Is a sale-leaseback of equipment the lessee already owns and paid tax on subject to Texas sales and use tax?

Subject

Sale — Leaseback Transaction — Not Subject To Tax — Only A Financing Arrangement — Factors Considered (Prior Use, Depreciation, Intention Of Parties)

Plain-English summary

A taxpayer asked the Comptroller how Texas sales and use tax applies to sale-leaseback transactions in which the lessee already owns equipment -- and already paid tax on the original purchase -- and then obtains financing based on, or in exchange for, its interest in that equipment. The taxpayer described three scenarios, and the Comptroller addressed each one separately:

• "True Sale-Leaseback": The lessee sells the equipment to the lessor and leases it back under an operating lease (a true lease). This is a taxable transaction. The lessee cannot buy the equipment tax-free for resale, because the equipment was already used by the lessee before the sale-leaseback. The lessee may give the lessor a resale certificate instead of tax when selling the equipment to the lessor, but the lessor must then collect tax from the customer (the lessee) on the total lease charges. No credit is given for the tax the customer already paid on the original purchase, because sales and use tax is a tax on transactions.

• "Conditional Sale Type Lease Following Nominal Sale": This is a nontaxable financing arrangement. If the financing lease is merely a security device -- the lessor is really just a secured creditor, and the lessee keeps all the indicia of ownership before and after the deal -- then no sales tax is due on either the sale to the lessor or the leaseback to the lessee. The Comptroller based this on the court decision in Bullock v. Citizens National Bank of Waco, where the lessee had paid tax on the original purchase, used the equipment, and then obtained bank financing through a sale-leaseback that was really a financing lease.

• "Secured Loan": Also nontaxable. Where the equipment is merely collateral for a loan, there is no sale at all.

The Comptroller notes this opinion is based on the facts submitted, and other facts -- even if similar -- may yield a different result.

What this means for you

Equipment owners considering sale-leaseback financing

If you already own equipment and paid tax on it, structuring a deal as a true sale-leaseback (an operating lease) means the lessor must charge you tax on the ongoing lease payments -- there's no credit for tax you already paid. But if the arrangement is really a financing device, such as a lease that's functionally a secured loan (a "conditional sale type lease" or a straightforward secured loan using the equipment as collateral), the transaction is treated as nontaxable financing rather than a taxable sale and lease.

Lessors and equipment finance companies

Whether a sale-leaseback is taxed as a sale/lease or treated as nontaxable financing turns on substance over form: does the lessor function as a secured creditor while the lessee retains the indicia of ownership before and after the deal? That distinction, drawn from Bullock v. Citizens National Bank of Waco, determines whether you need to collect sales tax on lease charges.

Accountants and tax professionals

When structuring or reviewing a client's sale-leaseback, classify it into one of the three patterns described in this ruling -- true sale-leaseback (taxable operating lease), conditional-sale-type lease after a nominal sale (nontaxable financing), or secured loan (nontaxable, equipment as mere collateral). Note that this ruling addresses only the general fact pattern presented and states that different facts may change the outcome.

Common questions

Q: If I sell equipment I already own to a lessor and lease it back, is that taxable?
A: Under the "True Sale-Leaseback" scenario in this ruling, yes -- if it's an operating lease (a true lease), the lessor must collect tax from the lessee on the total lease charges. The lessee may give the lessor a resale certificate for the sale itself, but tax still applies to the lease payments.

Q: Do I get credit for the sales tax I already paid when I originally bought the equipment?
A: No. The ruling states that sales and use tax is a tax on transactions, and no credit is allowed for tax previously paid by the customer on the original equipment purchase.

Q: When is a sale-leaseback treated as nontaxable financing instead?
A: When the arrangement is really just a security device -- either a "conditional sale type lease following nominal sale" where the lessor is essentially a secured creditor and the lessee keeps the indicia of ownership, or a straightforward secured loan where the equipment is merely collateral. In both cases, no sales tax applies to the sale or the leaseback.

Q: What court case does the Comptroller rely on?
A: Bullock v. Citizens National Bank of Waco, involving a lessee who had paid tax on the original equipment purchase, used the equipment, and then entered into a sale-leaseback that was really a financing lease with a bank.

Q: Could the answer be different for my situation?
A: Yes. The letter states the opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1430D03

Original ruling text

September 24, 1996

Dear **:

Thank you for your letter concerning the sales and use tax
treatment of sale-leaseback transactions.

In the general situation you presented, the lessee already
owns and has paid tax on the original purchase of equipment
involved in the sale-leaseback transactions. You described
three different scenarios in which the lessee obtains financing
based on the security of, or in exchange for, the lessee's
interest in the equipment.

In your "True Sale-Leaseback" scenario, the lessee owes tax
on the original purchase of equipment. The lessee cannot
purchase the equipment tax free for resale if it was used
by the lessee prior to the sale-leaseback. The lessee may
accept a resale certificate from the lessor in lieu of tax
when selling the equipment to the lessor. The lessor is
required to collect tax from the customer on the total
charges for the equipment leased under the operating lease.
(An operating lease is a lease contract which gives the lessee
use of the leased property for a certain period; you might call
it a true lease.) The sales and use tax is a tax on transactions,
and no credit is allowed for the tax previously paid by the
customer on the original equipment purchase.

The "Conditional Sale Type Lease Following Nominal Sale"
scenario you described is a nontaxable financing arrangement.
If the financing lease is merely a security device, the lessor
is in the position of a secured creditor, and the lessee retains
all of the indicia of ownership before and after the sale-leaseback
transaction, based on the court decision in Bullock v. Citizens
National Bank of Waco, sales tax is not due on the sale to the
lessor or the leaseback by the lessee. In that court case, a copy
of which is enclosed, the lessee paid tax on the original purchase
of the equipment, used the equipment for a period of time, and then
sought financing from a bank by entering into a sale-leaseback
transaction that was a financing lease.

Finally, the "Secured Loan" scenario you described is nontaxable.
A secured loan, in which the equipment is merely collateral for
the loan, is not a sale.

This opinion is based on the facts you submitted. Other facts,
though similar, may yield different results.

I hope this information is helpful. Should you have any further
questions, please feel free to contact David Somerville of the Tax
Policy Division at 1-800-531-5441, extension 5-0030.

Sincerely,

Karey W. Barton, Manager
Tax Policy Division

NOTE: Previous Accession Number 9609554L