Did South Carolina sales or use tax apply when a company nominally sold equipment and leased it back but retained title, possession, costs, and risk of loss?

Plain-English summary

South Carolina Private Letter Ruling 90-13 treated a purported equipment sale and leaseback as a financing arrangement rather than a taxable sale followed by a taxable lease.

ABC Company had bought equipment from vendors and paid sales tax. It later entered an agreement under which it purportedly sold the equipment to Corporation C and leased it back. But ABC kept legal title and possession, paid every expense associated with the equipment, bore the risk of loss, and was treated as the owner for income-tax and sales-and-use-tax purposes.

Because neither legal title nor possession transferred and ABC retained the benefits and burdens of ownership, the ruling concluded that neither the transfer to Corporation C nor the leaseback was subject to sales or use tax.

Why the form did not control

South Carolina's statutory definition of a sale included a transfer of title, possession, or both for consideration and also included rentals and leases. The Department therefore examined whether the transaction actually transferred title or possession or created a genuine lease.

The agreement did neither. ABC possessed the equipment before and after the transaction and expressly retained legal title. The remaining contract terms also left ABC with the practical responsibilities and risks of ownership.

The ruling compared those facts with court decisions recognizing that a transaction labeled a sale and leaseback may instead be financing. It emphasized the parties' substantive arrangement rather than the document labels.

Contract terms that mattered

• ABC retained legal title to the equipment.
• The arrangement was a net lease, so ABC bore all expenses connected with the property.
• ABC had to sell the property to be released from the lease and could receive part of the sale proceeds in some circumstances.
• ABC could purchase the property for adjusted acquisition cost or fair market value, whichever was greater.
• ABC bore the equipment's risk of loss.
• ABC was treated as the owner for income-tax and sales-and-use-tax purposes.
• Possession never moved from ABC to Corporation C.

ABC treated the arrangement as an operating lease for financial statements but as a capital lease for federal income-tax purposes. The ruling explained that a capital-lease lessee treats the property as owned, records it as an asset, and deducts depreciation rather than lease payments.

What this means for you

Companies seeking equipment financing

A transaction's sales-tax treatment can follow its substance. Calling documents a sale and lease did not create taxable transfers when the original owner never gave up title, possession, or ownership burdens.

Leasing and finance companies

The ruling relied on the entire allocation of title, possession, costs, risk, sale proceeds, purchase rights, and tax ownership. A different agreement could produce a different classification.

Accountants and tax professionals

ABC had already paid sales tax when it initially bought the equipment. The ruling found no sales or use tax on the later financing arrangement.

Common questions

Q: Was ABC's transfer of equipment to Corporation C taxable?

A: No. ABC retained legal title and possession, so the ruling found no actual sale.

Q: Were the leaseback payments subject to sales or use tax?

A: No under the stated facts. The agreement was financing rather than an actual lease.

Q: Did ABC still bear the equipment's costs and risks?

A: Yes. ABC paid the expenses, bore the risk of loss, and remained the owner for income-tax and sales-and-use-tax purposes.

Q: Does every sale-leaseback avoid South Carolina tax?

A: No. This ruling depended on the specific terms showing that no real sale or lease occurred.

Q: Can another company rely on PLR 90-13?

A: No. The ruling states that it applied only to the requesting taxpayer's facts and had no precedential value.

Citations and references

• S.C. Code section 12-36-910(A) — 1990 sales tax on retail sales
• S.C. Code section 12-36-1310(A) — 1990 use tax
• S.C. Code sections 12-36-110 and 12-36-120 — retail and wholesale sale definitions
• S.C. Code section 12-36-100 — sale and purchase definition
• Footpress Corporation v. Strickland, 251 S.E.2d 278 (Ga. 1978) — sale-leaseback financing authority cited by the ruling
• Cedars-Sinai Medical Center v. State Board of Equalization, 208 Cal. Rptr. 837, 162 Cal. App. 3d 1182 (1984) — analogous hospital-equipment financing arrangement cited by the ruling
• S.C. Code section 12-3-170 and SC Revenue Procedure 87-3 — PLR authority cited in the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR90-13.pdf

Original ruling text

SC PRIVATE LETTER RULING #90-13

TO:

ABC Company

SUBJECT:

Sale/Leaseback - Financing Arrangement
(Sales Tax)

TAX ANALYST:

Sally Major

REFERENCES:

S.C. Code Ann. Section 12-36-910(A) (Enacted June, 1990)
S.C. Code Ann. Section 12-35-1310(A) (Enacted June, 1990)
S.C. Code Ann. Section 12-36-110 (Enacted June, 1990)
S.C. Code Ann. Section 12-36-120 (Enacted June, 1990)
S.C. Code Ann. Section 12-36-100 (Enacted June, 1990)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request.
Private Letter Rulings have no precedential value and are not intended for
distribution.

Question:
Is the transfer of equipment under the agreement in question from ABC Company to Corporation
C, or the subsequent "lease" from Corporation C to ABC Company, subject to sales and use tax?
Facts:
ABC Company purchased tangible personal property from several vendors. At the time of the
purchase, ABC Company paid sales tax on the purchase price. Subsequently, ABC Company
entered into a lease agreement with another company (Corporation C) whereby ABC Company
"sold" the property to Corporation C and then "leased" the property back from Corporation C.
The agreement, entitled "Lease Agreement B" and dated as of September 28, 1989, contains the
following provisions:

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1. ABC Company retains legal title to the property. (Section 4)

2. The lease is a net lease; therefore, ABC Company bears all expenses associated with the
   property. (Section 5)
3. ABC Company must sell the property to be released from the lease (even at the end of the
   initial term) and can receive some of the proceeds from the sale in certain circumstances.
   (Section 12)
4. The lease allows ABC Company to purchase the property for the "Adjusted Acquisition
   Cost" or its fair market value, whichever is greater. (Section 13)
5. ABC Company bears the burden of loss of the equipment. (Section 15)
6. ABC Company is treated as the owner of the property for income tax, as well as sales and
   use tax purposes. (Section 21)

According to ABC Company, the lease is being treated as an operating lease for financial
statement purposes and a capital lease for federal income tax purposes. Corporation C is a
leasing company and would not be interested in the equipment except for leasing purposes.
Under a capital lease for income tax purposes, the lessee treats the leased item as property owned
by the lessee. The property is recorded as an asset of the lessee and depreciation is deducted
rather than the lease payments. An operating lease is treated as a true lease with the lessee
deducting the lease payments.
Discussion:
Code Section 12-36-910(A) imposes a sales tax "upon every person engaged or continuing
within this State in the business of selling tangible personal property at retail."
Code Section 12-36-1310(A) imposes a use tax "on the storage, use, or other consumption in this
State of tangible personal property purchased at retail for storage, use, or other consumption in
this State, ..., regardless of whether the retailer is or is not engaged in business in this State."
The term "sale at retail" is defined in Code Section 12-36-110, in part, as, "...all sales of tangible
personal property except those defined as wholesale sales." A wholesale sale is defined in Code
Section 12-36-120, in part, as "a sale of tangible personal property to licensed retail merchants,
jobbers, dealers or other wholesalers for resale, and do not include sales to users or consumers."
Under Code Section 12-36-100 the term "sale" is defined as follows:
'Sale' and 'purchase' mean any transfer, exchange, or barter, conditional or otherwise, of
tangible personal property for a consideration including:
(1) a transaction in which possession of tangible personal property is transferred but
the seller retains title as security for payment, including installment and credit sales;

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(2) a rental, lease, or other form of agreement;
(3) a license to use or consume; and
(4) a transfer of title or possession, or both.
In summary, a sale occurs with the transfer of title, possession, or title and possession of tangible
personal property for a consideration.
In the fact situation presented, ABC Company retains legal title to the property (Section 4 of the
agreement), as well as the benefits and burdens of ownership since it bears the burden of loss and
all expenses associated with the property. Additionally, possession of the property never
transfers. ABC Company possessed the property both before and after the transaction with
Corporation C. Therefore, neither legal title nor possession is transferred in the transaction in
question.
Furthermore, for both financial accounting and income tax purposes, the Accounting Standards
Board and the Internal Revenue Service have recognized that some leases are in substance
financing arrangements rather than true leases.
At least two state courts have recognized that a sale-leaseback transaction may be a financing
technique rather than a true sale and lease. Footpress Corporation v. Strickland, 251 S.E.2d 278
(Ga. 1978), Cedars-Sinai Medical Center v. State Board of Equalization, 208 Cal. Rptr. 837, 162
Cal. App. 3d 1182 (1984). Additionally, a number of states have recognized that a lease is
sometimes a financing technique rather than an actual lease. In those situations, the states have
generally taken the position that sales tax is imposed on the initial purchase price rather than on
the lease payments. American Bar Association Sales and Use Tax Handbook, paragraphs 1-502
(California), 12-502 (Hawaii), 13-502 (Idaho), 15-502.3 (Indiana), 16-502 (Iowa), 19-502
(Louisiana), 20-502 (Maine), 24-502.05 (Minnesota), 32-502 (New Mexico), 33-502 (New
York).
The facts in Cedars-Sinai Medical Center v. State Board of Equalization, supra, are similar to the
ABC Company situation. In Cedars-Sinai Medical Center, the Medical Center entered into lease
arrangements in order to obtain alternative financing of hospital equipment. The California
Court of Appeals found tha the transaction was a financing arrangement rather than a sale
transaction and, therefore, not subject to sales tax.
The Medical Center purchased a substantial amount of equipment on which it paid sales tax and
then used the equipment at the medical center. Later the Medical Center determined that it did
not have sufficient funds for an expansion of building and equipment. In order to obtain
alternative financing, the Medical Center entered into an arrangement with several leasing
companies whereby the Medical Center sold hospital equipment to the leasing companies and
then leased the equipment for continued use in the Medical Center.
The California definition of sale is virtually identical to the South Carolina definition. "For
taxation purposes 'sale' includes '[a]ny transfer of title or possession ... in any manner by any
means whatsoever, of tangible personal property for consideration." Cedars-Sinai Medical
Center, supra.
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The California State Board of Equalization contended that there were two transactions subject to
tax: one by the vendor to the Medical Center and a second by the leasing company leasing the
equipment back to the Medical Center. (The sale by the Medical Center to the leasing company
was considered a nontaxable wholesale sale.)
The California Court of Appeals held that the transaction between the Medical Center and the
leasing company was not a sale, but rather a financing transaction. In reaching its conclusion the
Court looked at the following factors:

1. The leasing companies that purchased the equipment had no use for the equipment and
   were not interested in purchasing the equipment.
2. The Medical Center was responsible for the payment of all license fees, assessments, and
   property, sales, use and other taxes imposed by any governmental entity.
3. The Medical Center assumed all risk of loss and liability associated with the equipment
   and for damages for injury or death to persons or property from the use of the property.
4. The Medical Center was required to insure the equipment against all risks of loss or
   damage.
5. The intention of the parties was that the transaction was a financing transaction rather
   than a sale transaction.
   Since the transaction was merely a financing technique, the Court held that no sales or use tax
   was due on the leasing transaction.
   Conclusion:
   The transfer of equipment from ABC Company to Corporation C, and the subsequent lease from
   Corporation C to ABC Company, are not subject to sales and use tax, as the agreement in
   question is merely a financing arrangement rather than an actual lease.

SOUTH CAROLINA DEPARTMENT OF REVENUE
s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman
s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner
s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
October 3
, 1990

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