In a sale-and-leaseback, when do the purchase, the resale to the lessor, and the lease-back get taxed — and does the lease term change the answer?

Plain-English summary

A sale-and-leaseback is a financing move: a business (the lessee) buys equipment from a retailer, sells it to a lessor (often a finance company), and the lessor leases it back to the same business. The company asked how Colorado sales/use tax applies across the three legs.

The Department walked through it:

• Leg 1 — the lessee's original purchase from the retailer. This is exempt as a wholesale sale (sale for resale) — but only if the lessee buys with the intent to resell to the lessor and actually resells the property without using it. If the lessee uses the property first (e.g., for six months) and only then sells it to the lessor, the original purchase is taxable even though a resale later happens.
• Legs 2 & 3 — the resale to the lessor and the lease-back — turn on the lease term:
• Lease longer than three years: the lease is itself treated as a sale (a wholesale sale). The lessor buys the property tax-free and instead collects sales tax on each lease payment the lessee makes.
• Lease of three years or less: the lessor is technically the ultimate consumer and must pay tax on the property when it acquires it. The lease payments are then exempt (because the lessor already paid the tax). However, the lessor can avoid being treated as the ultimate consumer — treating its purchase as a non-taxable wholesale buy — by getting prior Department approval (DR 0440) to collect tax on the lease payments instead. Such permission is routinely granted (and once granted, the lessor must collect on all its short-term leases).
• Financing-lease wrinkle: if it's a financing lease, the lessor is collecting tax on the payments, and the lessor later factors (sells off) the credit obligation, the remaining tax not yet paid by the lessee becomes immediately due.

One gating presumption: the Department will presume a sale is not wholesale if the buyer — lessee or lessor — doesn't hold a valid, current Colorado retail sales tax license.

What this means for you

Businesses doing a sale-and-leaseback (lessees)

To keep your original purchase tax-free, you must genuinely buy for resale to the lessor and not use the property before reselling it. Use it first, and you owe tax on that initial purchase regardless of the later sale to the lessor. Make sure you hold a valid retail sales tax license, or the Department may not treat the buy as wholesale.

Lessors / finance companies

Your tax treatment is driven by the lease term. Over three years: buy tax-free, collect tax on every lease payment. Three years or less: you're the consumer and pay tax up front (payments then exempt) — unless you file DR 0440 to collect on the payments instead, which the Department routinely grants but which then applies to all your short-term leases. If you factor a financing lease's receivable, expect the unpaid remaining tax to accelerate and become due immediately.

Accountants and tax professionals

Map each leg: leg 1 wholesale under § 39-26-102(19) (defeated by intervening use); the lease-back classified by § 39-26-102(23) (>3 years = sale) vs. § 39-26-713(1)(a) (≤3 years, lessor as consumer, DR 0440 election); § 39-26-111(2) accelerates tax on factoring a financing lease. The wholesale presumption (Reg. 39-26-102.19) fails without a valid retail sales tax license. The >3-year "lease is a sale" rule is the same § 102(23) mechanism used in [[gil-15-007-leases-of-low-emitting-heavy-vehicles]].

Common questions

Q: Is a sale-and-leaseback taxable in Colorado?
A: Each leg is analyzed separately. The lessee's original purchase can be a tax-free wholesale buy (if truly for resale and not used first), and the lease-back's tax treatment depends on whether the lease runs more or less than three years.

Q: What if the lease is longer than three years?
A: The lease is treated as a sale. The lessor buys the property tax-free and collects sales tax on each lease payment from the lessee.

Q: What if the lease is three years or less?
A: The lessor is the ultimate consumer and pays tax when it buys the property; the lease payments are then exempt. The lessor can instead get a DR 0440 permit to collect tax on the lease payments — but then it must collect on all its short-term leases.

Q: My lessee used the equipment before selling it to the lessor — does that matter?
A: Yes. If the lessee uses the property and only later resells it to the lessor, the lessee's original purchase from the retailer is taxable, not a tax-free wholesale buy.

Q: What happens if a financing lessor factors the lease receivable?
A: Any remaining sales tax not yet paid by the lessee becomes immediately due.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes:
- § 39-26-102(19), C.R.S. (wholesale sale / sale-for-resale)
- § 39-26-102(23), C.R.S. (lease longer than three years treated as a sale)
- § 39-26-713(1)(a), C.R.S. (short-term lessor as ultimate consumer; election to collect on payments)
- § 39-26-111(2), C.R.S. (factoring a financing-lease obligation accelerates remaining tax)

Rules and forms:
- 1 CCR 201-4, Department Regulation 39-26-102.19 (no wholesale presumption without a valid retail sales tax license)
- DR 0440 (Permit to Collect Sales Tax on the Rental or Lease Basis)
- Department Rule 24-35-103.5 (GIL / PLR procedure)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-15-023.pdf

Original ruling text

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

GIL-15-023
October 15, 2015
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Sale-and-Leaseback Transactions
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXX (“Company) a request for guidance on sale-and-leaseback
transactions. The Colorado Department of Revenue (“Department”) issues general information letters
and private letter rulings. A general information letter provides a general overview of the relevant tax
issues but is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of a
fee. For more information about general information letters and private letter rulings, please see
Department Regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department treats this request as one for a general information letter. It is important to remember
that general information letters, such as this one, are general discussions of tax law and are not binding
on the Department. If Company would like the Department to issue a private letter ruling on the issue
raised here, Company can submit a request and fee in compliance with Department Regulation 24-35103.5.
Issue
Is a sale-and-leaseback subject to sales or use tax?
Background
Company purchases taxable tangible personal property from a third party. Company sells the property
to a lessor who leases back the property to Company.
Discussion
A sale-and-leaseback typically occurs when a lessee purchases tangible personal property from a
retailer, resells the property to a lessor, and the lessor leases back the property to the lessee.

The initial purchase of the property from the retailer by the lessee is exempt from tax as a wholesale
sale1 (i.e., sale for resale) if the lessee purchases the property with the intent to resell the property to the
lessor and, in fact, does resell the property without using it.2
The tax obligations of the subsequent sale-and-leaseback transaction hinge on the term of the lease. If
the term of the lease is more than three years, the lease is considered a sale (and, thus, a wholesale
sale); therefore, the lessor may purchase the property without paying tax and instead collect tax on each
lease payment paid by the lessee.3 If the term of the lease is three years or less, the lessor is technically
considered the ultimate consumer of the property and must pay tax on the property at acquisition. In
turn, the lease payments paid by the lessee are exempt from tax because the lessor has already paid
tax on such property.4 However, the lessor can avoid being treated as the ultimate consumer and, thus,
treat its purchase from the lessee as a non-taxable wholesale purchase for resale by requesting prior
approval from the Department to collect tax on lease payments rather than on the acquisition of the
property.5
Lastly, if the lease is a financing lease and the lessor collects tax on the lease payments but
subsequently decides to factor the credit obligation, the remainder of any tax not yet paid by the lessee
becomes immediately due.6
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on state
taxes issues. However, the Department does not make a specific determination here on any of the
issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter does
not address sales and use taxes administered by home-rule cities and home-rule counties. You may
wish to consult with local governments which administer their own sales or use taxes about the
applicability of those taxes. Visit our web site at www.colorado.gov/tax for more information about state
and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter 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 letter.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue

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§ 39-26-102(19), C.R.S. The Department will presume that a sale is not a wholesale sale if the buyer
(whether lessee or lessor) does not have a valid and current retail sales tax license issued by the
Department. See Department Regulation 1 CCR 201-4, 39-26-102.19.
For example, if the lessee purchases the property and uses the property for six months and then decides
to resell the property to the lessor, then the lessee’s purchase of the property from retailer is taxable even
though the lessee later resells the property to the lessor.

§ 39-26-102(23), C.R.S.
§ 39-26-713(1)(a), C.R.S.
Ibid. A lessor who would like to purchase the short-term (three years or less) leased property exempt from tax must
apply for permission from the Department and, if granted, the lessor must collect sales tax on all its short-term leases.
A lessor can make such request by submitting to the Department DR 0440, Permit to Collect Sales Tax on the Rental
or Lease Basis which can be found on the Department’s website at https://www.colorado.gov/pacific/tax/formsnumber-order. Such permission is routinely granted.
See, § 39-26-111(2), C.R.S.
DR 4010A (06/11/14)