After a lessee defaults, is money an equipment lessor recovers by judgment or from a guarantor subject to NY sales tax?

Plain-English summary

The petitioner is an equipment lease-finance company that uses both true leases (it keeps title; lessee pays rent over time) and financing leases (an outright sale with financing; title passes at the outset and the lease functions as a UCC security agreement). It asked about the sales-tax treatment of money it recovers after a default, in two scenarios (companion to TSB-A-13(5)S).

The Office of Counsel split the answer by lease type:

• Scenario 1 -- TRUE lease (taxable recoveries). The petitioner collected tax on each monthly payment. The lessee defaults; the petitioner repossesses and resells the equipment (charging tax on that resale), leaving a deficiency, and then wins a $20,000 judgment against the lessee. Any part of that judgment it collects is taxable, because it is payment for a liability arising under a lease that transferred possession of tangible personal property for consideration (Tax Law 1101(b)(5), 1105(a); 20 NYCRR 541.9(c)(1); TSB-A-04(1)S). The same is true if it instead receives $10,000 from a third-party guarantor -- a guarantor's payment is still a taxable receipt (analogous to 20 NYCRR 526.5(c), where a manufacturer's coupon counts in the vendor's taxable receipts).

• Scenario 2 -- FINANCING lease (nontaxable recoveries). Here the petitioner made an outright sale and collected and remitted the full sales tax up front. After default, repossession, and resale, it wins a judgment for the deficiency. No part of that judgment is taxable, because the entire sales tax was already collected and remitted on the original sale. The result is the same for a payment from a guarantor.

General principle: recovering part of a bad debt on a taxable sale is not subject to sales tax if the petitioner never received a bad-debt credit or refund for that debt.

What this means for you

Lessors and equipment-finance companies

How a default recovery is taxed follows how the original deal was taxed.
- On a true lease (tax paid per rental), post-default recoveries are taxable -- whether you collect them from the lessee by judgment or from a guarantor. Build that tax into what you pursue and collect.
- On a financing lease / outright sale (full tax paid up front), recoveries are not taxable, because the tax is already paid.
- If you wrote off a bad debt but never claimed a sales-tax bad-debt credit or refund, later recovering some of it doesn't create new sales tax.

Guarantor and third-party payments count

A payment from a third-party guarantor on a true lease is a taxable receipt, just like a payment from the lessee -- third-party money still counts in your receipts.

Common questions

Q: We won a judgment after a true-lease default -- is what we collect taxable?
A: Yes. It's payment for a liability under a lease that transferred possession for consideration, so it's a taxable receipt.

Q: Same situation but it was a financing lease -- still taxable?
A: No. You already collected and remitted the full tax up front, so the recovery isn't taxable.

Q: A guarantor (not the lessee) pays us -- does that change the answer?
A: No. A guarantor's payment is treated the same as the lessee's -- taxable on a true lease, not taxable on a financing lease.

Q: We recovered part of a bad debt -- is that taxable?
A: Not if you never took a bad-debt credit or refund for it.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(5) (definition of sale; lease)
• 20 NYCRR section 541.9(c)(1) (lease default amounts)
• 20 NYCRR section 526.5(c) (third-party payments included in receipts)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_3s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(3)S
Sales Tax
January 8, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S110826B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner, name and address redacted. Petitioner inquires as to the sales tax implications of a
recovery on a bad debt in regard to a taxable sale. We conclude that where Petitioner enters into
a true lease of taxable equipment, the lessee defaults, and Petitioner eventually wins a court
judgment against the lessee for a portion of the amount due under the lease, any collection of the
judgment would be taxable. We also conclude that Petitioner’s subsequent recovery of a part of
a bad debt involving a taxable sale would not be subject to sales tax if Petitioner never received
any bad debt credit or refund in regard to that bad debt.
Facts
Petitioner is an equipment lease finance company that uses both true leases and financing
leases to make its sales. The equipment that is the subject of this petition does not include any
property that would be subject to the acceleration provisions in Tax Law section 1111(i). When
Petitioner makes an outright sale of equipment (i.e., title transfers to the purchaser at the outset
of the contract), but provides financing, it enters into a financing lease with the purchaser. The
financing lease functions as a security agreement for purposes of the Uniform Commercial Code.
A true lease is a sale in which Petitioner retains title to the property, but allows the lessee to have
possession of the property in return for a series of rental payments. Petitioner asks about the
taxability of recoveries made on accounts under two different scenarios where the lessee defaults
and the account has been written off for purposes of general accounting principles and Federal
income tax purposes.
Under Scenario 1, Petitioner enters into a 60-month equipment lease that is a true lease.
Petitioner collects sales tax on each monthly payment. The lease provides that, in the case of the
lessee’s default, Petitioner can require the lessee to pay all accrued and unpaid balance, as well
as “all unpaid future balance of this Agreement.” Prior to the end of the term of the contract, the
lessee defaults. Petitioner obtains possession of the equipment and sells it to an unrelated thirdparty, charging the applicable sales tax. Application of the sale proceeds to the lessee’s account
results in a net deficiency balance of $55,000. Petitioner charges the debt off as bad debt in
accordance with generally accepted accounting principles, but does not claim any bad debt
deduction for New York sales tax purposes. Petitioner is awarded $20,000 as a final judgment
from litigation in regard to the bad debt. Alternatively, it receives $10,000 from a third party
guarantor in regard to the debt.

-2-

TSB-A-13(3)S
Sales Tax
January 8, 2013

Under Scenario 2, Petitioner enters into a 60-month financing lease for equipment.
Petitioner charges sales tax on the total cost of the equipment that was financed. The purchaser
eventually defaults, Petitioner regains the equipment, and sells it to an unrelated third party,
charging the applicable sales tax. Application of the sale proceeds leaves a net deficiency
balance of $25,000 on the financing lease. That balance is charged off to bad debt in accordance
with generally accepted accounting principles. No refund request or credit is taken for the
uncollected portion of the up-front sales tax that was financed into the contract.
Analysis
The Tax Law imposes sales and use tax on retail sales of tangible personal property and
the sale, except for resale, of certain services (see Tax Law § 1105[a], [c]). The term “sale,” as
used in article 28, includes “[a]ny transfer of title or possession or both, exchange or barter,
rental, lease or license to use or consume, conditional or otherwise” (Tax Law § 1101[b][5]).
Section 526.7(c) (1) of the Sales and Use Tax Regulations provides that: “[t]he terms rental,
lease, license to use refer to all transactions in which there is a transfer of possession of tangible
personal property without a transfer of title to the property. 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.” The Regulations recognize that a contract denominated as a lease of tangible
personal property may in fact represent a security agreement (see 20 NYCRR § 526.7[c][3]).
Because the sales tax is a transaction tax, liability for the tax occurs at the time of the
transaction (see 20 NYCRR § 525.2[a][2]). In the case of a lease, the tax is imposed on each
rental payment at the time paid, regardless of the date of the agreement (see Matter of Petrolane
N.E. Gas Service v. State Tax Commn., 79 AD2d 104 [3d Dept 1981]).
Petitioner inquires about the sales tax consequences of making recoveries on a bad debt
account in two different scenarios.
In Scenario 1, Petitioner leases equipment under a true lease, which is for 60 months.
Petitioner collects sales tax on each payment. The lessee defaults. Petitioner recovers the
property and sells it, leaving a net deficiency balance of $55,000. The lease provides that, in the
case of the lessee’s default, Petitioner can require the lessee to pay all accrued and unpaid
balances, as well as “the unpaid future balance of this Agreement.” Subsequently, Petitioner
obtains a $20,000 judgment against the lessee. Any part of the $20,000 judgment that Petitioner
collects is subject to sales and use tax because it represents payment for a liability that resulted
under a lease in which Petitioner transferred possession of tangible personal property to the
lessee for a consideration (see Tax Law §§ 1101[b][5]; 1105[a]; 20 NYCRR § 541.9[c][1][c];
TSB-A-2004[1]S). Similarly, if, as Petitioner alternatively posits, it is paid $10,000 from a
guarantor on the lease as a result of the lessee’s default, that payment would also constitute a
taxable receipt, notwithstanding that it comes from a third-party and not the lessee (see 20
NYCRR § 526.5[c][when a vendor is tendered a manufacturer’s coupon in partial payment for a
taxable purchase, the amount of the manufacturer’s coupon is included in the vendor’s taxable
receipts]).

-3-

TSB-A-13(3)S
Sales Tax
January 8, 2013

In Scenario 2, Petitioner makes an outright sale of equipment under a financing lease.
After it has collected and remitted the appropriate sales tax, the purchaser defaults. Petitioner
eventually writes off the account as a bad debt, but does not obtain a bad debt credit or refund
from the Department. Petitioner obtains a court judgment as damages for the purchaser’s breach
of the financing lease. No part of the judgment is subject to sales tax because Petitioner has
already collected and remitted the full amount of the sales tax due in relation to the purchase of
the equipment under the financing lease. The result would be the same if, alternatively,
Petitioner received a $2,000 payment from a third-party guarantor.

DATED: January 8, 2013

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.