11 is still
applicable to personal property.
2

business with the federal government were found not to violate the Supremacy Clause of
the Constitution and in Washington v. United States, 460 U.S 536 (1983) which held
similarly. Thus whether the property is subject to South Carolina property tax turns on
whether the tax is actually assessed against the United States or its property or whether it is
assessed against a private party doing business with the federal government.
In United States v. Allegheny County, 322 U.S. 174 (1944), the United States Supreme
Court held that machines owned by the United States and leased to a private party who used
the machines to manufacture guns for the government were immune from state property
taxation. The Court determined that the scheme of taxation used by Pennsylvania was
nothing more than the widely used ad valorem property tax which imposed the tax on the
property itself. The Court held “… that Government-owned property, to the full extent of
the Government’s interest therein, is immune from taxation, either as against the
Government itself or against one who holds it as bailee.” 322 U.S. at 189.
In this instance, while the federal government is not the technical title owner of the
property, it is treated as the owner of the property for South Carolina property tax purposes.
The tax imposed is an ad valorem tax on the property so any tax assessed would be
assessed to the federal government.2 However, the principles of McCullough v. Maryland,
supra, and United States vs. Allegheny County, supra, do not allow the tax to apply to the
property of the federal government. Therefore, the personal property that is leased by
Lessor to the federal government under a financing lease is not subject to property taxes in
South Carolina.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank, III, Director

November 1
, 2004
Columbia, South Carolina

2

Note that if this were a lease where the Lessor did properly depreciate the personal property for
income tax purposes, the Lessor would be treated as the owner of the property and would be
subject to ad valorem property taxes on the property.
3