Is a bank that finances an equipment lease — advancing the money and taking an assignment of the lessor's interest, but never holding title or possession — a 'vendor' that must collect and remit sales tax?

Plain-English summary

This four-party deal is a financed equipment lease. A lessee picks out equipment and a supplier; a lessor (in the leasing business) pays the supplier the full price plus any sales tax and leases the equipment to the lessee; and Manufacturers and Traders Trust Company (M&T) advances the lessor the money to fund the equipment in exchange for an assignment of the lessor's interest. M&T never takes possession of the equipment, never takes depreciation, files UCC financing statements, and handles the whole thing as a commercial loan. The lessee has exclusive possession and control throughout. M&T asked whether it is a "vendor" that must collect and remit sales tax.

The answer: no. M&T is a financier, not a vendor.

• A "sale" requires a transfer of title or possession of tangible personal property (§ 1101(b)(5); 20 NYCRR 526.7(a)(1)).
• A lease "entered into merely as a security agreement," with no actual transfer of possession from lessor to lessee, is not a 'sale' (20 NYCRR 526.7(c)(3)).
• M&T neither receives title to nor possession of the equipment; its interest is financial in nature.
• So M&T does not meet the definition of a vendor (§ 1101(b)(8)) and is not a "person required to collect tax" (§ 1131(1)). It owes no duty to collect or remit New York State and local sales taxes.

What this means for you

Financing a lease is not the same as leasing. New York's sales tax attaches to a transfer of title or possession. A lender that funds an equipment deal and takes only a security interest / assignment — without ever holding the equipment — hasn't made a taxable transfer, so it isn't a vendor.

The tax still gets paid — just not by the financier. In this structure the lessor already remits the sales tax (or collects an exemption certificate) when it pays the supplier, and the lease to the lessee is handled by the lessor. M&T stepping in as the money source doesn't add a second layer of collection duty.

Substance over label. The Department looked at what M&T actually held (a financial interest secured by UCC filings, with no possession and no depreciation) rather than the paperwork's "lease" vocabulary. If a "lease" is really a security arrangement, 526.7(c)(3) says it isn't a sale.

Common questions

Q: Who collects the sales tax in a financed lease like this?
A: Not the financing bank. On these facts the lessor pays the tax (or takes an exemption certificate) when it acquires the equipment from the supplier, and it is the lessor — not M&T — that deals with the lessee.

Q: Why doesn't taking an assignment of the lessor's interest make the bank a vendor?
A: Because the assignment gives the bank a financial/security interest, not title or possession of the equipment. Without a transfer of title or possession there is no "sale," so no vendor duty arises.

Q: Would the answer change if the bank took possession of the equipment?
A: Potentially. The ruling turns on M&T never holding title or possession. A party that does take title or possession and re-leases the equipment could be making a taxable lease (a "sale" under § 1101(b)(5)).

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(8) — defines "vendor"
• Tax Law § 1101(b)(5) — defines "sale" to include any transfer of title or possession, rental, lease, or license
• Tax Law § 1131(1) — defines "persons required to collect tax" (includes every vendor)
• 20 NYCRR 526.7(a)(1) — a sale requires a transfer of title or possession for consideration
• 20 NYCRR 526.7(c)(3) — a lease entered into merely as a security agreement, with no transfer of possession, is not a sale

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1980.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h80_128s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-80(128)S
Sales Tax
July 15, 1980

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S800327A

On March 27, 1980, a Petition for Advisory Opinion was received from the
Manufacturers and Traders Trust Company, One M & T Plaza, Buffalo, New York
14203.
The issue raised is whether the petitioner, pursuant to article 28 of the
Tax Law, is a vendor making sales of tangible personal property and as such
responsible for collecting and remitting sales taxes or receiving exemption
certificates.
The transaction presented involves four parties, referred to as the Lessor,
the Lessee, the Supplier, and Manufacturers and Traders Trust Company
(Petitioner). The Lessor is in the business of setting up financed leases for
customers such as the Lessee. The Lessee contacts the Lessor concerning
equipment. The Lessee selects both the equipment and the supplier from whom the
equipment is purchased. The Lessor remits the full sale price plus applicable
sales taxes (or applicable exemption certificates) to the Supplier. Petitioner
will advance to the Lessor funds to finance the equipment. In consideration of
such advance, the Lessor will assign its interest in the transaction to
Petitioner.
Petitioner will never take physical possession of the equipment. The Lessee
will have exclusive control and possession of the equipment during the term
established for payment.
Petitioner will handle the transaction as a commercial loan for all
purposes. Petitioner does not take depreciation deductions on the equipment, and
never takes possession of the leased equipment at the end of the leased term.
UCC financing statements are filed for the equipment and the agreement
therefor.
Section 1101(b)(8) of the Tax Law defines a vendor as "... (A) A person
making sales of tangible personal property or services, the receipts from which
are taxed by this article; (B) A person maintaining a place of business in the
state and making sales ...(C) A person who solicits business either by employees,
independent contractors, agents or other representatives or by distribution of
catalogs or other advertising matter and by reason thereof makes sales to persons
within the state of tangible personal property or services ...."
Section 1101(b)(5) of the Tax Law defines a sale as "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
...."
Section 1131(1) of the Tax Law states, " 'Persons required to collect tax'
or 'person required to collect any tax imposed by this article' shall include:
every vendor of tangible personal property or services ...."
Section 526.7(a)(1) of the Sales and Use Tax Regulations defines a sale as
"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."

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (4/80)

2
TSB-H-80(128)S
Sales Tax
July 15, 1980

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (4/80)

3
TSB-H-80(128)S
Sales Tax
July 15, 1980
Section 526.7(c) states, "(1)...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.... (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."
The Sales Tax Law requires a vendor of tangible personal property or
services who is required to collect tax and every person purchasing tangible
personal property for resale, to register as a vendor with the Tax Commission.
To be considered a vendor, a person would have to meet the criteria enumerated
in the Tax Law.
Before a transaction is considered a sale, there must be a transfer of
title or possession or both of tangible personal property by a vendor to the
purchaser.
In the instant transaction, Petitioner neither receives title to nor
possession of tangible personal property. Petitioner's interest in the
transaction is financial in nature.
Accordingly, Petitioner is not a vendor of tangible personal property and
is not under a duty to collect or remit New York State and local sales taxes.

Dated: June 30, 1980

s/ LOUIS ETLINGER
Deputy Director
Technical Services Bureau