Is Colorado sales or use tax due when a lessee pays $1 to take title at the end of a Lease Intended as Security (LIS) agreement?

Plain-English summary

A financing company offers a Lease Intended as Security (LIS) — a financing structure under a Master Lease. It asked whether sales or use tax is due when the lessee pays $1 at the end of the LIS to take title. The Department explained the two possible characterizations but declined to decide which fit.

If it's a finance lease → installment sale → the $1 buyout is taxable. Colorado treats certain leases ("finance leases") as installment sales, not true leases. There, the financing company buys the goods from the vendor and "leases" them to the consumer, holding title during the term as security for the credit it extended. The result: the vendor's sale to the financing company is an exempt wholesale sale, and the financing company's "lease" to the consumer is a taxable credit/installment sale. In that structure, the consumer's purchase of the equipment at the end of the lease for nominal consideration (the $1) is subject to tax (the Department cited GIL-2008-23).

If it's really a loan → the consumer already paid → no tax on the $1. By contrast, when a buyer borrows from a financing company and uses the loan proceeds to buy goods directly from a retailer, the consumer is the purchaser and pays sales tax on that purchase; the financing company has no sales tax obligation because it's neither the purchaser nor the seller. The facts the company described point this way: the invoices name the lessee as the buyer, the customer already paid tax on the purchase, and title remains with the lessee while the company holds only a security interest. In that case, the $1 at the end simply clears the security interest — no additional tax.

Why no answer: the Department said it does not determine the tax consequences of a particular transaction in a general information letter; to get a ruling on the LIS and Master Lease documents, the company must submit a private letter ruling.

What this means for you

Equipment financers and lessors

The label "lease" doesn't settle it. Characterize the deal: a finance lease is an installment sale — you buy wholesale (exempt) and collect tax on the credit sale, with the nominal buyout taxable. A genuine loan/security arrangement where the customer is the buyer and already paid the tax leaves you, the financer, with no sales tax obligation, and the $1 buyout adds no tax. Make sure your invoicing, title, and tax-collection practices match the structure you intend.

Lessees / borrowers

Whether you owe tax on a nominal end-of-term buyout depends on how the financing was structured and whether you already paid tax up front. If you were the named buyer and paid sales tax when you acquired the equipment, a $1 payment to clear a security interest generally shouldn't be taxed again.

Accountants and tax professionals

This is the true-lease vs. finance-lease vs. secured-loan distinction (GIL-2008-23). The presence of an exempt wholesale purchase by the financer plus a taxable credit sale to the consumer signals a finance lease (buyout taxable). Customer-as-named-buyer + tax already paid + financer holds only a security interest signals a loan (no further tax). For a binding call on specific documents, get a PLR.

Common questions

Q: Is the $1 end-of-lease payment on an LIS taxable?
A: It depends. If the LIS is a finance lease (installment sale), the nominal buyout is taxable. If it's really a loan and the customer already paid sales tax as the buyer, no additional tax is due on the $1. The Department didn't decide which applies.

Q: How do I tell which structure I have?
A: Look at who the buyer is on the vendor invoice, who holds title, whether the customer already paid tax, and whether the financer holds only a security interest. Those facts distinguish a finance lease from a secured loan.

Q: How do I get a definitive answer?
A: Submit a private letter ruling with the Master Lease and related documents.

Citations and references

Authorities:
- General Information Letter GIL-2008-23 (true lease vs. finance lease / installment sale)
- Regulation 24-35-103.5 (procedure for general information letters and private letter rulings)

Related rulings

• [[gil-11-013-taxability-of-leased-property]] — true lease vs. finance lease; finance lease = credit sale, collect on installments
• [[gil-09-005-sales-tax-responsibility-for-motor-vehicle-leases]] — taxable sale at lease end; who collects

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-09-020.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

April 27, 2009
XXXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
Re: purchase option on LIS
Dear XXXXXXXXXXXX,
You have requested guidance regarding whether the XXXXXXXXXXXXXXXXXXXXX (
“Company) has responsibility for collecting sales or use tax when a lessee pays $1.00 on the
expiration of a Lease Intended as Security agreement.
The Department issues general information letters and private letter rulings. A general
information letter provides a general overview of the applicable tax law, does not provide a
specific determination, and is not binding on the department. A private letter ruling is a
determination of the applicability of tax to a specific set of circumstances and is binding in the
department. A party requesting a private letter ruling must provide certain information and
remit a fee. For more information about general information letters and private letter rulings,
please refer to the Department’s regulation 24-35-103.5, C.R.S., which is available on our web
site at: www.colorado.gov/revenue/tax.
I will initially treat your request as one for a general information letter because the request does
not contain the information necessary for a private letter ruling. You may resubmit this request
as a request for a private letter ruling.
Issue
Is sales or use tax due when a lessee pays the Company $1.00 at the expiration of the LIS?
Background
The Company offers its customers a financing option referred to as a Lease Intended as
Security (LIS). The LIS incorporates the terms and conditions of a Master Lease agreement
between the company and lessee. The company assumes that the customer is making a
purchase of the equipment. Invoices from the vendor name the lessee as the buyer. The
customer has paid tax on these purchases and title to the equipment remains with the lessee.

The company is the lessor of the equipment and holds a security interest only in the
equipment.
Discussion
Colorado law will treat certain leases, often referred to as “Finance Leases,” as installment
sales rather than a true lease. In these cases, a financing company will purchase goods from
the vendor and “lease” the goods to the ultimate consumer. The financing company typically
holds title to the goods for the term of the lease as security for its extension of credit to the
lessee. The sale from the vendor to the financing company is an exempt wholesale sale and
the subsequent “lease” by the financing company to the ultimate consumer is a taxable credit
or installment sale. See, Department GIL-2008-23 (General Information Letters can be
accessed on the department’s website at www.taxcolorado.org > FYI/Publications > Rulings).
The purchase of the equipment at the expiration of the lease by the consumer for nominal
consideration is subject to tax.
In contrast, when a buyer obtains a loan from a financing company and uses the loan proceeds
to purchase goods from a retailer, the consumer is the purchaser and must pay sales tax on
the purchase. The financing company does not have any sales tax obligation because it is
neither the purchaser nor seller of the goods.
We do not, in the context of a general information letter, make a determination regarding the
tax consequence of any particular transaction. If you would like a ruling on the taxability of the
transactions outlined in the Master Lease agreement and other documents, you must submit
your request as a private letter ruling.
Miscellaneous
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this redacted
version of the ruling will be made public within 60 days of the date of this letter. Please let me
know in writing within that 60 day period whether you have any suggestions or concerns about
this redacted version of the ruling.

Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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