When a business sells equipment it already owns to a bank or lender and then leases it back, does Utah sales tax apply to the sale, and do the lease payments count as taxable rent?

Plain-English summary

A tax software and research company asked the Commission for comprehensive guidance on how Utah sales tax treats "sale-leaseback" transactions — where a company that already owns equipment sells title (but not possession) to a bank or other financing source, then leases the same equipment back — so it could give accurate guidance to its own customers.

The Commission's baseline rule: Utah taxes retail sales and leases of tangible personal property unless a specific exemption applies. Since July 1995, § 59-12-102(13)(c) creates a targeted exemption for sale-leaseback lease payments, but only when all three conditions are satisfied:

1. The lessee already paid sales tax on its original purchase of the property, and then enters a transaction transferring title to the lessor (bank/financing source).
2. The transaction is genuinely intended as a form of financing for the purchaser-lessee, not an ordinary sale-and-rent arrangement.
3. The purchaser-lessee capitalizes the property as its own asset for financial reporting purposes, and accounts for the lease payments as payments under a financing arrangement — not as a lease expense.

If the lessee's original purchase of the property was itself exempt from sales/use tax, this sale-leaseback exemption doesn't apply at all (there's no "double" tax benefit). Title must genuinely pass to the bank or financing source — if the bank only holds a security lien rather than actual title, it's not a true sale-leaseback; in that case, payments to the bank are simply loan payments and were never taxable rent to begin with. And critically, if the lessee books the lease payments as an ordinary expense (rather than capitalizing the equipment as an asset), condition (3) fails and the lease payments become taxable.

Utah imposes no time limit between the original purchase and a later sale-leaseback — a company can use equipment for a period of time and then enter a qualifying sale-leaseback later, as long as all three conditions are met at that point.

The Commission also addressed related structuring questions: conditional sales are still taxable sales under § 59-12-102(15)'s broad "conditional or otherwise" language, so structuring a transaction as an installment sale or lease-with-option-to-buy doesn't avoid tax if it would otherwise be taxable as an outright sale. And while the isolated/occasional sale exemption (§ 59-12-104(14)) can let a business sell used equipment to a bank tax-free (as long as the seller isn't regularly in the business of selling such items), that exemption only covers the sale — the leaseback itself is a separate, taxable rental transaction unless it independently satisfies the three-part sale-leaseback financing test above. Likewise, a bank buying equipment tax-free for resale (intending to lease it) still owes tax on the subsequent lease/rental. Because neither of these alternate routes actually avoids tax on the leaseback, the Commission noted most taxpayers rely on the dedicated sale-leaseback financing exemption instead.

What this means for you

Businesses considering a sale-leaseback for financing

Structure the deal deliberately around all three statutory conditions: make sure you already paid sales tax on the original purchase, document the transaction as genuine financing, and — critically — capitalize the equipment as your own asset on your books rather than expensing the lease payments. Missing any one of the three conditions makes the lease payments taxable.

Companies whose original purchase was tax-exempt

Don't assume a later sale-leaseback will be exempt just because you follow the standard structure — if your original purchase of the equipment was itself exempt from sales/use tax, the sale-leaseback exemption doesn't apply to your lease payments at all.

Lenders and equipment finance companies

Confirm whether title genuinely transfers to you in a sale-leaseback deal — if you only hold a security lien rather than title, the arrangement is a loan, not a sale-leaseback, and the analysis (and the underlying documentation you need) is different.

Common questions

Q: Are all sale-leaseback lease payments exempt from Utah sales tax?
A: No — only if the lessee already paid tax on the original purchase, the deal is genuine financing, and the lessee capitalizes the property as its own asset (rather than expensing the lease payments).

Q: Does it matter how much time passes between the original purchase and the sale-leaseback?
A: No, Utah law sets no time limit — a company can use the equipment for a period first and still qualify later, as long as all three conditions are met.

Q: Can I avoid tax on a leaseback by selling my equipment to a bank as an "isolated sale"?
A: The sale itself might be exempt as an isolated/occasional sale, but the leaseback is treated as a separate, taxable rental transaction unless it independently meets the three-part sale-leaseback financing test.

Q: Does this ruling apply to my transaction?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts. Another taxpayer can't rely on it as binding, though it may carry weight in a later appeal depending on how closely the facts match.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-102(13)(c) (sale-leaseback financing exemption)
• Utah Code Ann. § 59-12-102(15) (taxable sale definition, including conditional transfers)
• Utah Code Ann. § 59-12-104(14) (isolated or occasional sale exemption)
• Utah Admin. Rule R865-19S-38(D) and R865-19S-39(E) (isolated-sale interpretation)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-082.pdf

Original ruling text

96-082

Response
May 15, 1996

Request

Mr.
R. H. Hansen, Chairman

State
Tax Commission

Heber
M. Wells Bldg

160
East 300 South

Salt
Lake City, UT 84134

Dear
Sir/Madam:

XXXXX
is a tax software development and research company that provides tax
calculation systems and research materials to its customers. In order to provide our customers with
accurate and authoritative information, it is important that we review our
products for current and correct tax data.
This ensures that our customers are in proper compliance with all state
tax laws. Also, the state is certain
that the proper amount of sales/use tax is being remitted.

We
would like to provide our customers with guidance and assistance in making
taxability decisions of sale and leaseback transactions. We have defined a sale leaseback transaction
as a transaction whereby a company transfers title but not possession of
tangible personal property that they already own to another party. Then this
company leases the same tangible personal property back from the other
party. Therefore, we respectfully
request that a formal opinion be issued to clarify the State's position on the
following transaction:

Company A originally purchases tangible personal property
from a manufacturer. After a period of time
Company A sell's title to this tangible personal property to a bank, other
financial source, or the original manufacturer. Then Company A leases the tangible personal property back from
the bank, other financial source, or the original manufacturer.

We
are specifically asking the tax ramifications on sale and leaseback
transactions for the following items:

1. The overall taxability of sale and leaseback
   transactions.

2. The taxability of the sale and leaseback
   transaction when the original purchase of the tangible personal property was
   exempt.

3. The taxability of the sale and leaseback
   transaction when the original purchaser paid sales tax when the tangible
   personal property was first bought.

4. The time period that the original purchaser
   has to complete the sale and leaseback transaction.

5. The taxability of the sale and leaseback
   transaction if the original purchaser uses the tangible personal property.

6. When will the state consider the sale of
   tangible personal property from the original purchaser to the bank, other
   financial source, or the manufacturer an occasional or casual sale.

7. The conditions necessary to consider the
   sale and leaseback transaction a conditional sale.

8. The conditions necessary to consider the
   sale and leaseback transaction a financial arrangement.

9. The state's interpretation of the intent of
   the sale and leaseback transaction when the original purchaser used the
   tangible personal property prior to the sale and leaseback.

We
are asking that you provide the proper legal cite's with your response to the
above questions.

Your
attention in this matter is greatly appreciated. I have enclosed for your convenience a self addressed stamped
envelope. If you have any further
questions, please do not hesitate to contact me at XXXXX.

Sincerely,

XXXXX

XXXXX

Re:
Advisory Opinion - Sale Leaseback Financing

Dear
XXXXX

We have received your
request for information pertaining to sale-leaseback financing. We find as follows:

Utah law imposes sales
and use tax on retail sales and leases of personal tangible property unless a
statutory exemption applies. However,
effective July 1995, section 59-12-102 (13) (c) of the Utah Code provides that
lease payments made under a sale-leaseback agreement are exempt from sales tax
if:

(1) the lessee pays sales tax
on its initial purchase and then enters into a sale-leaseback transaction which
transfers title to the property to the lessor,

(2) the transaction is intended
as a form of financing for the property to the purchaser-lessee, and

(3) the purchaser-lessee
capitalizes the subject property for financial reporting purposes, and accounts
for the lease payments as payment made under a financing arrangement.

If the initial
purchase of the tangible personal property was exempt from sales or use tax,
the sale-leaseback provision cited above does not apply. Additionally, title must pass to the bank or
other financing source. If the bank
holds only a secured lien on the property, it is not a true sale-leaseback
arrangement. Of course, if the bank
holds only a secured lien on the property, any payments made to the bank are
merely payments on a loan and not taxable rental payments.

Let me emphasize that
the equipment must be capitalized by the lessee as an asset. If the lease payments are shown as an
expense on the lessee�s accounts, the arrangement fails to meet (3) above and
tax is due on the lease or rental payments.

Utah law sets no conditions
as to the time that lapses between the purchase of the equipment and the sale
leaseback arrangement. Therefore, even
if a company purchases and uses tangible personal property for a time, then
enters a sale-leaseback arrangement, the exemption applies so long as the
transaction fulfills all of the conditions listed above.

With regard to
conditional sales, section 59-12-102 (15) of the Utah Code defines taxable
sales as �any transfer of title, exchange or barter, conditional or
otherwise, in any manner, of tangible personal property or any other
taxable item or service under Subsection 59-12-103(1), for consideration.� (Emphasis added.) We are not sure what type of transaction you have in mind, but it
is taxable if a right to possession, operation, or use of an item of tangible
personal property is granted and the transfer would be taxable if an outright
sale were made. Therefore, if the
transaction is structured as an installment sale or a lease with an option to
buy, it is still taxable.

Utah law provides a
sales tax exemption for isolated and occasional sales of items of tangible
personal property except vehicles which are required to be titled or registered
under Utah law. Under section 59-12-104
(14) of the Utah Code, isolated or occasional sales by persons not regularly
engaged in business are exempt from sales tax.
Utah Administrative Rule R865-19S-38 (D) construes the term
"business" as an enterprise engaged in selling tangible personal
property or taxable services. Read
together, these regulations exempt an isolated sale when it is made by a person
who is not pursuing his regular course of business of selling tangible personal
property. The sale by a business of its
used fixtures, machinery, and equipment is considered an isolated or occasional
sale unless the sale is one of a series of sales sufficient in number to
indicate the seller deals in the sale of such items. Utah Admin. R. R865-19S-39 (E).

Under the isolated and
occasional sale rule, a business may sell an item of tangible personal property
to a bank or other financing source tax free.
However, the leaseback is a separate transaction, and it is subject to
sales tax. Likewise, the bank or other
financing source may purchase the item tax free as a purchase for resale if it
makes the purchase with the intention of renting or leasing the item in the
regular course of business. However,
the subsequent rental or lease transaction will be subject to tax. Because these types of transactions cannot
save the leaseback from taxation, most taxpayers rely on the sale-leaseback
provisions described above.

We notice that your
letter was mailed to our old address.
Please note our new address for your records:

Utah State Tax Commission

210 North 1950 West

Salt Lake City, Utah 84134

Please let us know if
you have other questions.

For the Commission,

Alice Shearer,

Commissioner