Is a $1-buyout computer lease to a student taxable, and does the schools exemption apply?

Plain-English summary

A company leases computers and educational equipment to students, with a deal that lets the student buy the equipment for $1 at the end of the lease. It asked (1) whether sales tax applies, and (2) whether the sales-to-schools exemption covers it. The Department's guidance: it's taxable, and the schools exemption doesn't apply. (This is a General Information Letter, so it's a discussion of the rules, not a binding determination.)

Why it's taxable — it's really a financed purchase, not a "lease." Colorado taxes the sale or lease of tangible personal property. A "lease" that is irrevocable for its initial term and lets the user buy the item at the end for a nominal price ($1) is treated as a sale on credit (a finance lease), not a true lease (§ 39-26-111; criteria in § 4-1-203). A credit sale is a taxable sale. And the Department added: even if it were a true lease, the computers are still taxable — for a short-term lease (three years or less) the lessor pays tax on the equipment when it acquires it (or, with Department permission via Form DR 0440, collects tax on the lease payments), and for a lease longer than three years the lessor must collect tax on the lease payments (§ 39-26-102(23), § 39-26-713). Either way, tax applies.

Why the schools exemption doesn't apply. Colorado exempts sales to schools (§ 39-26-704(4)) — but not sales to students. Here the student signs the lease, makes the installment payments, and owns the equipment at the end, so the buyer is the student, not the school. Just as students pay tax on supplemental learning materials they buy, this transaction isn't covered by the schools exemption. The separate exemption for sales by PTAs, booster clubs, and student groups (§ 39-26-725) also doesn't apply, because the company isn't one of those listed sellers.

What this means for you

Companies leasing devices to consumers or students with a buyout

A "lease" with a nominal end-of-term buyout (like $1) is almost certainly a credit sale for tax purposes, so treat it as a taxable sale. Don't assume a school-adjacent program is exempt: if the student or parent is the contracting buyer, the schools exemption doesn't reach it. Structure matters — who signs, who pays, and who ends up owning the device determine the buyer.

Schools and education programs

The exemption protects the school's own purchases. A device program where the student is the buyer is taxable, even if the school facilitates it. If the school itself buys (or truly leases) the equipment, that's a different analysis.

Accountants and tax professionals

Run the true-lease-vs-credit-sale test first (§ 39-26-111; § 4-1-203 — irrevocable term + nominal buyout ⇒ credit sale). If it's a true lease, apply the short/long-term lease mechanics (§ 39-26-102(23), § 39-26-713; DR 0440). For exemptions, identify the actual buyer — schools exemption (§ 39-26-704(4)) is buyer-specific and doesn't extend to students (cf. PLR 16-007). This is a GIL — guidance, not a determination.

Common questions

Q: Is a $1-buyout computer lease taxable in Colorado? A: Yes. That nominal buyout plus an irrevocable term makes it a credit sale (a financed purchase), which is taxable — and even a true lease of the computers would be taxable.

Q: My program runs through a school — is it exempt? A: Not if the student is the buyer. The schools exemption covers sales to schools, not to students. Here the student signs the lease, pays, and owns the equipment, so the exemption doesn't apply.

Q: What if the company really is a true lessor, not making a credit sale? A: Still taxable. For leases of three years or less the lessor pays tax on acquiring the equipment (or collects on payments with DR 0440 permission); for longer leases the lessor collects tax on the lease payments.

Q: Does the PTA/booster/student-group exemption help? A: No. That exemption is for sales by those specific groups, and the company isn't one of them.

Q: Does this letter decide my case?
A: No. A General Information Letter is general guidance and is not binding on the Department; it makes no specific determination. For a binding answer, request a private letter ruling.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-collected local taxes only; self-collected home-rule cities set their own rules — check with each.

Citations and references

Statutes and rules:

• § 39-26-104, C.R.S. (sales tax on the sale or lease of tangible personal property)
• § 39-26-111, C.R.S. (sale on credit / installment sale)
• § 4-1-203, C.R.S. (criteria distinguishing a true lease from a sale on credit)
• § 39-26-102(23) and § 39-26-713, C.R.S. (short-term vs long-term lease mechanics; Form DR 0440 election)
• § 39-26-704(4), C.R.S. (exemption for sales to schools — does not extend to students)
• § 39-26-725, C.R.S. (exemption for sales by PTAs, booster clubs, and student groups)
• See also 1 CCR 201-4, Rule 39-26-718(8)(d)(i); PLR 16-007 (sales of learning materials to students are taxable)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-17-002.pdf

Original ruling text

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

GIL-17-002

January 24, 2017
XXXXXXXXXXXXXXX
Attn:XXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Equipment Leases
Dear XXXXXXXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance on whether sales or use tax applies to leases of computers to students. 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 Rule 1 CCR 201-1, 24-35-103.5. The Department treats this request as 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 pay the fee in compliance with Department Rule 1 CCR 201-1, 24-35-103.5. Issue

1. Does sales tax apply to leases of computers and related equipment used by
   students?
2. Is the lease exempt from taxation under the exemption for sales to schools?
   Background
   Company leases computers and related equipment that provides educational materials to students. The lease is entered into by the student and, at the end of the lease term, the student can purchase the computer and related equipment for $1.

Structure of Analysis
To determine whether Company has an obligation to collect Colorado sales or use tax for computers and related equipment leased to students, the Department will examine the following questions:

1. Is the lease of computer and related equipment subject to sales tax pursuant to §3926-104 and 111, C.R.S.?
2. Is the lease exempt pursuant to §39-26-704(4) or 725, C.R.S.?
   Discussion
   Colorado imposes sales tax on the sale or lease of tangible personal property.1 A sale includes a sale made on credit and the buyer pays in installments. Some leases are treated as a credit sale (sometimes referred to as a finance lease) rather than a “true” lease. A lease that is not a true lease allows the retailer to make a sale on credit while retaining title to the goods until the final payment is made.2 There are several factors that may be considered when evaluating whether a lease is a credit sale, but, generally speaking, a lease is treated as a credit sale if the lease is irrevocable by the lessee for the initial term of the lease and the lessee can purchase the property at the end of the lease term for the nominal value.3 Moreover, even if what Company characterizes as a lease is not a credit sale but is a true lease, the computers are subject to tax. Lessors who make leases of three years or less in duration (short term leases) are treated as the consumer of the leased property and must pay sales or use tax on the leased property at the time of acquisition. However, the lessor may obtain permission from the Department to collect sales tax on lease payments if the lessor files form DR 0440.4 Lessors whose leases are longer than three years must collect sales tax on lease payments.5 Sales to schools are exempt.6 This exemption does not extend to sales to students.7 For example, students often purchase learning materials, such as supplemental learning materials, from bookstores and there is no basis for claiming such sales are exempt from tax. The Department has previously provided guidance that sales of books and other learning materials by schools to students is subject to tax.8 The same rationale applies here. Company is not selling or leasing its product to schools. The lease is entered into by the student, the student is liable for the installment payments, and the student owns the equipment at the end of the lease. Therefore, the transaction is likely not exempt under the sales to school exemption.

1

2
3
4
5
6
7
8
2

§ 39-26-104, C.R.S. Sales tax on leases depends on whether the lease is a short term or long term lease. See, §39-26-102(23), C.R.S. We not address this distinction here because we conclude that the Company’s lease are not true leases but rather sales on credit.
§ 39-26-111, C.R.S.
The criteria for determining whether a lease is sale on credit are set forth in § 4-1-203, C.R.S. Company states that the lease is not a true lease but, rather, is a credit sale.
§ 39-26-713, C.R.S.
§ 39-26-102(23), C.R.S.
§ 39-26-704(4), C.R.S.
See, § 39-26-704(4), C.R.S. and Department Rule, 1 CCR 201-4, 39-26-718 paragraph (8)(d)(i). See, e.g., PLR-16-007 DR 4010A (06/11/14)

Finally, sales by parent / teacher associations, booster club, and student groups are also exempt.9 However, this exemption does not apply here because Company is not one of the listed exempt sellers. 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 homerule 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

9

3

§ 39-26-725, C.R.S.

DR 4010A (06/11/14)