Was a computer-equipment sale-leaseback a taxable sale and rental or merely a financing arrangement, and was the original sales tax refundable?

Plain-English summary

The purchaser paid sales tax on computer equipment, transferred it into a sale-leaseback arrangement, and sought a refund because the lease payments included rental-use tax.

The Comptroller said the initial purchase remained taxable because the purchaser lacked a sales-tax permit. No refund of that tax was due.

The later payments were not taxable if the leaseback party was only a secured creditor with a security interest and the original purchaser retained possession, maintained the equipment, paid property taxes and insurance, bore the risk of loss, claimed depreciation, and received title at the end of the term. When those criteria were met, the arrangement was a financing security device rather than a sale.

Common questions

Was the initial equipment purchase taxable? Yes.

Was that tax refundable? No.

When were the leaseback payments nontaxable? When the listed facts showed a secured-creditor financing rather than a sale.

What ownership factors mattered? Possession, maintenance, property taxes, insurance, risk of loss, depreciation, and final title.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8604L0727B09

Original ruling text

April 28, 1986

Dear ***:

Thank you for your letter concerning a refund of sales tax on the
purchase of computer equipment from ABC Corporation. Your fact
situation and the response follows:

On March 28, 1986, I telephoned your office requesting a resale
number for the purpose of obtaining a sales tax refund. CORP A
paid sales tax on equipment purchased for resale to COMPANY Z,
agent for the leaseback. The lease payment includes rental use
tax so I am requesting a refund of sales tax.

When I called your office, I was told to use our state identification
number. Your office was to send documentation support for this procedure.
On April 8, 1986, I telephoned inquiring as to the status of my request.
*** informed me that your office would have to make a ruling as
to which party has the liability of collected sales tax; I am enclosing
the documentation you requested.

The amount of the sales tax refund being sought from the ABC CORP is
$***, so I would appreciate your immediate attention to this matter.

Response: Sales tax was due on the initial purchase of the computer
equipment from ABC since CORP A does not have a sales tax permit. Tax is
not due on the sale/lease back payments if COMPANY Z is in the position of
a secured creditor, having only a security interest in the computer equipment,
and CORP A retains possession, is responsible for maintenance, payment of
property taxes, insurance, bears the risk of loss, takes advantage of
depreciation expense and obtains title to the equipment at the end of
the lease term.

If this criteria is met the sale/leaseback transaction is merely a
security device for a financing arrangement. A sale has not occurred
and tax is not due on the payments to COMPANY Z, neither is a refund
due from ABC.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at
the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division