Was a purported sale-leaseback of office furniture a taxable operating lease or a financing arrangement?

Plain-English summary

Florida treated the office-furniture sale-leaseback as a financing arrangement rather than a taxable operating lease of tangible personal property. The lessor held bare legal title as security, while the taxpayer retained substantially all benefits and risks of ownership.

The taxpayer had bought several hundred pieces of office furniture for $273,780.55 during 2000 and paid sales tax to the vendors. It later sold the furniture to the lessor for the same purchase price without physically moving it, then signed a master equipment “lease” to obtain cash for business operations.

The payment schedule called for 60 monthly payments of $5,939.10. The taxpayer treated the arrangement as a loan in its financial statements and for federal income-tax purposes, continued depreciating the furniture, and continued reporting it for tangible-personal-property tax.

Five document terms showed financing

The Department highlighted that:

1. The taxpayer accepted the furniture “AS IS.”
2. The taxpayer received the benefit of manufacturer warranties.
3. An incorporated addendum transferred title after final payment for $1.
4. The taxpayer had to obtain insurance and bore the entire risk of loss.
5. The taxpayer retained the tax benefits associated with the furniture.

The taxpayer also had maintenance, repair, indemnity, and liability duties. Read together, the documents placed the economics of ownership with the taxpayer rather than the nominal lessor.

The $1 option was nominal

Rule 12A-1.071 treated a contract as a conditional-sale-type transaction from inception when it transferred substantially all ownership risks and benefits and transferred title at the end or included a nominal purchase option. The quoted rule treated an option as nominal if it did not exceed $100 or 1% of the total contract price, whichever was less.

The $1 addendum met that test. Florida therefore found a financing arrangement and did not treat the scheduled payments as gross proceeds from an operating lease.

What this means for you

Equipment finance teams and borrowers

Review the full document set, including schedules and addenda. A master agreement's “lease” label or standard fair-market-value option can be displaced by incorporated terms that transfer title for a nominal amount.

Lessors and accounting teams

Trace who bears loss, insurance, maintenance, warranty enforcement, depreciation, tax benefits, and residual-value risk. Consistent accounting supports the analysis but does not replace the contract terms.

Tax professionals

Separate tax paid on the original furniture purchase from tax treatment of later financing payments. This ruling did not state that every sale-leaseback is nontaxable.

Common questions

Q: Did Florida treat the transaction as an operating lease?
A: No. It was a financing arrangement on the reviewed documents.

Q: Why did the $1 option matter?
A: It was a nominal amount and transferred title after final payment, supporting conditional-sale treatment.

Q: Who bore the furniture's ownership risks?
A: The taxpayer accepted it as-is, maintained and insured it, bore risk of loss, and handled warranty claims.

Q: Were the scheduled payments taxable lease receipts?
A: No, because the Department concluded that the transaction was financing rather than a tangible-property lease.

Citations and references

• Fla. Stat. § 212.05(1)(a), (c) — tangible-property sale and rental tax
• Fla. Stat. § 212.02(10)(g), (15) — lease and sale definitions
• Fla. Admin. Code r. 12A-1.071(1) — operating and conditional-sale-type leases
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-056

Original ruling text

SUMMARY

QUESTION: Is the transaction in question as lease of

tangible personal property or a financing arrangement?

ANSWER - Based on Facts Below: The documents, when reviewed

as a whole, indicate that the transaction was intended to

be a financing arrangement, not a lease of tangible

personal property. This was evidenced by the following: 1)
Taxpayer accepted the tangible personal property AS IS; 2)
the Taxpayer was entitled to the applicable warranties; 3)
the Taxpayer was provided a purchase option of $1.00 at the
end of the lease; 4) the Taxpayer was responsible for
obtaining insurance on the tangible personal property; and
5) the Taxpayer was entitled to all the tax benefits

related to the tangible personal property.

Nov 20, 2003

Re: Technical Assistance Advisement 03A-056
Sales and Use Tax - Sale & leaseback (TPP)
Sections: 212.05 and 212.02, F.S.

Rule: 12A-1.071, F.A.C.
Petitioner: XXX

FEI#: XX

STN: XX

Dear:

This letter is a response to your petition dated September
2, 2003, for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the

authority of s. 213.22, F.S.

Documents provided by Taxpayer

You have provided several documents that are relevant to

the transaction. These include the following:

Equipment Schedule

Bill of Sale

Loan Amortization Schedule

Master Equipment Lease Agreement

Schedule No. One to Master Equipment Lease Agreement
Addendum A to Schedule No. One to Master Equipment Lease
Agreement

Certificate of Acceptance

Officers’ Certificate

Certification of Insurance Protection on Leased Equipment
Financing Statement

Evidence of Property Insurance

Certificate of Liability Insurance

Discussion of Information Per Taxpayer's Petition

The following facts were presented in the above listed
documents and in our telephone conversation on October 22,
2003, and in my telephone conversation with XXXXX

on November 3, 2003:

The Taxpayer is a Florida corporation engaged in the
business of providing tax and accounting services to
several companies within a large group of entities related

to the Taxpayer. The other party involved is XXXXX (herein

"Lessor").

The Taxpayer purchased several hundred pieces of office
furniture for use in its office building from unrelated

third party furniture vendors at various times during the
year 2000. All of the furniture was purchased by the
Taxpayer prior to November 10, 2000. At the time of each
furniture purchase, the Taxpayer did not intend to resell

or release the furniture. Therefore, for each purchase of
furniture, sales tax was properly paid by the Taxpayer to

the furniture vendors. The total purchase price of all the

items of furniture was $273,780.55.

In order to obtain cash for its business operations, the
Taxpayer entered into a sale-leaseback arrangement with
Lessor as a source of financing. On November 1, 2000, the
Taxpayer sold all of the office furniture it had purchased

to Lessor. You stated, however, that no physical transfer
of the property occurred. The purchase price on the bill

of sale is equal to the total amount the Taxpayer paid for
all the furniture. On November 10, 2000, the Taxpayer
signed a Master Equipment Lease Agreement (herein
"Agreement"), allowing the Taxpayer to lease back the
furniture from Lessor. The Agreement represents Lessor's
standard equipment lease agreement. In order to tailor the
Agreement to the Taxpayer's specific requirements, the
Agreement was modified with the addition of Addendum A.
Addendum A is referenced and incorporated into the
Agreement in Schedule No. One. Schedule No. One was
integrated into and made part of the Agreement with the

signature of both parties on November 10, 2000.

Schedule No. One indicates that the Taxpayer will pay a
total of $356,346.00 in lease payments, which is comprised
of 60 monthly payments of $5,939.10. The amount of these
lease payments was computed by using the total purchase
price of the office furniture of $273,780.55 and adding 6%
sales tax of $16,426.83. The resulting total of

$290,207.38 is amortized over 60 months at a rate of
approximately 8.7%, which yields a monthly payment of
$5,939.10. At the time the Taxpayer signed the Agreement,
this rate was a fairly competitive borrowing rate. The
Taxpayer had a line of credit with another financial
institution at approximately 8.25%. You have indicated

that at the time the Agreement was signed, other personnel
were involved on behalf of the Taxpayer and, due to the
complexity of the transaction and ignorance, tax was

included in the computation of the monthly payments.

The Taxpayer has treated the sale and execution of the
Agreement as a loan for both financial accounting and

federal income tax purposes. The Taxpayer included the

office furniture among it depreciable assets on the balance
sheet of its financial statements. In addition, the
unamortized portion of the lease was reported as a loan on
the balance sheet of the Taxpayer's financial statements.
The Taxpayer also depreciated the office furniture on its
federal income tax returns. For each tax year since the
office furniture was purchased, the Taxpayer reported and
paid tax on the office furniture for tangible personal

property tax purposes.

Although not specifically provided for in the Agreement,
there has always been an understanding between Lessor and
the Taxpayer that the Taxpayer could pay the lease off
early for an amount equal to the unamortized balance of the
total lease payments. Since interest rates have declined

in the past several months, the Taxpayer is now able to
obtain financing at a rate significantly lower than 8.7%.
Therefore, the Taxpayer is attempting to pay off the lease,
which will then relieve the Taxpayer of any and all
responsibilities under the Agreement. In July 2003, the
Taxpayer transferred a wire payment to Lessor for
$124,003.69 in order to pay off the lease. Lessor
responded in a letter to the Taxpayer that the payoff

should instead be $155,623.89. This amount approximates
the balance shown for the current time period on the
attached Loan Amortization Schedule, and the difference
between the two amounts is the sales tax portion of the

lease charged by Lessor.

Discussion of Information Per Documents Provided

Agreement

The Taxpayer is referred to as the "Lessee" and Lessor is
referred to as the "Lessor." Section 1.B.(5) provides in

part:

... Lessee accepts said Items AS IS WHERE IS.... If Lessee
for any reason does not accept any Item of Equipment,
Lessee shall, on demand by Lessor, pay Lessor any amounts

theretofore paid or owing by Lessor with respect to the

purchase of such Item, and upon such payment, Lessee shall

be subrogated to Lessor's claims, if any, against the

manufacturer or other supplier thereof, and Lessee shall

become entitled to such item, AS IS WHERE IS, AND WITH

WAIVER OF ALL WARRANTIES AS SET FORTH HEREIN by Lessor with
respect to any matter whatsoever, and Lessee shall

indemnify and save Lessor harmless from any and all

liability to the supplier or manufacturer of said Item.

Section 1.D.(4) provides in part:

that Lessee has been informed by Lessor... that Lessee is
entitled under the promises and warranties (if any)
provided to Lessor by the manufacturer or supplier of the
Equipment in connection with or as part of the contract by
which Lessor has or will acquire the Equipment and Lessee
may contact the manufacturer or supplier of the Equipment
and receive an accurate and complete statement of such

promises and warranties...

Section 3.B. provides in part:

... Lessee shall have the option to purchase all (but not
less than all) Items as to which the Term shall expire
contemporaneously AS IS, WHERE IS at the end of the Term
for such Items for cash. Lessee shall give Lessor written
notice not less than 90 days prior to the end of the Term
of Lessee's tentative election to purchase. Lessor shall
notify Lessee in writing of the purchase price of such
Items, which shall be Lessor's estimate, in its sole
discretion, of fair market value, and Lessee shall have the
right, exercisable within 15 days after such notice from
Lessor, to deliver to Lessor Lessee's written, irrevocable

commitment to purchase such Items....

Section 5.B. provides in part:

Lessor hereby assigns to Lessee and Lessee shall have the
benefit of any and all manufacturer's warranties, service
agreements and patent indemnities with respect to the

Equipment; provided, however, that Lessee's sole remedy for

the breach of any such warranty, indemnification or service
agreement shall be against the manufacturer, and not

against Lessor or any assignee of Lessor....

Section 8. provides in part:

... C. Lessee will at its expense maintain, service and

repair any damage to any Equipment.... Lessee will maintain
in effect a warranty by or contract with the manufacturer,

or other recognized maintenance provider covering
maintenance of the Equipment, and will send Lessor a copy
on request. If Lessee has the Equipment maintained by
anyone other than the manufacturer, Lessee will pay any
cost necessary to have the manufacturer re-certify the
Equipment for continued maintenance at the expiration of

its Lease term, or any renewal term....

E. ... Lessee shall indemnify Lessor and any third party

dealing with Lessor against any liability, loss or expense
incurred by it or any third party dealing with Lessor as a
result of any act of omission of the Lessee which is

inconsistent with the provisions of this paragraph.

Section 10. provides in part:

A. Lessee hereby assumes the entire risk of loss of the

Equipment, from any and every cause whatsoever....

Section 11. provides in part:

At its own expense, Lessee shall maintain All-Risk Property
Insurance on each Item of Equipment for the replacement
cost of such Item, and shall maintain adequate
Comprehensive General Public Liability, Auto Liability if
applicable, Products Liability and Property Damage

Insurance with respect to each Item....

Section 12. provides in part:

A. Lessee shall defend, indemnify and save harmless Lessor,

or any assignee or transferee of Lessor... from and against

any claim, cause of action, damages, liability, cost, fee

or expense....

Addendum A to Schedule No. One to Master Equipment Lease

Agreement

... 6. Title to the Equipment shall pass to Lessee for
$1.00 upon receipt by Lessor of final payment under the
Lease. Lessor agrees that it to will not be entitled to Tax

Benefits related to the Equipment subject to this Lease.

Requested Advisement

You have requested an advisement that the subject Agreement
between Taxpayer and Lessor, when considered with all other
relevant documents to the same transaction, constitutes a
financing arrangement, rather than a lease or rental
arrangement. Therefore, payments made in accordance with

the Agreement would not be subject to tax.

Applicable Law

Section 212.05, F.S. provides in part:

It is hereby declared to be the legislative intent that

every person is exercising a taxable privilege who engages
in the business of selling tangible personal property at
retail in this state... or who rents or furnishes any of

the things or services taxable under this chapter, or who
stores for use or consumption in this state any item or
article of tangible personal property as defined herein and

who leases or rents such property within the state.

(1) For the exercise of such privilege, a tax is levied on
each taxable transaction or incident, which tax is due and

payable as follows:

(a)1.a. At the rate of 6 percent of the sales price of each
item or article of tangible personal property when sold at

retail in this state....

(c) At the rate of 6 percent of the gross proceeds derived

from the lease or rental of tangible personal property...

Section 212.02(10)(g) and (15)(a) and (e), F.S., provide:

(10)(g) "Lease," “let,” or "rental" also means the leasing
or rental of tangible personal property and the possession
or use thereof by the lessee or rentee for a consideration,

without transfer of the title of such property...

(15) "Sale" means and includes:

(a) Any transfer of title or possession, or both, exchange,
barter, license, lease, or rental, conditional or
otherwise, in any manner or by any means whatsoever, of

tangible personal property for a consideration...

Rule 12A-1.071, F.AC., provides in part:

(1)(a) For the purpose of this rule, the term "lease"
includes any rental or license to use tangible personal
property, unless a different meaning is clearly indicated
by the context in which it is used.... All leases of

tangible personal property other than conditional-sale type
leases as described in paragraph (1)(d) of this rule, are
operating leases. Whether a transaction is a "sale" or a
"rental, lease, or license to use" shall be determined in

accordance with the provisions of the agreement...

(c) For an operating lease, tax applies to the gross

proceeds derived from the lease of tangible personal

property...

(d) Where a contract designated as a lease transfers
substantially all the benefits, including depreciation, and
risks inherent in the ownership of tangible personal
property to the lessee, and ownership of the tangible
personal property to the lessee at the end of the lease
term, or the contract contains a purchase option for a
nominal amount, the contract shall be regarded as a sale of

tangible personal property under a security agreement

(commonly referred to as a conditional-sale type lease)
from its inception. The purchase option shall be regarded
as a nominal amount if it does not exceed $100 or 1 percent
of the total contract price, whichever is the lesser

amount.

(e) Whether a lease is a conditional-sale type lease or an
operating lease shall be determined in accordance with the
provisions of the agreement, read in light of the facts and
circumstances existing at the time the agreement was

executed....

(f) In the case of a conditional-sale type lease executed

on or after the effective date of this rule, the Executive
Director or the Executive Director's designee in the
responsible program will consider these to be sales and
purchases from their inception with tax due and payable at
the moment the contractual agreement is entered into or
when the property comes to rest in this state if at a later

date....

Analysis and Conclusion

Rule 12A-1.071(1)(d), F.A.C., provides that where a lease
transfers substantially all the benefits, including
depreciation, and risks inherent in the ownership of tangible
personal property to the lessee and the contract contains a
purchase option for a nominal amount, the contract shall be
considered a sale of tangible personal property from its
inception. The question that we must answer in this case is
whether, when the transaction is analyzed as a whole in light of
the documents and both parties’ intentions, the Lessor is
engaged in leasing tangible personal property to the Taxpayer,
or whether the transaction is in substance a financing
arrangement under which bare legal title to the property is held
by the Lessor as security for repayment. The documents, when
reviewed as a whole, indicate that the transaction was intended
to be a financing arrangement, not a lease of tangible personal
property. This is evidenced by the following: 1) the Taxpayer
accepted the tangible personal property AS IS; 2) the Taxpayer

was entitled to the applicable warranties; 3) the Taxpayer was

provided a purchase option of $1.00 at the end of the Lease; 4)
the Taxpayer was responsible for obtaining insurance on the
tangible personal property; and 5) the Taxpayer was entitled to

all the tax benefits related to the tangible personal property.

This transaction would not be considered a "lease" of
tangible personal property as substantially all of the benefits
and risks inherent in the ownership of tangible personal
property have been transferred to the Taxpayer. Furthermore,
ownership of the tangible personal property is transferred to
the Taxpayer at the end of the lease for a nominal amount

($1.00).

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the department
only under the facts and circumstances described in the request
for this advice, as specified in Section 213.22, F.S. Our
response is predicated upon those facts and the specific
situation Summarized above. You are advised that subsequent
statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice
is based may subject similar future transactions to a different

treatment from that which is expressed in this response.

You are further advised that this response, your request
and related backup documents are public records under Chapter
119, F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. IN an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department

within 15 days of the date of this letter.

Sincerely,

Leigh L. Ceci

Tax Law Specialist

Technical Assistance and Dispute Resolution

850/922-4784

Control #56667