Did Kansas's local compensating use tax apply after July 1, 2003 to equipment leases with Kansas franchisees that already existed?

Plain-English summary

A national corporation leased equipment to Kansas franchisees and already collected state retailers' compensating use tax. It asked whether the new Kansas local use tax effective July 1, 2003 applied to leases signed before that date.

The Department answered yes. Both state and local use tax applied to lease receipts for reporting periods after July 1, 2003.

Section 3 of 2003 H.B. 2005 imposed the local tax without a grandfather clause for existing contracts. The lessor therefore added the local use-tax rate at the franchisee's Kansas place of business to the state use-tax rate.

The tax base was the total amount of each lease payment. The new tax increased the tax added to the invoice but did not alter the underlying lease amount received by the lessor.

What this means for you

Equipment lessors and franchisors

Do not omit a newly effective local use tax merely because the lease predates it when the law provides no grandfather rule.

Kansas franchisees

The applicable local component was the rate at the franchisee's place of business under the opinion.

Accountants

Apply the tax to lease payments in post-effective-date reporting periods and calculate it on the total lease payment.

Common questions

Q: Were existing leases grandfathered?
A: No. The Department found no grandfather clause.

Q: When did local use tax begin applying?
A: To lease receipts for reporting periods after July 1, 2003.

Q: Which local rate applied?
A: The rate at the Kansas franchisee's place of business.

Q: What was the tax base?
A: The total amount of each lease payment.

Citations and references

• 2003 H.B. 2005, § 3 — local compensating use tax imposition cited by the Department

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2003-007

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

October 29, 2003

XXXX
XXXX
XXXX

RE: Your fax received on September 11, 2003

Dear XXXX:

I have been asked to answer your fax that we received last month. You work for a corporation that has franchises across the country. You collect retailers' compensating (use) tax on equipment leased to Kansas franchisees. You ask how the new Kansas local use tax that took effect on July 1, 2003 effects these exiting leases. Please be advised that both state and local sales tax use tax has applied to these lease receipts for all reporting periods after July 1, 2003.

The new imposition of local use tax is found at 2003 HB 2005, Sec. 3. The new Kansas law does not contain a grandfather clause to allow existing lease contracts to continue to be taxed at only the state use tax rate.

As a lessee who does business in Kansas, I must assume that you always have added Kansas use tax to the lease charges billed to your Kansas franchisees. The new tax requires you to collect the state use tax, as you did in the past, plus the local use tax in place at the franchisee's place of business. Since the tax base is the total amount of each lease payment, your Kansas franchisees should have no complaint with you since the new local tax was imposed by the Kansas legislature. By adding the state and local use tax to each lease charge, you are simply doing what Kansas law requires you to do. While the taxes have increased, the underlying lease amount that you receive in lease payments was not changed.

I hope that my answer to your question is clear. If you need to discuss this matter further, please call me at 785-296-3081.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 10/29/2003 Date Modified: 10/29/2003

Table 1

Table 2