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 asked whether sales or use tax is due when a lessee pays $1 at the end of a Lease Intended as Security agreement. The company's stated facts were that invoices named the lessee as buyer, the customer had paid tax, title remained with the lessee, and the financing company held only a security interest.

The Department explained two general treatments. In a finance lease treated as an installment sale, the financing company purchases the goods from the vendor and the later transaction with the consumer is a taxable credit or installment sale; the purchase for nominal consideration at lease expiration is subject to tax. In a loan arrangement where the buyer purchases directly from a retailer and pays tax, the financing company is neither purchaser nor seller and has no sales-tax obligation.

The Department did not determine which treatment applied to the company's transaction. It said that determination would require a private letter ruling addressing the Master Lease and other documents.

What this means for you

Finance leases and loans

The tax result depends on how the documents and transaction are characterized. This GIL describes the two possible frameworks but does not decide whether the described LIS is a finance lease or a loan.

Reviewing an arrangement

The letter identifies facts relevant to its discussion, including who is named as buyer, who paid tax, who holds title, and whether the financing company holds only a security interest. Those facts do not substitute for a determination on a particular agreement.

Common questions

Q: Does the GIL decide whether the $1 payment in this LIS is taxable?
A: No. It says the nominal purchase is taxable in the finance-lease framework and describes no additional tax obligation for the financing company in the loan framework, but it does not decide which framework applies.

Q: What does the letter say about the loan framework?
A: When a buyer uses a loan to purchase goods from a retailer and pays sales tax, the financing company is neither purchaser nor seller and has no sales-tax obligation. The GIL does not separately decide the tax treatment of the buyer's $1 payment under the company's documents.

Q: How can the company obtain a definitive answer?
A: It must submit a request for a private letter ruling addressing the Master Lease and other transaction 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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