Does an out-of-state government agency, or the company it leases light rail cars from, owe Utah corporate franchise tax if the agency subleases those cars to Utah Transit Authority?

Plain-English summary

An out-of-state political subdivision (a state government transit-type agency) leased light rail transit cars from an equipment lessor and wanted to sublease those cars to the Utah Transit Authority, with UTA getting an option to buy the cars at the end of the sublease. The agency asked whether it, or its lessor, would owe Utah corporate franchise tax because of the sublease.

The Commission answered only half the question. The agency itself owes nothing, because Utah's corporate franchise tax only reaches "corporations," and Utah Code Ann. § 59-7-101(8) defines that term by reference to the Internal Revenue Code. Since the agency isn't subject to federal income tax as a political subdivision of its home state, it isn't a "corporation" under Utah law either — so the tax doesn't apply to it, regardless of nexus.

The lessor's situation was different, and the Commission declined to rule on it. If the original lease or the new sublease is treated as a sale of the rail cars for federal tax purposes, the lessor wouldn't be considered the "owner" of the cars in Utah at all, and would have no nexus. But if the lessor is still the true owner, its presence via leased property physically located in Utah could create income tax nexus — unless the lessor is a passive investor with no leasing customers of its own in the state. The request didn't say whether the lessor was a party to the sublease or had any control over it, so the Commission couldn't tell which side of that line the lessor fell on.

What this means for you

Out-of-state government agencies and public authorities

If your agency isn't subject to federal income tax, Utah's corporate franchise tax generally can't reach you either — the definition of "corporation" in § 59-7-101(8) borrows directly from federal tax status. That holds even if you're actively doing business (like subleasing equipment) in Utah, because the franchise tax's threshold question is entity type, not nexus.

Equipment lessors and leasing companies

Whether your leased property physically located in Utah creates income tax nexus for you turns on how "hands off" you are. Courts have gone both ways: a nondomiciliary owner's leased property being present in a state can be enough for nexus, but a truly passive investor with no leasing customers of its own in the state may escape it. If you're a lessor whose lessee subleases your equipment into Utah, document your lack of involvement in and control over that sublease — the more removed you are, the stronger the passive-investor argument.

Accountants and tax professionals structuring lease/sublease deals

Watch the threshold question: is the transaction actually a lease, or is it treated as a sale for federal tax purposes? If it's a sale, the "lessor" isn't an owner of Utah-situated property at all and nexus concerns evaporate. If it stays a true lease, nexus analysis turns on facts the Commission couldn't evaluate here — the lessor's rights under the original lease, whether it's a party to the sublease, and whether its activity is "regular and systematic" enough to reach exploiting the Utah market.

Common questions

Q: Why did the Commission rule on one party but not the other?
A: The requesting agency gave enough facts to answer its own question definitively (it isn't a "corporation" under Utah's definition, full stop). But it didn't know or state key facts about the lessor's role in the sublease, so the Commission couldn't determine whether the lessor was a passive investor or had one hitting the "regular and systematic business activity" nexus threshhold.

Q: Does this mean lessors of equipment used in Utah never owe Utah franchise tax?
A: No — it means the answer is fact-dependent. A lessor that is genuinely passive (no Utah leasing customers, no control over how its equipment is used once leased out) has a stronger case against nexus than one actively involved in placing or managing equipment in Utah.

Q: Can I rely on this ruling for my own lease structure?
A: No. This PLR binds the Commission only for the specific taxpayer and facts presented, and expressly leaves the lessor's nexus question open for lack of facts. If your situation involves an out-of-state lessor with property used in Utah, you'd need your own ruling or advice addressing your specific facts.

Citations and references

Statutes:

• Utah Code Ann. § 59-7-101(8) (definition of "corporation" for Utah's corporate franchise tax)
• 26 U.S.C. §§ 7701(a), 7704 (federal definitions incorporated by reference)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/03-007.html

Original ruling text

REQUEST LETTER

03-007

NAME

ADDRESS

PHONE

FAX

On behalf of my client, COMPANY("COMPANY"), I am requesting the rulings set forth below. COMPANY is the lessee under a lease of certain light rail transit cars (the "Equipment"). COMPANY is considering subleasing the Equipment to Utah Transit Authority ("OTHER COMPANY") under a sublease (the "Sublease") pursuant to which OTHER COMPANY would pay rent (the "Sublease Rent") to COMPANY. The Sublease will contain an option under which OTHER COMPANY will have the right to purchase the Equipment at the end of the term of the Sublease on payment of a certain amount (the "Sublease Purchase Option Amount"). The lessor of the Equipment (the "lessor") is not currently subject to Utah income tax. COMPANY is a political subdivision of the State of STATE. As such, it is not subject to United States federal income tax. Based upon the foregoing facts, your rulings are requested as follows:

1. COMPANY will not be subject to Utah income tax on the Sublease Rent or the Sublease Purchase Option Amount.

2. The Lessor will not be subject to Utah income tax on the Sublease Rent, the Sublease Purchase Option Amount, or otherwise as a result of the Sublease.

Please do not hesitate to give me a call if you should have any questions regarding the foregoing. Thank you for your assistance in this matter.

NAME

Cc: NAME

NAME

RESPONSE LETTER

May 6, 2003

NAME

ADDRESS

RE: Private Letter Ruling Request � Subleasing Equipment and the Utah Corporate Franchise Tax Consequences

Dear NAME,

We have received your request for a private letter ruling concerning a possible sublease between COMPANY (�COMPANY�) and OTHER COMPANY (�OTHER COMPANY�). OTHER COMPANY plans to sublease light rail cars from COMPANY with an option to purchase the cars at the end of the lease. Under these circumstances, you specifically ask whether COMPANY or the Lessor from whom COMPANY itself leases the light rail cars would be subject to Utah corporate franchise taxes because of the proposed sublease between COMPANY and OTHER COMPANY.

COMPANY Tax Consequences. You state that COMPANY, as a STATE political
subdivision, is not subject to United Stated federal income tax. To be subject to Utah�s corporate franchise
tax, an entity must first be a �corporation,� which is defined in Utah Code
Ann. �59-7-101(8) to include �(a) entities defined as corporations under
Sections 7701(a) and 7704, Internal Revenue Code; and (b) other organizations
that are taxed as corporations for federal income tax purposes under the
Internal Revenue Code.� Under Sections 7701(a) and 7704 of the Internal Revenue
Code, a �corporation� includes associations, joint-stock companies, insurance
companies, and publicly traded partnerships.
We do not believe COMPANY satisfies the definition of �corporation� for
Utah corporate franchise purpose.
Although an association may, in the broadest sense, include any entity
where a number of persons have united for a business purpose, we believe that
the term, for purposes of Utah�s corporate franchise tax, means an organization
treated as a corporation for federal tax purposes. Accordingly, if the United States does not consider COMPANY a
corporation subject to federal income tax, then we would not consider it a
�corporation� subject to Utah�s corporate franchise tax.

Lessor Tax Consequences. No information is provided about the Lessor, but we assume that
it is a corporation subject to federal income tax and, should it have income
tax nexus with Utah, Utah�s corporate franchise tax. You have stated that the Lessor is not currently subject to Utah
income tax, which we interpret to mean that the Lessor does not currently have
income tax nexus with Utah. At issue
then, is whether the sublease between COMPANY and OTHER COMPANY would result in
the Lessor obtaining income tax nexus with Utah. The presence of a nondomiciliary�s leased property in Utah may or
may not, depending on the circumstances, establish nexus between the property
owner and Utah for income tax purposes.

First, if either the lease between COMPANY and the Lessor or the sublease between COMPANY and OTHER COMPANY is treated, for federal tax purposes, as a sale of the rail cars rather than a lease of the rail cars, the Lessor would not be considered the owner of the rail cars for Utah corporate franchise purposes. Accordingly, the presence of the rail cars in Utah would not establish nexus for the Lessor in Utah, and the Lessor would have no Utah corporate franchise tax liability.

However, should the Lessor still be considered the owner of the rail cars brought into Utah, it could conceivably have nexus with Utah for income tax purposes. Various state courts have determined that the presence of a nondomiciliary�s leased property in a state affords that state a basis on which to impose its income tax. On the other hand, various state courts have also determined that an owner of leased property does not have income tax nexus with a state if that owner is a passive investor in the property and does not have leasing customers in the state. It is not known whether the Lessor is a party to the sublease between COMPANY and OTHER COMPANY or if the Lessor�s initial contract afforded COMPANY controlling rights in any subsequent sublease. Presumably, the Lessor is sufficiently removed from the sublease transaction so that it would not have income tax nexus, even though its leased property would be located in Utah.

At this time, however, without knowledge of the Lessor�s participation in, and rights under, the initial lease and subsequent sublease, we are unable to rule whether the Lessor would be a passive investor without income tax nexus with Utah. The facts and circumstances surrounding the lease and sublease could conceivably show the Lessor�s actions to be indicative of a regular and systematic business activity to exploit a market in Utah, and income tax nexus with Utah could be imposed.

Should you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

03-007