Was a commercial equipment agreement labeled a lease actually taxable rent, and what amount bore documentary stamp tax?

Subject

Lease of Equipment

Plain-English summary

The “Commercial Equipment Lease” was a financing contract, not a taxable equipment lease. Customers obtained title and possession directly from vendors using funds advanced by an affiliate; the affiliate never owned or possessed the equipment unless default occurred and held only a security interest. Customer repayments therefore were not subject to sales or use tax.

For documentary stamp tax, the ruling said tax applied to the total amount financed, including unconditionally payable interest, unless the document clearly separated the principal amount from interest.

What this means for you

The agreement's lease label did not control. Florida examined who transferred title and possession and found a lender-borrower relationship instead.

Common questions

Did the financing affiliate sell or lease the equipment? No. It neither owned nor possessed it.

What secured repayment? A perfected security interest in the customer-owned equipment.

When could document tax be limited to principal? When the document clearly stated principal separately from interest.

Citations and references

• Fla. Stat. §§ 212.02(10)(g), 212.02(16)(a), 212.05, 212.11(3), and 213.22
• Fla. Admin. Code r. 12A-1.071(1)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94M-001

Original ruling text

Title:

Lease of Equipment

Jan 12, 1994

Re: Technical Assistance Advisement 94M-001
Sales Tax / Documentary Stamp Tax;
Finance Agreement Denominated a Lease
Chapters 201 and 212, Florida Statutes
XXX (Herein the "Parent")
FEI# XXX
XXX (Herein the "Leasing Company")
Parent's Affiliate Banks and Non-banking Subsidiaries
Identified in Your April 28, 1993, Petition (Herein
collectively "Affiliates" or singularly "Affiliate")

Dear :

This response is in reply to your October 4, 1993, petition
for the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to s. 213.22, F.S., concerning the
captioned matter and parties. 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.
Therefore, the Department is herewith granting your request for
the issuance of a TAA and the ensuing discourse shall embody
said ruling.

DISCUSSION OF FACTS

Your petition and supporting documents impart the following
significant information regarding the issues under advisement
herein:

FROM YOUR PETITION

"[Leasing Company] is an affiliate of [Parent]. [Parent]
is the holding company of the [Affiliates] listed on the
above chart.... [Leasing Company] is preparing
documentation for equipment financing arrangements between

[Affiliate] and the customers of [Affiliate]. These
financing arrangements will be utilized to allow the
customers to finance through [Affiliate] the purchase of
tangible personal property with the funds of [Affiliate].
Each of the financing arrangements will be evidenced by a
Commercial Equipment Lease' (hereinafter referred to as theFinance Agreement'). A form Finance Agreement is
attached to this request as Exhibit A.

"Although the Finance Agreement is denominated a lease,' the provisions of the Finance Agreement substantively create a financing and security arrangement rather than atrue' lease. Under the Finance Agreement, [Affiliate]
provides financing from time to time to allow the customers
to purchase equipment. When the customer decides to
purchase equipment, the customer executes a Schedule of
Repayment (the `Schedule') identifying the item to be
purchased. The Schedule sets out the terms of repayment,
the provisions of which are triggered by the execution of
an Acceptance Certificate. The Acceptance Certificate is
executed by the customer at the time it receives and
accepts the equipment. The Acceptance Certificate and the
Schedule are both attached to the Finance Agreement.

"The customer purchases the equipment from the party and at
all times holds title to, and retains possession of, the
equipment. At no time will [Leasing Company] or
[Affiliate] hold title to the equipment or have the right
to the possession of the equipment, except in the event
that the customer defaults on its obligations with
[Affiliate].

"The Schedule describes the property to be financed and the
payment schedule under which the customer is to repay
Affiliate for the financing of the equipment. The Schedule
includes sections titled Interim Equipment Payments' andEquipment Payments' which state the term of the payments
and the amount of each payment. The amount of Interim
Equipment Payments includes interest only, and the amount
of Equipment Payments includes both principal and interest.
The actual amount financed by the customer is not

separately stated under the Equipment Payment section of
the Schedule. The amount financed can be determined by
looking at another section of the Schedule in which the
customer authorizes [Affiliate] to pay the customer(or the
customer and the seller jointly) a certain dollar amount
for the equipment. In the event that the customer makes a
prepayment under the Schedule, the finance Agreement
provides that the final payment shall be adjusted to give
credit for any unearned interest."

The following provisions are found in an attached document
styled, "Commercial Equipment Lease" or as identified in
your letter dated October 4, 1993, as a "Finance
Agreement":

"MASTER LEASE. Lessee wishes to purchase certain
equipment from time to time and has requested that
Lessor provide the financing for such equipment
pursuant to the terms of this Lease. The relationship
between Lessor and Lessee is to be a continuing one
over a period of time, with items of equipment being
added to or deleted from the equipment financed by
this Lease from time to time, by the addition or
deletion of schedules to this Lease, and this Lease
shall be a master lease agreement applying to all such
equipment.

"In consideration of the foregoing and other valuable
consideration, Lessor and Lessee agree as follows:

"LEASE. Lessor and Lessee agree that Lessor will
finance pursuant to the provisions of this Lease the
equipment that is described on one or more schedules
of equipment executed pursuant to this Lease and
signed by Lessor and Lessee from time to time, which
schedules (the `Schedules') are incorporated herein by
reference and are deemed to be included in any
reference to this Lease....

"SECURITY INTEREST. Notwithstanding that this
instrument is referred to as a `Lease,' Lessee will at

all times hold title to the Equipment during the term
of payments for such Equipment. Lessee hereby grants
to Lessor a security interest in the Equipment,
whether now or hereafter covered by this Lease....

"Perfection of Security Interest. Lessee agrees to
execute such financing statements, notices of lien,
and powers of attorney, and to take whatever other
actions are requested by Lessor to perfect and
continue Lessor's security interest in the equipment,
including the delivery to Lessor of all certificates
of title or manufacturer's certificates of origin....

"Title. Lessee represents and warrants to Lessor that
it holds good and marketable title to the Equipment,
free and clear of all liens and encumbrances except
for the lien of this Lease....

"LESSEE'S RIGHT TO POSSESSION. Until an Event of
Default, Lessee may have possession and beneficial use
of all the Equipment and may use it in any lawful
manner not inconsistent with this Lease...."

The following provision is found in an attached document
styled "Delivery and Acceptance Certificate":

"(f) Lessee acknowledges that Lessor is neither the
manufacturer, distributor, seller, or owner of the
Equipment, and that Lessor has no knowledge or
familiarity with it...."

The following provisions are found in an attached document
styled "Schedule of Equipment":

"Pursuant to the Lease, Lessee hereby requests and
authorizes Lessor to pay $___ (the `Amount Financed')
to the party or parties specified in the pay proceeds
letter or letters provided in connection herewith. Lessee
hereby grants to Lessor a security interest in the
foregoing Equipment and the related property, as more fully
described in the Lease."

REQUESTED ADVISEMENT

You endeavor to elicit the Department's advice regarding
the following specific issues:

Sales tax: "Whether the Florida sales tax is inapplicable
to above described transaction under which [Affiliate] is
to provide financing in order for the customer to purchase
tangible personal property."

Documentary stamp tax: "Whether the Florida documentary
stamp tax is applicable to the total amount of payments
made by the customer to [Affiliate] under the finance
agreement (i.e., principal and interest) or whether it is
applicable only to the portion of the total amount of
payments which constitutes principal."

DISCUSSION OF LAW

SALES TAX

We consult the following passages of the Florida Statutes
as pertinent to the resolution of your question regarding sales
and use tax:

Section 212.02(16)(a), F.S.: "`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...."

Section 212.05, F.S.: "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,
including the business of making mail order sales, 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:....
"(c) At the rate of 6 percent of the gross proceeds derived
from the lease or rental of tangible personal property, as
defined herein, except the lease or rental of a commercial
motor vehicle as defined in s. 316.003(66)(a) to one lessee
or rentee for a period of not less than 12 months when tax
was paid on the acquisition of such vehicle by the lessor,
when the lease or rental of such property is an established
business or part of an established business or the same is
incidental or germane to such business.
"(d) At the rate of 6 percent of the lease or rental price
paid by a lessee or rentee, or contracted or agreed to be
paid by a lessee or rentee, to the owner of the tangible
personal property...."
(Emphasis Supplied)
Section 212.11(3), F.S.: "Except as otherwise expressly
provided for herein, it is hereby declared to be the
intention of this chapter to imposed a tax on the gross
proceeds of all leases and rentals of tangible personal
property in this state when the lease or rental is a part
of the regularly established business, or the same is
incidental or germane thereto."

Section 212.02(10)(g), F.S.: "(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, except as expressly provided to
the contrary herein."

The operative rule construing and elucidating the forgoing
statutory definition of the term "Lease" is Rule 12A-1.071,
F.A.C., which states the following:

"(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. The term refers to all

transactions that are not bailments in which there is a
transfer of possession of tangible personal property,
without regard to limitations upon the use, for a
consideration, without a transfer of title to the property.
It is not essential for a transfer of possession of
tangible personal property to include the right to move the
tangible personal property. It includes a transaction under
which a person secures for a consideration the temporary
use of tangible personal property which, although not on
his premises, is operated by or under the direction or
control of the person or his employees. 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 arental, lease, or license to use' shall be determined in
accordance with the provisions of the agreement.
"(b) Transfer of possession with respect to an operating
lease means that one of the following attributes of
tangible personal property ownership has been transferred:
"1. Custody or possession of the property, actual or
constructive;
"2. The right to custody or possession of the property; or,
"3. The right to use and control or direct the use of the
property. (Emphasis Supplied)

FINDING

It is clear from the foregoing statutory law, that the
legislature intends the application of sales tax to the lease of
tangible personal property. Moreover, it is clear that the
statutory definition of the term `lease', set out above, with
respect to the lease of tangible personal property contemplates
an instrument which transfers possession and not title to the
lessee for a consideration. Additionally, elucidation of the
elements constituting a "lease" of tangible personal property
for sales tax purposes are set forth in Rule 12A-1.071(1),
F.A.C., above. Consistent with the statutory definition of such
leases noted above, the rule envisions a lease for sales tax
purposes as an instrument which for consideration grants the
actual or constructive custody or possession of tangible
personal property, the right to such custody or possession, or

the right to use and control or direct the use of tangible
personal property. When considering the elucidation of the
statutory definition of the term "lease" provided by the rule,
keep in mind that agency determinations with regard to a
statute's interpretation and applicability are entitled to great
deference and have considerable persuasive force in the absence
of clear error or conflict with legislative intent. Little
Munyon Island, Inc. v. Department of Environmental Regulation,
492 So.2d 735, 737 (Fla. 1st DCA 1983); Santaniello v.
Department of Professional Regulation, 432 So.2d 84, 85 (Fla.
1st DCA 1983); State Ex Rel. Szabo Food Serv., Inc. of N. C. v.
Dickinson, 286 So.2d 529, 531 (Fla. 1973), reh. den. Jan. 9,
1974.

A careful examination of the terms and conditions of the
Commercial Equipment Lease (the "Finance Agreement"), in
particular those excerpts replicated above, reveals that such
terms and conditions objectively manifest the substance of the
Finance Agreement to be a financing contract and not a lease.
The Finance Agreement does not transfer possession of the
equipment to the Lessee (the "Purchaser"). To the contrary, the
Purchaser receives possession and title to the equipment
directly from the vendor and simply pays the purchase price to
the vendor using funds advanced by Affiliate. Recall that item
(e) of the terms of the Delivery and Acceptance Certificate
which is incorporated into the Finance Agreement by reference
contains an express acknowledgement that the Affiliate is
neither the manufacturer, distributor, seller, nor owner of the
Equipment. Thus, Affiliate cannot very well transfer possession
or title to the equipment to the Purchaser when Affiliate has
neither. In fact, under the terms of the Finance Agreement, the
Affiliate will never have possession of or gain title to the
equipment unless and until an act of default by the Purchaser
occurs.

It is clear from the terms and conditions of the Finance
Agreement that the substance and function of the Finance
Agreement is to establish a contractual relationship of lender
and borrower by and between Affiliate and Purchaser as opposed
to that of lessor and lessee. The Finance Agreement in
substance provides for the advancing of funds from Affiliate to

Purchaser for Purchaser's use in acquiring equipment from third
party vendors. The Finance Agreement further provides for the
creation, perfection, and maintenance of a security interest in
favor of the Affiliate with respect to the equipment purchased
by Purchaser in order to secure repayment by the Purchaser of
the purchase funds advanced by Affiliate.

Inasmuch as the substance of the Finance Agreement reveals
that it is a financing contract and not a lease under the sales
tax law discussed herein, the payments made by Purchaser to
Affiliate pursuant to and in accord with the Finance Agreement
constitute the repayment of borrowed funds secured by the
Purchaser's equipment as collateral and, hence, are not lease
payments. The substance of a transaction and not the form in
which it is cast determines its tax treatment. See Department
of Revenue v. Anheuser-Busch, 527 So.2d 877 (Fla. 1st DCA 1988),
reh. den. Aug. 1, 1988; Department of Revenue v. Seaboard
Coastline R. Co., 480 So.2d 1349 (Fla. 1st DCA 1985), rev. den.,
492 So.2d 1331 (Fla. 1986).

Therefore, in summation, the Department hereby affirms that
the payments made by the Purchaser to the Affiliate pursuant to
and in accord with the Finance Agreement are not subject to
sales or use tax since: (i) neither title nor possession of the
equipment ever resides with the Leasing Company or the
Affiliates except in the event of a default by the Purchaser
under the Finance Agreement; (ii) neither the Leasing Company
nor the Affiliate can convey title or possession of the
equipment to the Purchaser as neither is vested with title and
neither has possession of the equipment; and (iii) the Finance
Agreement does not operate nor does it have the capacity to
transfer title or possession of the equipment from the Leasing
Company or the Affiliate (neither of whom have title or
possession of the equipment) to the Purchaser. In short, the
Finance Agreement does not manifest the required element of
transferring title or possession of the equipment for a
consideration necessary to constitute a "sale" under the
definition of the term "sale" provided in s. 212.02(16)(a),
F.S., for sales tax purposes.

DOCUMENTARY STAMP TAX

Documentary stamp tax is due on the total amount financed
unless the document clearly sets forth the principal amount
distinguished from the interest portion. If the interest is
unconditionally payable, the documentary stamp tax is payable on
the total amount financed, both principal and interest.

This response constitutes a Technical Assistance Advisement
under s. 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 s. 213.22, F.S. Our response is
predicated on 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 than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist
Technical Assistance

M.E. Clemens
Tax Audit Specialist
Technical Assistance

DMW/MEC/mh
Con. #11420