Was the lease with a purchase option equal to 69% of estimated fair market value an operating lease, and when was Texas sales tax due?

Plain-English summary

The contract qualified as an operating lease for Texas sales and use tax. Although a purchase option set at 69% of estimated fair market value might have been a bargain option for accounting or federal income-tax purposes, the Comptroller found it was not a nominal purchase price under Rule 3.294.

Tax generally became due as the lease amounts became payable under the contract. If the lessor collected the entire tax at the lease's inception, however, all of it had to be reported in the same return period in which it was collected.

The lessor could give the manufacturer a resale certificate when purchasing the leased property. The letter also flagged a historical prior-contract provision for certain contracts entered into on or before July 21, 1987, effective through June 30, 1990.

What this means for you

The tax classification did not automatically follow financial-accounting or federal income-tax treatment. The contract's option failed Texas's nominal-price test, and the tax reporting schedule followed when lease charges—or the tax itself—were collected.

Common questions

Was this an operating lease? Yes.

Did the 69% purchase option make it a financing lease? No. The Comptroller did not consider that option price nominal under Rule 3.294.

When was tax due? Generally as each lease amount became payable.

What if all tax was collected upfront? It had to be reported in the same return period as collection.

Citations and references

• Comptroller Rule 3.294 — operating-versus-financing lease classification and nominal purchase price.
• The letter mentions a prior-contract rule for certain written contracts made by July 21, 1987, but does not give its number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8707L0823C07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS

STATE OF TEXAS

AUSTIN, 78774

BOB BULLOCK

Comptroller

July 29, 1987

Dear **:

Thank you for the recent letter regarding sales and use tax treatment of a lease agreement between your company and CORP ABC.

This contract qualifies as an operating lease for sales and use tax purposes. Although the purchase option price at 69% of the estimated fair market value might be considered to be a "bargain purchase option" per financial accounting or federal income tax criteria, it is not considered a "nominal purchase price" under the enclosed Rule 3.294.

As I explained in our phone conversation last week, generally under an operating lease tax is due on the lease amounts as they become payable as stipulated in the contract. However, if the lessor collects the entire tax amount at the inception of the lease, the amount must be reported in the same return period as collected.

The lessor should issue the manufacturer a resale certificate at the time of purchase in lieu of tax.

I would like to point out that the tax bill passed by the legislature last week will affect this lease in terms of the rate increase. There is a prior contract exemption provision for certain written contracts entered into on or before July 21, 1987; this exemption is effective through June 30, 1990. I have enclosed a copy of our rule concerning prior contracts, which will explain which contracts qualify in more detail.

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 me at 1-800-252-5555 toll free from anywhere in Texas. The regular number is 512/463-4600. You may write me at the Tax Policy Division.

Sincerely,

Sandi Skaggs

Tax Policy Division