Could a chain of purchases, leases, and subleases of semiconductor equipment qualify as tax-exempt resale transactions before the equipment reached the operating joint venture?

Subject

Lease of Tangible Personal Property

Plain-English summary

The Department approved the intermediate purchases, lease, and sublease as tax-exempt resale transactions, subject to strict dealer-registration and resale-certificate conditions. The equipment was designed for expansion of a semiconductor manufacturing facility and moved through a financing structure before reaching the operating joint venture.

The parties stated that they were registered Florida dealers and would tender resale certificates at each intermediate acquisition. The equipment would not be used to make production-quality semiconductor wafers before the lease and sublease became effective, although it would be installed and tested.

For the final manufacturing-user lease, the joint venture also had to satisfy the temporary-exemption rule. The ruling emphasized registration with the WAGES Program Business Registry before exempt purchases made on or after July 1, 1996; failure to register made those purchases taxable.

What this means for you

A financing or lease chain did not itself prevent resale treatment. Each intermediate party had to acquire the equipment exclusively for the next lease or resale, be registered as a dealer before the transaction, and deliver a valid resale certificate.

The final user's manufacturing exemption was separate from the intermediate resale exemptions. It depended on receiving the permit and satisfying the program's conditions.

Common questions

Q: Could equipment purchased exclusively for leasing be bought tax-free? Yes, when the lessor was already registered as a dealer and gave the vendor a valid resale certificate.

Q: Could a prime lessee avoid tax when it leased solely to sublease? Yes, under the same registration and resale-certificate structure.

Q: Were the joint venture's final lease payments automatically exempt? No. They were exempt only to the extent provided by the temporary manufacturing exemption after the permit was granted.

Q: Did preproduction testing defeat the resale structure? Not on the stated facts, which said the equipment would not make production-quality wafers before the lease and sublease began.

Citations and references

• Fla. Stat. § 212.05(1)(a)1.a. and (1)(c) — tax on retail sales and tangible-property leases
• Fla. Stat. § 212.02(14)(a) and (15) — retail sale and sale definitions
• Fla. Stat. § 212.07(1)(b) — strict compliance for resale transactions
• Fla. Admin. Code R. 12A-1.071(2)(a)1. and (7) — purchases and leases solely for leasing or subleasing
• Fla. Admin. Code R. 12A-1.038(1) — resale-certificate requirements
• Fla. Admin. Code R. 12A-1.096(3); Fla. Stat. § 212.08(5)(b)7. — temporary manufacturing exemption and WAGES registration condition
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-015

Original ruling text

SUMMARY

A company intends to acquire certain manufacturing equipment designed for the purpose of producing semiconductor products. A series of proposed transactions are intended to ultimately result in the purchasing, financing, leasing and subleasing of the equipment for the expansion of a manufacturing facility. Tangible personal property purchased for leasing purposes may be purchased tax exempt, under certain conditions. The tangible personal property must be purchased exclusively for leasing purposes, the lessor must be a registered dealer at the time of purchase, and the purchaser must issue a resale certificate to the seller in lieu of paying tax. The taxpayers have registered with the Department as "dealers", and will tender resale certificates, upon each acquisition of the equipment for the sole purpose of leasing or subleasing the Equipment. Therefore, the transactions will be exempt from tax, as a sale for resale. With respect to lease payments for the expansion of the facility, the facility must qualify for a Temporary Tax Exemption Permit and will be exempt from tax only to the extent provided in Rule 12A-1.096(3), F.A.C.

Mar 05, 1997

Re: Technical Assistance Advisement 97A-015 Lease of Tangible Personal Property Sections 212.05, 212.02 and 212.07, F.S. Rule 12A-1.071 and 12A-1.038 F.A.C.

Dear :

Your letter of May 3, 1996, requested a Technical Assistance Advisement concerning the above referenced matter. This response constitutes a Technical Assistance Advisement (TAA) under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

DISCUSSION OF FACTS

Your letter of May 3, 1996, states in part:

This firm represents the following entities with respect to the transactions described in this letter:

• [XXX corporation ("XXX")

• XXX corporation and wholly-owned subsidiary of XXX
  ("XXX"), individually and as a partner in a contemplated joint venture (the "Joint Venture") to be formed between XXX., a XXX corporation ("XXX");

• The XXX trust initially to be formed by XXX as the
  grantor and sole beneficiary (the "Trust"); and

• XXX corporation and wholly owned subsidiary of XXX
  ("Subsidiary").]

2. Description of Transaction:

Pursuant to approximately 200 purchase orders (the "Purchase Orders") placed with manufacturers outside of the State of Florida (the "Manufacturers") and assigned, without consideration, to [XXX by an affiliate of XXX (herein the "Affiliate")], [XXX] intends to acquire certain manufacturing equipment designed and manufactured for the purpose of manufacturing and producing semiconductor products (the "Equipment"). The Equipment will eventually be utilized by the Joint Venture through a series of transactions which will ultimately result in the continuation and expansion of a semiconductor manufacturing business currently operated at a manufacturing facility located in [XXX] (the "Facility"). The purchases of Equipment by [XXX], and, as hereinafter described, after the Initial Phase (as defined below) by the Trust, will take place over a period of approximately eighteen (18) months in duration.

During an initial phase expected to last for two to three months (the "Initial Phase"), [XXX] will acquire the Equipment from the Manufacturers, for the sole purpose of reselling the Equipment to the Trust. [XXX] has entered into a Purchase and Sale Agreement (the "Purchase Agreement") to sell the Equipment acquired by [XXX] to the Trust, and has registered with the Florida Department of Revenue as a "dealer" and tendered resale certificates to the [M]anufacturers. At present, [XXX] is the sole grantor and sole beneficiary of the Trust. Prior to the transfer of the Equipment to the Trust pursuant to the Purchase Agreement, one or more third parties will become the beneficial owners of the Trust (the "Owner Participants") and [XXX] will withdraw from the Trust. [XXX] will take delivery of the Equipment during the Initial Phase and will ensure that the Equipment is installed and tested at the Facility prior to reselling such Equipment to the Trust. The testing program includes preproduction test runs of semiconductor wafers.

The Trust will be acquiring the Equipment for the sole purpose of leasing the Equipment to the Subsidiary. The Trust will finance its purchase of the Equipment by funds provided by the Owner Participants and the issuance of debt. The Trust has registered as a "dealer" with the Department and upon the purchase of the Equipment by the Trust pursuant to the Purchase Agreement, the Trust will deliver a resale certificate to [XXX].

Immediately upon acquisition of the Equipment by the Trust, the Trust will lease the Equipment to the Subsidiary. The Subsidiary will be leasing the Equipment for the sole purpose of subleasing the Equipment to the Joint Venture. The Subsidiary has registered as a "dealer" with the Department and upon the lease of the Equipment by the Subsidiary from the Trust, the Subsidiary will deliver a resale certificate to the Trust. Immediately upon the execution of the lease by the Subsidiary and the trust, the Subsidiary will sublease the Equipment to the Joint Venture. Both the lease and the sublease described above will constitute "operating leases" (as opposed to "capital

leases") within Florida Administrative Code Rule 12A-1.071. The Equipment will not be used to manufacture production quality semiconductor wafers prior to the effective date of the lease by the Trust to the Subsidiary and the sublease between the Subsidiary and the Joint Venture.

After the Initial Phase, [XXX] will not act as an intermediate "title holder," and the Trust will take title to purchased Equipment directly from the Manufacturers. The Trust will then continue to lease such Equipment to the Subsidiary as described above, and the Subsidiary will sublease such Equipment to the Joint Venture as described above.

Certain Purchase Orders provide for F.O.B. at a location within the State of Florida and, accordingly, title and risk of loss to this Equipment pass within the State of Florida. In most cases, however, sales pursuant to Purchase Orders are F.O.B. Manufacturers Plant. In connection with these Purchase Orders, a majority provide for transfer of title and risk of loss outside the State of Florida (with the remainder providing for transfer of title and risk of loss within the State of Florida).

Subsequent to the delivery of this Request for Technical Assistance to the Department, the Joint Venture will be filing an Application for Temporary Tax Exemption Permit (form DR-1214) concerning the expansion of the production capacity of the Facility as a result of the acquisition of the Equipment.

REQUESTED ADVISEMENT

Your request advice as to the following issues:

(a) During the Initial Phase, the acquisition of the Equipment by [XXX] from the Manufacturers is exempt from Florida Sales and Use tax (the "Tax") as a sale for "resale" pursuant to Florida Administrative Code Rule 12A1.038(1).

(b) During the Initial Phase, the acquisition of the Equipment by the Trust from [XXX] pursuant to the Purchase Agreement is exempt from Tax as a sale for "releasing" pursuant to Florida Administrative Code Rule 12A1.071(2)(a)1.

(c) After the Initial Phase, the acquisition of Equipment by the Trust from the Manufacturers is exempt from Tax as a sale for "re-leasing" pursuant to Florida Administrative Code Rule 12A-1.071(2)(a)1.

(d) The lease of the Equipment by the Subsidiary from the Trust is exempt from Tax as a lease for "re-leasing" pursuant to Florida Administrative Code Rule 12A-1.071(7).

(e) If the Joint Venture qualifies for and is granted the Temporary Tax Exemption Permit described above pursuant to Florida Administrative Code Rule 12A-1.096(3), the lease payments made by the Joint Venture to the Subsidiary will be exempt from tax to the extent provided in 12A-1.096(3) notwithstanding the transactions described in (a) through (d) above.

RELEVANT AUTHORITY

Section 212.05, F.S., is cited in pertinent 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....

(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, computed on each taxable sale for the purpose of remitting the amount of tax due the state, and

including each and every retail sale.
...
(c) At the rate of 6 percent of the gross proceeds derived from the lease or rental of tangible personal property....

Section 212.02, F.S., provides in part:

(14)(a) "Retail sale" or a "sale at retail" means a sale to a consumer or to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this part, and includes all such transactions that may be made in lieu of retail sales or sale at retail.
...

(15) "Sale" means and includes:
(a) Any transfer of title or possession, or both, exchange, barter, license, or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration....

Section 212.07(1)(b), F.S. is cited in pertinent part:

A resale must be in strict compliance with the rules and regulations, and any dealer who makes a sale for resale which is not in strict compliance with the rules and regulations shall himself or herself be liable for and pay the tax....

APPLICABLE RULES

Rule 12A-1.071(2)(a)1. and (7), F.A.C., states:

(2)(a)1. Tangible personal property purchased exclusively for leasing purposes may be purchased exempt, providing the lessor is registered with the Department as a dealer at the time of purchase and issues the vendor a valid resale certificate in lieu of tax. Any purchases made prior to the time of registration as a dealer are subject to tax.

(7) The lease payments on tangible personal property which

is leased solely for the purpose of leasing it to a third party are exempt. The prime lessee is required to register with the Department as a dealer and issue the prime lessor a resale certificate in lieu of tax.

Rule 12A-1.038(1), F.A.C., provides in pertinent part:

It is the specific legislative intent that each and every sale, admission, use, storage, consumption or rental is taxable under Chapter 212, F.S, unless such sale, admission, use, storage, consumption or rental is specifically exempt. The exempt status of the transaction must be established by the dealer. Unless the dealer shall have taken from the purchaser a certificate signed by the dealer or dealer's authorized representative to the effect that the property or service was purchased for resale and bearing the date, the name and address of the purchaser, the effective date of the certificate, and the number of the dealer's certificate of registration,... the sale shall be deemed to be a taxable sale at retail....

DETERMINATION

Based upon the cited statutory and regulatory authority, the facts as presented in your request, and as provided in s. 212.02(14)(a), F.S., "retail sale" or "sale at retail" means a sale of tangible personal property or services for any purpose other than for resale. Pursuant to Subsection 212.02(15), F.S., "sale" includes "... any transfer of title or possession, or both,..." of tangible personal property for a consideration. As described in Rule 12A-1.071(2), F.A.C., tangible personal property purchased for leasing purposes may be purchased tax exempt, under certain conditions. The tangible personal property must be purchased exclusively for leasing purposes, the lessor must be a registered dealer at the time of purchase, and the purchaser must issue a resale certificate to the seller in lieu of paying tax.

According to your letter, the Taxpayers have registered with the Florida Department of Revenue as "dealers", in accordance with Chapter 212, F.S., and will tender resale certificates, pursuant

to Section 212.07, F.S., and Rule 12A-1.038, F.A.C., upon each acquisition of the Equipment for the sole purpose of leasing or subleasing the Equipment. Therefore, the transactions described in your request for Assistance on pages four and five, (a) through (d), will be exempt from sales and use tax, as a sale for "resale".

With respect to the transaction described on page five, paragraph (e), the lease payments made by the Joint Venture to the Subsidiary will be exempt from tax only to the extent provided in Rule 12A-1.096(3), F.A.C., and only if the Joint Venture qualifies for and is granted the Temporary Tax Exemption Permit. It must be emphasized that s. 212.08(5)(b)7., F.S., as amended by section 15, Chapter 96-320, L.O.F., requires the Joint Venture to be registered with the WAGES (Work and Gain Economic Self-sufficiency Act) Program Business Registry prior to making any exempt purchases on or after July 1, 1996. Failure to do so will result in those purchases becoming taxable. For your convenience I have enclosed a copy of the flyers issued by the Department concerning these changes.

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 that 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,

Vicki Allen
Tax Law Specialist
Tax Policy and Dispute Resolution

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