Does an out-of-state captive equipment-finance company that leases/finances equipment used in Utah, with no Utah office or employees, have Utah income/franchise, property, and sales/use tax nexus?

Plain-English summary

A tax advisor asked the Utah State Tax Commission to rule on the tax treatment of "Company A," a captive finance company (part of an affiliated group with manufacturer/dealer companies B and C) that buys equipment finance/lease payment streams from independent dealers and direct sales offices, then finances or leases that equipment to end customers in about 45 states. Almost all (99.9%) of Company A's customers lease with intent to purchase and do buy at the end of the term, typically for $1 or 10% of the original price — arrangements that can look economically like conditional sales rather than true leases. Company A has one traveling salesperson based in Illinois who spends minimal time (no more than two days a year, one day per visit) in any given state, including Utah.

The Commission answered across three separate taxes, with the outcome for each depending heavily on whether Company A's specific transactions are true leases or secured loans:

Income/franchise tax

Utah taxes any out-of-state corporation with sufficient contacts to create nexus and Utah-source income (§ 59-7-104, § 59-7-201). Company A has nexus if it owns and leases property in Utah, services/maintains leased equipment here (directly or through a third party), collects delinquent Utah accounts, checks customer credit, repossesses property in Utah, or uses representatives to conduct business here, per Admin. Rule R865-6F-6. If Company A has nexus, its income is apportioned under Utah's UDITPA formula (§ 59-7-302 et seq.): the property factor (average value of Utah real/personal property, including leased property, versus everywhere) and the sales factor (income from Utah leases, plus loan-account income where the greater share of income-producing activity — measured by cost of performance — occurs in Utah, § 59-7-319). Because Company A has no Utah employees, there's no payroll factor to apply.

Property tax

County assessors assess personal property to its owner, claimant of record, or occupant in possession as of January 1 each year (§ 59-2-303). An owner leasing property for use in Utah must file an annual affidavit with the county assessor where the property sits (§ 59-2-306); failing to do so risks penalties and possible seizure (§ 59-2-307). Critically, whether the arrangement is a true lease or a security interest decides who owes this tax — if it's merely a secured interest, the owner of the underlying property (not the party holding the security interest) is responsible. Utah's UCC test (§ 70A-1-201(37)(b)) treats a transaction as a security interest (not a lease) if the lessee's payment obligation runs for the full term without a termination right, and any one of: (i) the lease term equals or exceeds the equipment's remaining economic life; (ii) the lessee must renew for the remaining economic life or become the owner; (iii) the lessee can renew for nominal/no extra consideration; or (iv) the lessee can become the owner for nominal/no extra consideration. If Company A is the true lessor, Company A owes the property tax; if Company B or C is actually the lessor, they owe it instead.

Sales/use tax

Utah use tax applies to storage, use, or consumption of tangible personal property here; the vendor must collect and remit it if the vendor has nexus under § 59-12-107(5) — an office, warehouse, stock of goods, regular non-carrier delivery into Utah, or regular leasing/servicing activity here. Company A has sales/use tax nexus if it owns and leases property to Utah consumers, has sales agents here, or services the equipment (directly or through an agent). The tax treatment then splits by transaction type:

• True lease: Company A must collect sales tax on the full amount of each lease payment as it's received.
• Financing/servicing only, on behalf of a lessor: if Company A merely collects lease payments as an agent for the actual lessor (who has Utah nexus), Company A collects sales/use tax on the full lease payment if the payment is made directly to Company A; if the payment goes directly to the lessor, the lessor collects it.
• Secured loan / conditional sale: if the arrangement is really a financed purchase rather than a lease, sales/use tax is collected up front on the full purchase price by the seller (if the seller has Utah nexus) — the ongoing loan payments themselves are not separately taxed.

What this means for you

Captive finance companies and equipment lessors operating in multiple states

Your Utah tax exposure across income, property, and sales/use tax all turn on the same underlying fact question: is this transaction really a lease or is it a secured financing arrangement? Structuring documents, buyout price, depreciation treatment, and who holds title all feed into that test — get it right up front, since it changes who owes which tax and when.

Businesses with minimal traveling sales staff visiting many states

Even a single employee, if their time in a state is minimal and non-recurring (here, one day per visit, no more than two days a year in any state), may still support the "uses representatives ... to conduct company business" nexus factor for income/franchise tax purposes — the ruling doesn't say this amount of activity clears or fails the bar, only that it's one of the relevant factors to weigh alongside ownership, servicing, and collection activity.

Multi-party lease/finance structures (dealer, manufacturer, finance affiliate)

When a finance affiliate purchases a payment stream originated by a dealer or manufacturer's sales office, the tax obligations (property tax, sales tax collection) can fall on whichever entity is the true lessor/owner — not necessarily the entity actually collecting the payments. Map out the whole chain (dealer → finance company → end customer) before assuming which entity owes what.

Accountants and tax professionals

This ruling doesn't resolve Company A's classification definitively — it lays out the standards (UDITPA apportionment factors, the UCC lease-vs-security-interest test, and the sales/use tax collection triggers) for the taxpayer to apply to its own facts. Useful as a structured checklist for any multi-state equipment financing/leasing nexus question.

Common questions

Q: We're an out-of-state equipment lessor/finance company with no Utah office — do we have Utah nexus?
A: Possibly, even without an office. Nexus factors include owning and leasing property here, servicing/maintaining equipment here, collecting delinquent Utah accounts, checking Utah customer credit, repossessing property here, or using representatives to conduct business in Utah.

Q: We buy a lease payment stream from a dealer — do we or the dealer owe property tax on the equipment?
A: It depends on who is the true lessor/owner versus who merely holds a security interest. If your arrangement is really a secured loan rather than a lease, the actual owner of the property (not the finance company holding the security interest) owes the property tax.

Q: How do we know if our "lease" is really a security interest for Utah tax purposes?
A: Under § 70A-1-201(37)(b), if the lessee's payment obligation can't be terminated and any of these apply — the lease term covers the equipment's whole remaining life, the lessee must renew for that remaining life or buy the equipment, or the lessee can renew or buy for nominal/no extra cost — the transaction is treated as a security interest, not a true lease.

Q: When do we collect Utah sales/use tax — up front or on each lease payment?
A: If it's a true lease, tax is collected on the full amount of each lease payment as received. If it's really a secured loan/conditional sale, tax is collected up front on the full purchase price, and the ongoing loan payments are not separately taxed.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-7-104, § 59-7-201 (corporate franchise vs. income tax)
• Utah Admin. Rule R865-6F-6 (income/franchise tax nexus factors)
• Utah Code Ann. § 59-7-302 et seq. (UDITPA apportionment formula)
• Utah Code Ann. § 59-7-319 (sales factor cost-of-performance sourcing)
• Utah Code Ann. § 59-2-303, § 59-2-306, § 59-2-307 (property tax assessment, affidavit, penalties)
• Utah Code Ann. § 70A-2a-102(1)(j); § 59-12-102(15) (lease definition)
• Utah Code Ann. § 70A-1-201(37)(b) (UCC lease vs. security interest test)
• Utah Code Ann. § 59-12-107(5) (sales/use tax collection nexus factors)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-125.htm

Original ruling text

96-125

Response August 23, 1996

Request

XXXXX

Attn. XXXXX

Dear Sir/Madam:

As we have been directed by your department, we are respectfully
requesting an written ruling in response to the case scenario attached. We request the ruling to specify how the
company should be treated for income/franchise tax, and sales/use tax purposes.

We respectfully request a response as soon as possible. If you should have any questions, please do
not hesitate to call myself or XXXXX.

Very truly yours,

XXXXX

Company A, B, and C are part of an affiliated
group. Company A began business in
1996. Company A is a C Corporation incorporated in Delaware and based in
Ohio. Company A is a captive finance
company that finances/leases equipment to unrelated entities. Company A finances/leases equipment to
customers in approximately 45 states.
Company A purchases the finance/lease payment stream from unrelated
dealers who have purchased some of their equipment from companies B and C. In addition, Company A purchases the
finance/lease payment stream from branches which are direct sales offices of
Company B. In some circumstances,
Company A will finance/lease equipment not manufactured by Companies B or
C. All equipment financed goes directly
to the end customer from the respective form of distribution. Company A has no inventory of equipment to
be financed.

Approximately 99.9% of all of Company A�s customers
lease with the intent to purchase and do exercise this option at finance
maturity. All security interest (UCC)
in equipment is released at the end of the term. If the finance contracts are structured as leases, the leases are
classified as conditional sales contracts or bargain purchase arrangements
(typically $1 or 10% of equipment original selling price). The equipment is not recorded on Company A�s
books as fixed assets or inventory and is not depreciated on the books. The future stream of payments to be received
are recorded on Company A�s books as assets.

Company A employs one sales person located in
Illinois. She spends approximately 25%
of her time traveling throughout the United States and Canada. Her responsibilities include attending trade
shows and soliciting sales by conducting seminars for sales people of
independent dealers and direct sales offices of Company B and C on the use of
leasing as an effective tool for financing.
Her time in each state is minimal.
She spends no more than two days a per year in a particular state and
each visit to a state is for only one day.

1. For
   income/franchise tax purposes, does Company A have nexus in the state? If yes, please cite and attach support for
   having nexus in the state.

2. If Company
   A has income/franchise nexus in the state, what returns should company A be
   filing and what are the apportionment factors to be used to apportion income?

3. For
   property tax purposes, does Company A have nexus in the state? If yes, please cite and attach support for
   having nexus in the state. Who is
   responsible for listing the property, the lessor or the lessee?

4. If
   Company A has property tax nexus in the state, what return should be filed?

5. For
   sales/use tax purposes, does Company A have nexus in the state? If yes, please cite and attach support for
   having nexus in the state.

6. If
   Company A has sales/use tax nexus in the state, what should be included in the
   tax base (i.e. principle, interest, property tax pass through)?

7. If Company
   A has sales/use tax nexus in the state, when should the sales tax be
   collected? Up-front as a conditional
   sale or as the lease payments are received?

8. If
   Company A has sales/use tax nexus in the state, what return should be filed to
   remit the tax?

XXXXX

Advisory
Opinion - Application of sales/use tax, income tax, and property tax to an
out-of-state financing company.

Dear
XXXXX

We have received your request for advice
pertaining to your client, who finances or leases equipment in Utah. We offer the following guidance:

1. Corporate income/franchise tax.

Every business that is incorporated
in Utah or qualified to do business in Utah is subject to Utah corporate
franchise tax. Any business that is not
incorporated in or qualified to do business in Utah is subject to Utah
corporate income tax provisions (1) if that company has sufficient contact with
this state to create nexus, and (2) if it derives income from Utah
sources. ��59-7-104 and 201 Utah Code
Ann.

Company A has nexus in Utah if it
owns property and leases property here, provides service or maintenance for the
leased property (directly or through a third party), collects delinquent Utah
accounts, checks customer credit, repossesses property here, uses
representatives in Utah to conduct company business, or meets any other
conditions set out in Utah Administrative Rule R865-6F-6 (enclosed). If Company A holds tile to the property or
if it depreciates the property for tax purposes, that is evidence that Company
A owns the property rather than just a secured interest.

The amount of Company A�s business
income that is apportioned to Utah under the Utah UDITPA provisions is
determined on the basis of the property
factor, the sales factor, and the payroll factor. �59-7-302 et.seq. Utah Code Ann.

A.
The Property Factor. The
property factor is a fraction which is calculated on the basis of the average
value of Company A�s real and personal property in this state during the tax
period compared to the average value of all of Company A�s real and personal
property. The value of the property leased by Company A in Utah as well as the
value of any other real or personal property which is owned by Company A and
situated in Utah during the tax period must be included in the property
factor.

B.
The Sales Factor. Company A must
include the income attributable to its leases of property in Utah. Company A must also include income derived
from its loan accounts with Utah clients if performance of Company A�s service
to those clients occurred predominately in Utah. When the income-producing activity is performed both in Utah and
elsewhere, the income is allocated to the Utah sales factor if the greater
proportion of the income-producing activity takes place here, as measured by
costs of performance. �59-7-319 Utah
Code Ann.

C. The
Payroll Factor. Because you state that
Company A has no employee�s in Utah, there is no need to discuss the payroll
factor here.

2. Property tax.

The county assessor is required to
assess all personal property within that assessor�s county to the owner,
claimant of record or occupant in possession as of January 1 each year. �59-2-303 Utah Code Ann. If Company A owns property and leases it for
use in Utah, Company A is required to file affidavit annually with the county
assessor in the county where the property is located. �59-2-306 Utah Code Ann. Failure
to do so will result in penalties and possible seizure of the property. �59-2-307 Utah Code Ann. If Company A merely holds a secured interest
in the personal property, the owner of the property is responsible for the
property tax.

The question of whether Company A�s
transactions constitute true leases or security interests is important to
determining Company A�s property tax liability. A lease is a transfer of the right to possession or use of goods
for the term of the agreement in exchange for consideration. �70A-2a-102 (1) (j) and �59-12-102 (15) Utah
Code Ann. A secured interest is
distinguished from a lease in the Utah Uniform Commercial Code, which states in
part:

Whether
a transaction creates a lease or security interest is determined by the facts
of each case; however, a transaction creates a security interest if the
consideration the lessee is to pay the lessor for the right to possession and
use of the goods is an obligation for the term of the lease not subject to
termination by the lessee, and:

(i)
the original term of the lease is equal to or greater than the remaining
economic life of the goods;

(ii)
the lessee is bound to renew the lease for the remaining economic life of the
goods or is bound to become the owner of the goods;

(iii)
the lessee has an option to renew the lease for the remaining economic life of
the goods for no additional consideration or nominal additional consideration
upon compliance with the lease agreement; or

(iv)
the lessee has an option to become the owner of the goods for no additional consideration
or nominal additional consideration upon compliance with the lease
agreement.

�70A-1-201 (37) (b) Utah Code Ann.
(Emphasis added.) The complete text of this subsection is enclosed for your
information.

If Company A is involved in true lease
transactions in Utah, Company A is responsible for property tax on the leased
property. If either Company B or C are
lessors of property in Utah, they are responsible for the property tax. In any of these instances, we can help you
identify the appropriate county assessor if you need assistance.

3. Sales/use tax.

Use tax is a tax on the
storage, use or consumption of tangible personal property in Utah. When tangible personal property is sold in
interstate commerce for use or consumption in this state, the sale is subject
to Utah use tax. Although use tax is
the liability of the purchaser, the retail vendor is responsible for collecting
and remitting the tax to the State of Utah if the vendor has an office,
warehouse, salesperson, or other physical presence in Utah. Utah Code Section 59-12-107 (5) states, in
pertinent part:

(1)
(a) Each vendor shall pay or collect and remit the sales and use taxes imposed
by this chapter if within this state the vendor:

(i) has or utilizes an office, distribution
house, sales house, warehouse, service enterprise, or other place of business;

(ii) maintains a stock of goods;

. . .

(iv) regularly engages in the delivery of
property in this state other than by common carrier or United States mail; or

(v) regularly engages in any activity in
connection with the leasing or servicing of property located within this state.

Company A has nexus in Utah if it
owns property and leases that property to Utah consumers. Company A also has nexus in Utah if has
sales agents here, or if it provides service or maintenance for the equipment,
either directly or through an agent. If
Company A leases property for use in Utah, it must collect sales tax on the
total amount of each lease payment.

If Company A is merely financing the
lease of equipment and collecting the lease payments on behalf of the lessor,
the lessor has nexus in Utah. As an
agent for the lessor, Company A must collect sales/use tax on the total amount
of each lease payment. Likewise, if
Company A purchases an income stream from a lease, Company A must collect
sales/use tax on each lease payment if the payment is made directly to Company
A. If the lease payment is made
directly to the lessor, the lessor must collect the sales/use tax on each lease
payment.

If the transaction constitutes a
secured loan on a purchase of the equipment, the sales/use tax must be
collected up front by the seller, if the seller has nexus in Utah. The total amount of the purchase price is subject
to sales/use tax, but loan payments are not.

The question of whether Company A�s
transactions constitute true leases or security interests is important to
determining Company A�s property tax liability. A lease is a transfer of the right to possession or use of goods
for the term of the agreement in exchange for consideration. �70A-2a-102 (1) (j) and �59-12-102 (15) Utah
Code Ann. A secured interest is
distinguished from a lease in the Utah Uniform Commercial Code, which states in
part:

Whether
a transaction creates a lease or security interest is determined by the facts
of each case; however, a transaction creates a security interest if the
consideration the lessee is to pay the lessor for the right to possession and
use of the goods is an obligation for the term of the lease not subject to
termination by the lessee, and:

(i)
the original term of the lease is equal to or greater than the remaining
economic life of the goods;

(ii)
the lessee is bound to renew the lease for the remaining economic life of the
goods or is bound to become the owner of the goods;

(iii)
the lessee has an option to renew the lease for the remaining economic life of
the goods for no additional consideration or nominal additional consideration
upon compliance with the lease agreement; or

(iv)
the lessee has an option to become the owner of the goods for no additional
consideration or nominal additional consideration upon compliance with the
lease agreement.

�70A-1-201 (37) (b) Utah Code Ann.
(Emphasis added.) The complete text of this subsection is enclosed for your
information.

If Company A is involved in true
lease transactions in Utah, Company A is responsible for property tax on the
leased property. If either Company B or
C are lessors of property in Utah, they are responsible for the property
tax. In any of these instances, we can
help you identify the appropriate county assessor if you need assistance.

3. Sales/use tax.

Use tax is a tax on the
storage, use or consumption of tangible personal property in Utah. When tangible personal property is sold in
interstate commerce for use or consumption in this state, the sale is subject
to Utah use tax. Although use tax is
the liability of the purchaser, the retail vendor is responsible for collecting
and remitting the tax to the State of Utah if the vendor has an office,
warehouse, salesperson, or other physical presence in Utah. Utah Code Section 59-12-107 (5) states, in
pertinent part:

(1)
(a) Each vendor shall pay or collect and remit the sales and use taxes imposed
by this chapter if within this state the vendor:

(i) has or utilizes an office, distribution
house, sales house, warehouse, service enterprise, or other place of business;

(ii) maintains a stock of goods;

. . .

(iv) regularly engages in the delivery of
property in this state other than by common carrier or United States mail; or

(v) regularly engages in any activity in
connection with the leasing or servicing of property located within this state.

Company A has nexus in Utah if it
owns property and leases that property to Utah consumers. Company A also has nexus in Utah if has
sales agents here, or if it provides service or maintenance for the equipment,
either directly or through an agent. If
Company A leases property for use in Utah, it must collect sales tax on the
total amount of each lease payment.

If Company A is merely financing the
lease of equipment and collecting the lease payments on behalf of the lessor,
the lessor has nexus in Utah. As an
agent for the lessor, Company A must collect sales/use tax on the total amount
of each lease payment. Likewise, if
Company A purchases an income stream from a lease, Company A must collect
sales/use tax on each lease payment if the payment is made directly to Company
A. If the lease payment is made
directly to the lessor, the lessor must collect the sales/use tax on each lease
payment.

If the transaction constitutes a
secured loan on a purchase of the equipment, the sales/use tax must be
collected up front by the seller, if the seller has nexus in Utah. The total amount of the purchase price is
subject to sales/use tax, but loan payments are not.