Does a 'safe harbor lease' sale-leaseback trigger New York sales tax when it is done only to shift federal tax benefits and the offsetting monthly payments leave neither party economically changed?

Plain-English summary

Peat, Marwick, Mitchell & Co. asked about a "safe harbor lease" sale-leaseback under IRC § 168(f)(8). In the scenario, a taxpayer buys equipment for its own use and pays sales tax on that purchase, but cannot use certain federal tax benefits (the investment tax credit and accelerated cost-recovery deductions). To transfer those benefits, it enters a sale-leaseback with a third party: the purchaser/lessor makes a down payment and pays the balance monthly, and those payments are substantially equal to the rent the taxpayer pays back — so after the down payment, neither party's cash position changes. The taxpayer keeps continuous possession and all maintenance/insurance responsibility. The question: does this create sales tax liability (a) if title is not transferred to the lessor, and (b) if title is transferred?

The Department held it turns on whether title or possession is actually transferred.

• What a "sale" requires. Section § 1101(b)(5) defines a "sale" to require a transfer of title or possession (or a rental, lease, or license to use) for a consideration.
• (a) No transfer of title or possession — no sale, no tax. Where neither title nor possession passes from the seller/lessee to the purchaser/lessor, there is no sale to the lessor under § 1101(b)(5), and therefore no sale back to the lessee either. No sales tax liability arises from such a transaction.
• (b) Title transferred — a resale, and the leaseback is taxable. Where title is transferred to the purchaser/lessor for consideration, that transfer generally is a sale — but not a retail sale, because the purchase is made solely for resale. The resale, in the form of the lease back to the user, is a retail sale under § 1101(b)(4)(i) and (5), and its receipts are taxable under § 1105(a). (See TSB-M-82(5).)
• A limited caveat. Under certain limited circumstances a transfer of title in a sale-leaseback or other leasing transaction may not create a sales tax liability — see Matter of Sherwood Diversified Services, Inc., 382 F. Supp. 1359; Matter of Petrolane-Northeast Gas Service, 79 A.D.2d 1043; and 20 NYCRR 526.7(c)(3).

What this means for you

"Safe harbor" for income tax isn't safe harbor for sales tax. New York analyzes the sale-leaseback under its own definition of "sale." What matters is whether title or possession actually moves — not how the deal is characterized for federal income tax.

A pure paper transfer can avoid sales tax. If neither title nor possession changes hands (the classic financing-only safe-harbor lease), there's no "sale," so no sales tax on either leg.

But moving title creates a taxable lease stream. If title passes to the lessor, the lessor bought for resale (no tax on that leg), and the leaseback rentals become taxable under § 1105(a). Watch for the narrow exceptions in the cited cases and 20 NYCRR 526.7(c)(3).

Common questions

Q: My sale-leaseback is only to transfer federal tax benefits. Is it taxable in New York?
A: Only if there's an actual transfer of title or possession. If neither moves, there's no "sale" and no sales tax. If title is transferred, the leaseback rentals are taxable.

Q: We already paid sales tax when we first bought the equipment. Do we pay again?
A: Not if the sale-leaseback transfers no title or possession. If title is transferred, the lessor buys for resale (no tax there) but must collect tax on the lease payments back to you.

Q: Are there exceptions when title does move?
A: Yes, in limited circumstances — the opinion cites Matter of Sherwood Diversified Services, Matter of Petrolane-Northeast Gas Service, and 20 NYCRR 526.7(c)(3). Get specific advice on your facts.

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(4)(i) — "retail sale" excludes sales for resale
• Tax Law § 1101(b)(5) — "sale" requires a transfer of title or possession, or a rental/lease, for a consideration

Regulations / guidance / cases:

• 20 NYCRR § 526.7(c)(3) — circumstances where a transfer in a leasing transaction may not create a sales tax liability
• TSB-M-82(5) — Department memorandum on sale-leaseback treatment
• Matter of Sherwood Diversified Services, Inc., 382 F. Supp. 1359; Matter of Petrolane-Northeast Gas Service, 79 A.D.2d 1043 — limited situations avoiding liability

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a82_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(19)S
Sales Tax
May 31, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S811211A

On December 11, 1981 a Petition for Advisory Opinion was received from Peat, Marwick,
Mitchell & Co., 111 Washington Avenue, Albany, New York 12210.
The issue raised is whether the sale and leaseback of tangible personal property which
qualifies under the "safe harbor lease" provision of the Internal Revenue Code (I.R.C., §168(f)(8)),
would result in sales tax liability where (a) title to the property is not transferred to the lessor and (b)
where title to the property is transferred to the lessor. In each case, sales tax is paid by the original
purchaser at the time the property is purchased.
In the hypothetical situation presented in this Petition, a taxpayer acquires tangible personal
property for its own use, paying the appropriate sales tax on the initial purchase. Because of its tax
situation the taxpayer cannot utilize certain federal tax benefits otherwise available with respect to
the property, such as the investment tax credit and accelerated cost recovery deductions. The
taxpayer therefore enters into a sale - leaseback arrangement with a third party. Under the agreement,
the purchaser/lessor makes a down payment to the taxpayer (seller/lessee), and is to pay the balance
of the purchase price monthly. These monthly debt amortization payments are substantially equal
to the rental payments paid by the taxpayer to the purchaser/lessor. Thus, although there is a monthly
exchange of checks, the cash position of each party does not change subsequent to the payment of
the initial down payment. The sale - leaseback qualifies under the "safe harbor lease" provision of
the Internal Revenue Code, and is treated accordingly for federal income tax purposes.
Petitioner further describes the situation as follows: "Despite the characterization of the
transaction as a sale-leaseback of tangible personal property, there is no substantial transfer of the
property. In all material respects, taxpayer (lessee) remains the owner of the property. Lessee
maintains possession continuously; it assumes all responsibility for maintenance and insurance of
the property. The contract specifies that title does not pass to the purchaser/lessor. Alternatively, the
contract may provide that title does pass to the lessor. The only purpose of the sale-leaseback
transaction is to transfer to the lessor the right to utilize the federal investment tax credit and
accelerated cost recovery deductions. As noted in the previous paragraph, although the parties each
make monthly payments to the other, the amounts are substantially the same, so neither experiences
an economic change."
Section 1105(a) of the Tax Law imposes the State sales tax on the "receipts from every retail
sales of tangible personal property . . . ." The term "retail sale" is defined, in pertinent part, in section
1101(b)(4)(i) of the Tax Law as "A sale of tangible personal property to any person for any purpose,

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-82(19)S
Sales Tax
May 31, 1982

other than (A) for resale . . . . " The term sale is defined, in section 1101(b)(5) of the Tax Law, so
as to include "Any transfer of title or possession or both, . . . rental, lease or license to use . . . for a
consideration . . . . "
It follows from the foregoing that where there is no transfer of either title or possession from
the seller/lessee to the purchaser/lessor, there is no sale to the purchaser/lessor within the meaning
of section 1101(b)(5) of the Tax Law, and there can accordingly be no such sale back to the
seller/lessee. Accordingly, no sales tax liability would arise from such a transaction. However,
where, as a part of the transaction, title is transferred to the purchaser/lessor for a consideration, the
same will generally constitute a sale. Such sale will not constitute a retail sale because the purchase
is made for the sole purpose of resale. Such resale, however, in the form of a lease, will constitute
a retail sale with the meaning of section 1101(b)(4)(i) and (5) of the Tax Law, and the receipts
therefrom will be subject to tax under section 1105(a) of the Tax Law. See Technical Services
Bureau Memorandum TSB-M-82(5). It should be noted that under certain limited circumstances a
transfer of title as part of a sale-leaseback or other leasing transaction may not result in the creation
of a sales tax liability. See in this regard Matter of Sherwood Diversified Services, Inc., 382 F. Supp.
1359; Matter of Petrolane-Northeast Gas Service, 79 A.D. 2d 1043; 20 NYCRR 526.7(c)(3).

DATED: May 12, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau