When must an equipment finance company remit sales or use tax on its healthcare-equipment fair market value leases versus its conditional sales agreements?

Plain-English summary

DVI Financial Services finances healthcare equipment purchases for hospitals and clinics, mostly through two kinds of long-term arrangements: "fair market value leases" (true/operating leases where DVI keeps ownership and the customer can buy or renew at fair market value at the end) and "conditional sales agreements" (financing arrangements where DVI's interest in the equipment ends at the end of the term and the customer is treated as the owner for accounting and tax purposes). DVI asked when it should actually remit sales or use tax on these deals -- on each monthly payment, on the full equipment cost upfront, or some other way.

The answer depends on which kind of deal it really is. Under the fair market value leases, DVI is genuinely renting out tangible personal property, so that's an ordinary taxable rental: sales tax must be collected from the customer on each monthly lease payment, at the combined state and local rate where the equipment is delivered, and remitted with the sales tax return covering that period. Because DVI is making retail leases of the equipment, its own purchase of that equipment from the manufacturer counts as a purchase for resale, so DVI doesn't owe tax when it buys the equipment (as long as it gives its supplier a resale certificate). Under the conditional sales agreements, the analysis turns on whether DVI is genuinely acting only as a financing/lending source rather than a true buyer-then-seller of the equipment -- looking past the paperwork's form to the actual intent and facts of each deal. If DVI's arrangement is genuinely just security/financing, no sales or use tax applies to the monthly payments at all; instead, tax is due once, at the time of the original sale or first use of the equipment in New York, on the full purchase price -- collected either by DVI (if it briefly held an ownership interest and resold the equipment) or by whoever actually sold the equipment to the ultimate customer (if DVI was only ever a lender).

What this means for you

Equipment finance and leasing companies

Whether your deal is taxed as a stream of monthly rental payments or as a single upfront tax on the full equipment price depends on the deal's real economic substance (true lease versus disguised financing), not just its label -- look past your form documents to who actually holds an ownership interest and when, and to the parties' real intent.

Healthcare providers and other equipment lessees

Ask your financing company which type of arrangement you have; under a true lease, expect sales tax added to every monthly payment, but under a genuine financing/conditional-sale arrangement, tax is generally collected just once, on the full purchase price, with no tax added to your ongoing payments.

Accountants and tax professionals

This ruling is a useful walkthrough of New York's "look through the form to the substance" test for lease-versus-financing-agreement characterization (citing Cantor Fitzgerald Securities and the UCC's security-interest/financing-agency definitions) -- valuable any time a client's equipment finance company structures deals as fair-market-value leases alongside conditional sales agreements.

Common questions

Q: Is sales tax collected monthly or all at once on an equipment lease?
A: It depends on the deal type -- a true (fair market value) lease is taxed monthly on each rental payment; a genuine financing/conditional-sale arrangement is taxed once, upfront, on the full purchase price.

Q: Does labeling a deal a "conditional sales agreement" guarantee it's taxed as financing rather than a lease?
A: No -- the Department looks past the paperwork's label to the parties' actual intent and the facts and circumstances of the transaction to decide whether it's truly a financing/security arrangement.

Q: Does a leasing company owe tax when it buys equipment it plans to lease out?
A: No -- if the company is making taxable retail leases of the equipment to its customers, its own purchase of that equipment counts as a purchase for resale, so it can buy tax-free with a resale certificate.

Q: Does this ruling apply to my company's equipment leasing or financing structure?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own agreements and the parties' actual intent would need their own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_66s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(66)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S970806E

On August 6, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from DVI Financial Services, Inc., 500 Hyde Park,
Doylestown, Pennsylvania 18901.
Petitioner, DVI Financial Services, Inc.,
provided additional information pertaining to the Petition on August 12, 1997.
The issue raised by Petitioner concerns the timing of New York State and
local sales or compensating use tax payments with regard to Petitioner’s lease
and lease-type transactions.
Petitioner submitted the following facts as the basis for this Advisory
Opinion and provided samples of the lease agreements in question.
Petitioner is in the business of financing acquisitions of healthcare
related equipment by end-users, such as hospitals, ambulatory diagnostic and
therapeutic clinics and other healthcare providers. Nearly all of Petitioner’s
equipment financing transactions have terms ranging from 36 to 72 months and are
typically one of two types. These transactions are either true/operating leases,
which Petitioner refers to as fair market value leases, or financing lease-type
transactions, which Petitioner refers to as conditional sales agreements. Both
of these types of transactions are almost exclusively on a net basis, requiring
Petitioner’s customers (lessees) to pay, among other items, all sales and use
taxes. The sample lease agreements also provide that the lessees independently
select suppliers and the equipment at issue.
Petitioner does not provide
personnel to operate the equipment. (For purposes of this Opinion, it is assumed
that Petitioner’s customers are not exempt organizations pursuant to Section 1116
of the Tax Law and that the equipment is not exempt from tax.)
Under Petitioner’s fair market value lease transactions, Petitioner retains
the right to again lease or market the equipment at the end of the initial term
of the lease, subject to a fair market value purchase or renewal option granted
to the lessee.
Petitioner and the lessee execute and submit precautionary
Uniform Commercial Code (UCC) filings that indicate the true lease status of the
transaction.
For federal and state income tax purposes and under generally
accepted accounting principles (GAAP), Petitioner is considered the owner of the
equipment and is entitled to the applicable tax benefits.
In contrast, under Petitioner’s conditional sales agreement transactions,
Petitioner’s interest in the equipment is terminated at the end of the initial
transaction term. Petitioner and the lessee execute and submit UCC filings that
list Petitioner as a secured party and the lessee as the debtor to the
transaction.
For federal and state income tax purposes and under generally
accepted accounting principles, the lessee is considered the owner of the
equipment and is entitled to the applicable tax benefits.

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Sales Tax

For each of the financing alternatives described, Petitioner questions when
it should remit payment of the State and local sales or compensating use taxes
to the Department of Taxation and Finance. For example, if Petitioner finances
the purchase of a $1 million piece of medical equipment, with payments of $25,000
to be made over a 60-month period: should tax be added to the $25,000 payments
and remitted each month; should tax be added to the $1 million cost of the
equipment at the inception of the transaction and remitted in total at that time;
or should the tax be otherwise computed and remitted?
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides in part:
When used in this article for the purposes of the taxes
imposed by subdivisions (a), (b), (c) and (d) of section eleven
hundred five and by section eleven hundred ten, the following terms
shall mean:
(1) Purchase at retail.
A purchase by any person for any
purpose other than those set forth in clauses (A) and (B) of
subparagraph (i) of paragraph (4) of this subdivision.
*

*

*

(3) Receipt. The amount of the sale price of any property and
the charge for any service taxable under this article, valued in
money, whether received in money or otherwise, including any amount
for which credit is allowed by the vendor to the purchaser, without
any deduction for expenses or early payment discounts and also
including any charges by the vendor to the purchaser for shipping or
delivery regardless of whether such charges are separately stated in
the written contract, if any, or on the bill rendered to such
purchaser and regardless of whether such shipping or delivery is
provided by such vendor or a third party, but excluding any credit
for tangible personal property accepted in part payment and intended
for resale ....
(4) Retail sale. (i) A sale of tangible personal property to
any person for any purpose, other than (A) for resale as such or as
a physical component part of tangible personal property, or (B) for
use by that person in performing the services subject to tax under
paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of
section eleven hundred five....
(5) Sale, selling or purchase.
Any transfer of title or
possession or both, exchange or barter, rental, lease or license to
use or consume ... conditional or otherwise, in any manner or by any
means whatsoever for a consideration, or any agreement therefor....

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Sales Tax

(6) Tangible personal property.
of any nature....

Corporeal personal property

(7) Use. The exercise of any right or power over tangible
personal property by the purchaser thereof....
Section 1105(a) of the Tax Law imposes sales tax upon "[t]he receipts from
every retail sale of tangible personal property, except as otherwise provided in
this article."
Section 1110(a) of the Tax Law imposes compensating use tax, in pertinent
part, as follows:
Except to the extent that property or services have already
been or will be subject to the sales tax under this article, there
is hereby imposed on every person a use tax for the use within this
state ... except as otherwise exempted under this article, (A) of
any tangible personal property purchased at retail....
Section 1132(a) of the Tax Law provides that “[e]very person required to
collect the tax shall collect the tax from the customer when collecting the
price, amusement charge or rent to which it applies.” Section 1137(a) provides
that the tax shall be paid to the Department at the time of filing the returns
required to be filed under Section 1136 of the Tax Law.
Section 526.6(c) of the Sales and Use Tax Regulations in defining “retail
sale” provides, in part:
Resale exclusion. (1) Where a person, in the course of his
business operations, purchases tangible personal property or
services which he intends to sell, either in the form in which
purchased, or as a component part of other property or services, the
property or services which he has purchased will be considered as
purchased for resale, and therefore not subject to tax until he has
transferred the property to his customer.
Section 526.7 of the regulations provides, in part:
§526.7 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.
*

*

*

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Sales Tax

(c) Rentals, leases, licenses to use. (1) The terms rental,
lease and license to use refer to all transactions in which there is
a transfer for a consideration 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.
(3) A lease which has been entered into merely as a security
agreement, but which does not in fact represent a transaction in
which there has been a transfer of possession from the lessor to
the lessee, is not a "sale" within the meaning of the Tax Law.
*

*

*

(e) Transfer of possession.
*

*

*

(4) Transfer of possession with respect to a rental, lease or
license to use, means that one of the following attributes of
property ownership has been transferred:
(i) custody or possession of the tangible personal property,
actual or constructive;
(ii) the right to custody or possession of the tangible
personal property;
(iii) the right to use, or control or direct the use of,
tangible personal property.
These sections of law and regulations are also applicable to the local
sales and compensating use taxes imposed pursuant to the authority of Article 29
of the Tax Law.
Opinion
Under Petitioner’s fair market value lease transactions, Petitioner is
leasing equipment to healthcare providers and, as such, is making retail sales
of tangible personal property within the meaning and intent of Sections
1101(b)(4), (5) and (6) of the Tax Law. Accordingly, given Petitioner’s example
of the purchase of the $1 million piece of medical equipment, New York State and

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local sales taxes must be collected from the lessee on each of the $25,000
monthly payments, at the time of each payment. The taxes are imposed at the
combined State and local sales tax rate in effect in the taxing jurisdiction
where the equipment is delivered to the lessee. Petitioner must remit the taxes
it is required to collect to the Department when filing the sales tax returns
that cover the months in question (e.g., the annual, quarterly or part-quarterly
returns; see, Tax Law §1136 and 20 NYCRR 533.3).
It is noted that because the fair market value lease transactions are
subject to sales tax as retail sales, the sales of the healthcare related
equipment to Petitioner which are the subject of these leases are considered
sales for resale. Therefore, such sales to Petitioner are not subject to New
York State and local sales or compensating use taxes.
(See, Queens MRI
Associates, Adv Op Comm T&F, April 30, 1992, TSB-A-92(37)S.) If this equipment
is purchased by Petitioner in New York State, Petitioner must furnish the seller
with a properly completed Resale Certificate (see, Tax Law §1132(c) and 20 NYCRR
532.4).
Concerning Petitioner’s conditional sales agreement transactions, Section
526.7(c)(3) of the Sales and Use Tax Regulations, in defining "sale, selling or
purchase," recognizes that certain lease-type transactions entered into merely
as security or financing agreements are not sales within the meaning and intent
of the Tax Law. (See, Cantor Fitzgerald Securities, Adv Op Comm T&F, October 10,
1996, TSB-A-96(68)S). In determining whether Petitioner’s conditional sales
agreement transactions constitute security or financing agreements and as such
would not be subject to State and local sales or compensating use taxes, the
"pivotal issue" is to ascertain whether Petitioner is acting as a financing
agency, and not as a buyer and subsequent seller/lessor of the healthcare related
equipment. The proper method for analyzing these transactions is to look through
the form of the lease agreements and to examine the intent of the parties and the
facts and circumstances that exist at the time of each transaction. (See, Cantor
Fitzgerald Securities, supra; Matter of Sherwood Diversified Services, Inc.,
Debtor, 382 F. Supp. 1359; Clayton Funding Corporation, Tax App Trib, July 8,
1993, TSB-D-93(31)S; Eastman Kodak Company, Adv Op Comm T&F, March 12, 1990,
TSB-A-90(8)S; General Electric Capital Corporation, Adv Op Comm T&F, April 4,
1994, TSB-A-94(14)S. See, also, Sections 1-201(37) [”Security interest”] and
2-104(2) [”Financing agency”] of the New York State Uniform Commercial Code.)
In those instances where the intentions of the parties and the facts and
circumstances surrounding Petitioner’s conditional sales agreement transactions
clearly establish that such transactions are merely security or financing
agreements and that Petitioner is acting only as a financing agency, the
transactions would not be subject to State and local sales and compensating use
taxes. State and local sales or use taxes would be imposed, however, at the time
of the initial sale or use of the equipment in New York State.
In Petitioner’s conditional sales agreement transaction, Petitioner
indicates that its interest in the equipment is terminated at the end of the
initial transaction term.
Thus, Petitioner had an interest at the beginning of
the term.
Assuming that Petitioner’s interest was initially an ownership
interest and that Petitioner sold the equipment to the purchaser and entered into
the conditional sales agreement described, Petitioner would be required to

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collect sales tax on the full sales price of the equipment at the time of the
sale and remit such tax with the return for the period which includes the date
of sale.
No tax would be due on the monthly payments to Petitioner.
If
Petitioner’s interest at the beginning of the term were merely that of a lender,
then the monthly payments to Petitioner would likewise not be subject to sales
tax. However, the person selling the equipment to Petitioner’s lessee would be
required to collect and remit the tax, provided such person qualified as a vendor
under Section 1101(b)(8) of the Tax Law. Given Petitioner’s example, no sales
taxes are imposed on the $25,000 monthly payments. State and local sales taxes
are imposed at the time of the sale of the medical equipment on the full $1
million sales price if the equipment is delivered in New York State. If the
equipment is not delivered in New York but is subsequently brought into this
State for use here, State and local compensating use taxes are imposed on the
user, presumably the lessee, at the time of such use on the $1 million
consideration paid for the equipment, provided the user was a resident of the
State at the time of purchase. (See Section 1118(2) of the Tax Law. Section
1111 of the Tax Law provides special rules for computing consideration of
tangible personal property that is first used outside of New York State. These
special rules, although noteworthy, are not at issue in this Opinion.)
The sales or compensating use taxes, as the case may be, are imposed at the
combined New York State and local tax rate in effect in the taxing jurisdiction
where the equipment is delivered or used. These taxes must be remitted to the
Department when filing the sales tax return or, if the person filing is not a
vendor, the use tax return that covers the period in which the taxable event
occurs (see, Tax Law §1136, and 20 NYCRR 533.3 and 531.6).

DATED: November 4, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.