When equipment is leased under a lease that accounting rules treat as a capital lease, is sales tax based on the full periodic payment, the payment minus interest, or the capitalized asset value?

Plain-English summary

Joy Manufacturing Company leases equipment under an agreement that its accountants treat as a "capital lease" under Statement of Financial Accounting Standards (SFAS) No. 13. In accounting terms, a capital lease is recorded as an asset with a matching liability, and each periodic payment is split between interest expense and reduction of the lease liability — unlike an operating lease, where the whole payment is simply rent. Joy asked what the sales-tax base is:

• (A) the total periodic payment,
• (B) the total periodic payment less the interest portion, or
• (C) the capitalized value of the asset.

The Department held the tax base is each full lease payment (option A).

• The agreement controls whether it's a sale or a lease. Under 20 NYCRR 526.7, a "sale" is any transfer of title or possession for consideration, and leases and rentals are among the transactions taxed; "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" (526.7(c)(1)).
• This is a lease, not a purchase. The lease acknowledgement letter designates Joy as "The Lessee" and calls the deal a "Lease," not a purchase of equipment. "Thus the basis for determining the sales and use tax is each lease payment."
• The interest exclusion doesn't apply. The rule that excludes interest/finance/service charges from the taxable receipt (20 NYCRR 526.5(h)) covers "charge[s] for credit imposed by a vendor . . . in addition to the purchase price" — i.e., credit extended on a purchase. Here the payments are rent under a lease, so the accounting allocation of part of each payment to "interest expense" does not carve anything out of the taxable amount.
• Renewal is taxable too. The expenditure to exercise a lease renewal option is also a transaction subject to sales tax under Tax Law § 1101(b)(5).

What this means for you

Accounting labels don't set the sales-tax base — the lease terms do. SFAS 13 may require you to split a "capital lease" into asset value and interest on your books, but New York taxes each lease payment in full. You can't shrink the tax by pointing to the interest portion your accountant recorded.

Sale vs. lease is decided by your contract. If your document says "lease" and calls you the "lessee," New York treats it as a lease: tax each payment as it's made, rather than taxing an up-front purchase price. Structure the paperwork to match the deal you actually intend.

The interest exclusion is only for financed purchases. New York does let a vendor exclude separately imposed interest or finance charges — but only when credit is extended on a purchase price. Rent under a lease isn't a financed purchase, so there's no interest to back out.

Common questions

Q: Our lease is a "capital lease" for accounting. Can we pay tax only on the principal portion of each payment?
A: No. Because the agreement is a lease, sales tax is based on each full lease payment. The accounting split between principal and interest doesn't reduce the taxable amount.

Q: Is the tax based on the equipment's capitalized value up front?
A: No. It's a lease, so you don't tax a lump purchase price — you tax each lease payment as it comes due.

Q: We're renewing the lease. Is the renewal taxable?
A: Yes. Exercising a lease renewal option is itself a taxable transaction under § 1101(b)(5).

Citations and references

Statute:

• Tax Law § 1101(b)(5) — definition of "sale"; the transaction (including exercising a renewal option) is subject to tax

Regulations:

• 20 NYCRR 526.7 — "sale, selling, purchase" and "consideration"; leases and rentals are taxable transactions; whether a transaction is a sale or a lease is determined by the provisions of the agreement (526.7(c)(1))
• 20 NYCRR 526.5(h) — a charge for credit (interest, service charge, finance charge) imposed in addition to the purchase price is excluded from the taxable receipt as consideration for the extension of credit

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(14)S
Sales Tax
May 29, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINIONS

PETITION NO. S831130A

On November 30, 1983 a Petition for Advisory Opinion was received from Joy
Manufacturing Company, 301 Grant Avenue, Pittsburgh, Pennsylvania 15219.
The issue raised is what is the basis for determining sales tax on a leasing transaction which
is capitalized in accordance with accounting requirements as set forth in Statement of Financial
Accounting Standards (SFAS) No. 13, "Accounting for Leases."
Petitioner explains that SFAS No.13 identifies two types of leases from the viewpoint of the
Lessee: An operating lease and a capital lease. In accounting for the former, the basis for determining
sales and use tax is simply the lease payment. Accounting treatment of a capital lease requires
recording the property as an asset at the inception of the lease and, simultaneously, creating a liability
for the lease obligation. A portion of each periodic lease payment is then charged to interest expense
and the remainder is applied to the reduction of the lease liability.
In view of these accounting requirements, Petitioner inquires, is the basis for determining
sales and use tax
(A) The total periodic payment,
(B) The total periodic payment less the amount allocated to interest expense, or
(C) The capitalized value of the asset?
Section 526.7 of the New York State Sales and Use Tax Regulations states, in part: "Sale,
selling or purchase. (Tax Law 1101(b)(5)(a)) Definition. (1) The words sale, selling or purchase
mean any transaction in which there is a transfer of title or possession, or both, of tangible personal
property for a consideration. (2) Among the transactions included in the words sale, selling or
purchase are exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property. . . .(b) Consideration. The term consideration includes monetary consideration. . . .
Monetary consideration includes assumption of liabilities, fees, rentals, royalties or any other charge
that a purchaser, lessee or licensee is required to pay. (c) Rentals, leases, licenses to use. (1) the 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. (2) Where a lease with an option to purchase has been entered into, and the option is
exercised, the tax will be payable on the consideration given when the option is exercised, in
addition to the taxes paid or payable on each lease payment.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(14)S
Sales Tax
May 29, 1985

Section 526.5 of the Sales and Use Tax Regulations states in part: "(h) Interest. (1) Any
charge for credit imposed by a vendor and paid by a purchaser in addition to the purchase price under
a designation such as interest, service charge of finance charge is not deemed to be part of the sale
price of tangible personal property or charge for services rendered. Such charges are consideration
for the extension of credit and shall not be included in the receipt subject to sales tax."
A copy of the lease acknowledgement letter supplied by the Petitioner designates Petitioner
as "The Lessee" and refers to the transaction as a "Lease" and not a purchase of equipment. Thus the
basis for determining the sales and use tax is each lease payment.
The expenditure incurred by lessee in exercising the lease renewal option is also a transaction
subject to sales tax as defined in section 1101(b)(5) of the Tax Law.

DATED: May 8, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.