What are a finance company's Kansas sales and use tax duties under a conditional sales contract or purchase order financing arrangement?

Plain-English summary

A finance and leasing company registered as a Kansas retailer asked about its sales tax duties under a hybrid purchase order / conditional sales contract used to finance equipment for small-business end users.

How Kansas treats the transaction. In a conditional sale, the buyer takes immediate possession but the seller keeps title until a condition (usually full payment) is met. Sales tax is collected on the full selling price when the property is transferred. Separately stated finance charges, carrying charges, interest, insurance, and similar service charges are not part of the taxable selling price — but if they are not separately stated or separately billed, they become part of the selling price and are taxable. Because the finance company here doesn't retain title but agrees to pay the retailer on delivery, Kansas treats the deal as a conditional sale, with tax accruing when the retailer transfers the goods.

The Department's answers to the four questions:

1. Pay tax to the vendor. The finance company should pay the sales tax on the full selling price charged by the registered third-party vendor (excluding separately stated finance charges). If the vendor isn't registered, the finance company should accrue Kansas sales or use tax on the selling price (the property is used in Kansas) and finance that tax to the end user with the price.
2. Financing, not reselling. The finance company is not required to collect tax — the deal is treated as a financial transaction, not a resale. But because a finance company that pays for and takes a security-interest title can be viewed as the buyer, it's in its interest to make sure tax is paid at the time of sale (or to accrue it, or to hold an exemption certificate). If audited, the Department could pursue both the finance company and the end user for unpaid tax.
3. Unregistered vendor. Yes — the finance company may accrue the use tax on the vendor's invoice, pay it to Kansas, and finance the sales/use tax under the conditional sales contract.
4. Exempt end users. Certain end users (nonprofit hospitals, nonprofit educational institutions, Kansas political subdivisions, among others) are exempt. The finance company should require the end user to give it a copy of the completed exemption certificate the end user provided to the vendor. Although Kansas law puts the duty to obtain the certificate on the retailer (not the finance company), keeping a copy is sound practice and helps the finance company avoid an assessment if audited. (Certificates are on the Department's website under "Forms"; the exemption booklet is Publication KS-1520.)

What this means for you

Finance and leasing companies

Even though you're financing rather than reselling, make sure Kansas tax is paid on the goods — pay it to a registered vendor at the time of sale, or accrue and finance the sales/use tax when the vendor isn't registered. You can be held liable as the buyer, especially if you take title as security.

Separately state finance charges

Keep finance charges, interest, and similar service charges separately stated or separately billed. If they're lumped into the price, they become part of the taxable selling price.

Exempt end users

When the end user is exempt, get a copy of the exemption certificate they gave the vendor and keep it in your file — it documents why the transaction went untaxed and helps avoid an audit assessment.

Common questions

Q: Does my finance company have to collect Kansas sales tax on these deals?
A: No — the arrangement is treated as a financial transaction, not a resale, so you aren't required to collect tax as a retailer.

Q: Then why do I care about the tax?
A: Because you can be treated as the buyer (especially if you hold title as security) and be assessed for unpaid tax. Make sure the vendor collected it, or accrue and finance it yourself.

Q: The vendor isn't registered in Kansas. What do I do?
A: Accrue Kansas sales or use tax on the selling price, pay it to Kansas, and finance it to the end user under the contract.

Q: Are the finance charges taxable?
A: Not if they're separately stated or separately billed. If they aren't, they're treated as part of the selling price and are taxable.

Q: What about exempt customers?
A: Obtain and keep a copy of the exemption certificate the end user provided to the vendor; the legal duty to collect it is on the retailer, but keeping a copy protects you on audit.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department treats conditional-sale financing arrangements.

Citations and references

• Conditional sales contract treatment — a conditional sale is taxed on the full selling price when the property is transferred; separately stated finance/carrying/interest/insurance charges are excluded, but are taxable if not separately stated or billed. The Department treated the hybrid financing contract as a conditional sale.
• Finance company as buyer — a finance company that pays for property and takes a security-interest title can be viewed as the buyer and held liable for unpaid tax; the Department could pursue both it and the end user on audit.
• Publication KS-1520 — the Department's exemption certificate booklet; the finance company should obtain a copy of the end user's exemption certificate even though the collection duty rests on the retailer.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2003-018

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

April 14, 2003

XXXX
XXXX
XXXX

RE: Your letter dated March 21, 2003

Dear XXXX:

Thank you for your recent letter. In it, you describe a purchase order or conditional sales contract, and ask what you client's sales tax duties are under it. You identify your client by name and state that it is a finance and leasing company that is registered as a retailer with the State of Kansas.

A conditional sales contract is a sale in which the buyer gains immediate possession but the seller retains title until the buyer performed a condition --- normally payment in full of the purchase price. When there is a condition sale, sales tax must be collected by the seller on the full selling price at the time the property is transferred from the seller. Finance charges, carrying charges, interest, insurance, and other service charges for financing a sale of tangible personal property under a conditional, credit, or installment sales contract are not be considered to be part of the selling price and are not be subject to sales tax if such finance charges are segregated on the invoice, sales slip, or other billing document, or are billed separately to the buyer. If these charges are not separately stated or separately billed, the charges are considered to be part of the selling price and are taxable.

A purchase order is a document that authorized the retailer to deliver the goods with payment to be made later. A purchase order can be characterized as an offer that is accepted when a retailer supplies the quality and quantity ordered to the buyer.

The contract that you describe appears to be a hybrid of these two types of contracts since the financing company does not retain title but agrees to pay the retailer upon delivery. In cases like this, Kansas law treats the transaction as a conditional sale, in which tax accrues, and the sale is accounted for as being made, when the retailer transfers the property sold to the buyer. With these thoughts in mind, I will answer your questions.

1) Whether the Client should pay sales tax to the third party vendors (registered in Kansas as a vendor) on the invoice issued to the Client on behalf of the small business owner/end user?

Answer: Yes. The finance company should pay the sales tax on the full selling price charge by the third-party vendor. The selling price should not include any separately stated finance charges. If the third-party vendor is not registered to collect Kansas retailers' sales tax or compensating tax, the client should accrue Kansas sales or use tax on the selling price since the property will be used in Kansas. The tax accrued by the finance company should be financed to the end user along with the retail selling price for the goods.

2) Whether the creation of the conditional sales contract requires the Client to collect sales tax or whether it will be treated as a mere financial transaction?

Answer. No, the transaction will be treated as a financial transaction. The finance company is not required to collect tax. A finance company that enters into this type of a financing arrangement is not treated as a retailer who buys tangible personal property exempt and then sell it to its customer. The financing company is viewed as financing a sales transaction.
When a finance company engages in such transactions and pays for the property, it can be viewed as the buyer for certain purposes --- especially if it retains title to the property as a security interest. Therefore, it is in the finance company's best interest to make certain that Kansas tax is paid to any registered retailer at the time of sale, and that, if Kansas tax isn't paid at the time of sale, that the finance company either takes the necessary steps to accrue the sales or use tax that is due at the time of the sale, or has in its possession an exemption certificate issued by the end user. If the finance company is audited and it is discovered that tax was not paid to the vendor at the time of sale, the department could --- and probably would --- pursue both the finance company and the end user for the unpaid tax.

3) Where the equipment vendor is not a registered vendor, may the Client accrue the use tax on the vendor's invoice, pay the tax to Kansas, and finance the sales/use tax under the conditional sales contract?

Answer: Yes. A finance company that pays the purchase price of property can be seen as a buyer, especially if the finance company retains title to the property as a security interest. Therefore, it is in the finance company's best interest to make certain that any sales tax that is due is paid to the vendor, and if it wasn't paid to the vendor, to accrue the sales or use tax that is owed and finance the tax under the contract.

4) Assuming that exemptions are capable of being claimed by the end user, what steps if any must the Client take to qualify the receipts under the conditional sales contract as exempt?

Answer: In Kansas , certain end users are exempt from paying sales tax on their purchases. This includes non-profit hospitals, non-profit educational institutions, political subdivisions of the State of Kansas, among others. When a finance company enters into a contract like the ones discussed here, the finance company should require the end user to provide it with a copy of the completed exemption certificate that the end user provided to the vendor. Exemption certificates are available on our web site under "Forms" and may be downloaded and completed by the end user. Our web site address is www.ksrevenue.org and the exemption booklet is Publication KS-1520. This booklet was updated last month. Please note that Kansas law does not require the finance institution to secure and retain a copy of the end user's exemption certificate --- the law places this duty on the retailer who is presented with the end user's exemption claim. However, as a matter of sound business practice, the finance company should require the end user to provide it with a copy of the certificate. If audited, the finance institution will then be in possession of an exemption certificate that shows why the transaction went untaxed. As has been discussed, during an audit, a finance company can be held liable for untaxed purchases as a buyer, especially if the finance company acquires title to the purchases. The finance company's possession of a copy of the exemption certificate should help avoid this kind of assessment.

I hope that I have answered all of your questions. If you have any addition questions, please call me at 785-296-3081 and we can discuss them. This is private letter ruling. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this ruling.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 04/16/2003 Date Modified: 04/16/2003

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