In a sale-leaseback/cash-advance arrangement -- where a customer sells an appliance to a business and then leases it back while receiving a cash advance, backed by a refundable security deposit and a separate rental fee -- which parts of the transaction are subject to Texas sales tax?

Plain-English summary

The taxpayer described a specific cash-advance/sale-leaseback arrangement: a customer brings in an appliance (identified only by serial numbers), sells it to the business, and then leases it back for two weeks (extendable). If the customer wants a $100 cash advance, they write the business a $100 security-deposit check and a separate $20 "rental charge"/"lease fee" check, and the business issues them a $100 cash-advance check in return. The taxpayer asked which pieces of this — the appliance purchase, the security deposit, the rental/lease charge, and any lease extensions — carry Texas sales tax.

The Comptroller broke it down piece by piece: the business's purchase of the appliance from the customer qualifies as a purchase for resale, so the business can give the customer a resale certificate instead of paying tax on that purchase. The refundable security deposit is not taxable. But the rental/lease charge IS taxable, and the business must collect and report sales/use tax on it — as are any additional rent/lease fees if the customer extends the lease. And if the customer eventually buys the appliance back (whether by paying the $100 outright or by applying the security deposit to the purchase price), that repurchase is also a taxable sale, which the business must collect and report tax on.

What this means for you

Businesses running sale-leaseback/cash-advance appliance arrangements

Structure your paperwork to separately identify the resale purchase, the refundable deposit, and the rental/lease charge — the deposit itself stays untaxed, but the ongoing rental charge (and any extension fees) is taxable, and so is a later buy-back by the customer.

Customers using this kind of arrangement

Expect sales tax on your periodic rental/lease payments and on any final repurchase of the item, even though the initial security deposit itself isn't taxed.

Accountants and tax professionals

A useful worked example distinguishing a nontaxable refundable deposit from a taxable ongoing lease charge in a sale-leaseback structure, plus confirmation that a subsequent buy-back is a separate taxable sale event, not a wash against the original resale purchase.

Common questions

Q: Is a business's purchase of an item it intends to lease back to the seller taxable?
A: No — it qualifies as a purchase for resale, so the business can use a resale certificate instead of paying tax.

Q: Is a refundable security deposit taxable?
A: No.

Q: Is the rental/lease charge on the leased-back item taxable?
A: Yes, and the business must collect and report sales or use tax on it, including on any additional fees from extending the lease.

Q: If the customer later buys the item back, is that taxable?
A: Yes, whether they pay cash or apply the security deposit to the purchase price — it's a separate taxable sale.

Q: Can I rely on this letter for my own leaseback arrangement?
A: No. It's based on the specific facts presented and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

No specific Tax Code section or numbered Comptroller rule is quoted in the body of this letter; the answer applies the Comptroller's general policy on resale purchases, refundable deposits, and taxable lease/rental charges.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9909680L

Original ruling text

September 14, 1999

Dear Mr. **:

This is in response to your request for a ruling on what portion of the
"Lease Agreement" and Bill of Sale that you enclosed will be taxable. I have
restated your example and questions below followed by my response.

Example Transaction:

The customer brings me one or two serial numbers from an appliance; they keep
the appliance. They sell me the item(s) then I lease it (or them) back to the
customer (Lessee) for a period of two weeks. This can be extended. If the
Lessee needs a cash advance for $100.00, they give me a check for a security
deposit in the amount of $100.00 and a check for the "rental charge rate" or
"lease fee" in the amount of $20.00. I then issue them the "Cash Advance"
amount of $100.00 in the form of a computer-generated check.

Questions:

1. Do I pay tax on my purchase of their appliance?

2. Is tax charged on the "Security Deposit"?

3. Is tax charged on the 'Rental/lease"?

4. If the Lessee extends the lease after the initial rental/lease term and
   they pay additional rent/lease fees, are these taxable?

Response: Your purchase of the appliance from your customer qualifies as a
purchase for resale. You may issue the seller a resale certificate in lieu of
paying sales tax on the purchase of the appliance. Sales tax is not due on a
refundable security deposit that you hold from your customer.

Texas sales or use tax is due on the rental/lease charge that you make for the
appliance. You must collect and report sales or use tax on this charge.
Additional rent/lease fees paid on an extension of the initial rental/lease
term are taxable. If at the end of the lease or rental term the "lessee" buys
back the appliance from you (i.e., by paying you $100, or applying the security
deposit to the purchase price) sales tax is also due on this sale. You must
collect and report Texas sales tax on this transaction.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. I hope this information answers your questions.
If you need additional information, please call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Policy Division, Comptroller of Public Accounts. You may also e-mail our tax
help section at:

Sincerely,

Gilbert Zamora
Tax Policy