Was XYZ Corporation's equipment sale-and-leaseback a taxable lease or a nontaxable financing arrangement?

Plain-English summary

The South Carolina Department of Revenue treated XYZ Corporation's proposed equipment sale-and-leaseback as a financing arrangement, not a taxable sale followed by a true lease. Although the customer would transfer formal title to XYZ, the customer would keep possession and the practical rights and duties of ownership.

The ruling drew a general line: a true sale-and-leaseback that is a lease for income-tax purposes is subject to sales tax, while a transaction that is really a secured loan for income-tax purposes is not. On the represented facts, XYZ's arrangement fell on the loan side.

Why the transaction was financing

The customer already owned and used the equipment, had paid the applicable sales or use tax when it acquired the property, and wanted cash secured by the equipment. Under the proposed documents:

• the customer would transfer title to XYZ for cash equal to fair market value but never surrender possession;
• the “rent” schedule matched principal-and-interest amortization on the cash advance;
• the customer would keep the risk of loss and remain responsible for maintenance, insurance, and taxes;
• early termination required payment of accrued charges plus the unpaid principal amount;
• the customer retained the benefit of sale proceeds above the fixed option amount and bore part of any shortfall; and
• both parties would report the arrangement as a loan for federal income-tax purposes, with the customer continuing depreciation and XYZ reporting interest and principal repayment.

The Internal Revenue Service had also informed XYZ that the transaction was a loan for federal income-tax purposes.

Title alone did not create a sale

South Carolina's definition of “sale” included transfers of title or possession for consideration. But the Department said a bare title transfer used as a security interest was not enough when the customer retained possession and all ownership rights and responsibilities.

The ruling compared the arrangement to a borrower giving a vehicle title to a lender as collateral: the lender may hold title evidence, but the borrower remains the owner and remains responsible for the property.

Common questions

Q: Are all sale-and-leaseback transactions exempt from South Carolina sales tax?

A: No. The ruling says the substance controls. A true lease for income-tax purposes is taxable; a secured-loan arrangement is not.

Q: What facts made this arrangement look like a loan?

A: The customer kept possession, depreciation, risk of loss, maintenance, insurance, and tax responsibility, while payments tracked principal and interest and title functioned as security.

Q: Did the formal bill of sale make the transaction taxable?

A: Not on these facts. The Department concluded there was no real transfer of possession or ownership rights to XYZ.

Q: Can another financing company rely on PLR 99-2?

A: No. The opinion expressly has no precedential value and may be relied on only by its recipient for the covered transaction.

Citations and references

• S.C. Code Ann. § 12-36-910(A) (sales tax on retail sales)
• S.C. Code Ann. § 12-36-100 (definition of “sale”)
• S.C. Code Ann. § 12-36-110 (definition of retail sale)
• S.C. Code Ann. § 12-36-120 (definition of wholesale sale)
• SC Private Letter Ruling #90-13 (earlier consistent Department analysis cited in the ruling)
• Cedars-Sinai Medical Center v. State Board of Equalization, 208 Cal. Rptr. 837 (1984)

Subject

Sale & Lease v. Financing Arrangement

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR99-2.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214
SC PRIVATE LETTER RULING #99-2

TO:

XYZ Corporation

SUBJECT:

Sale & Lease v. Financing Arrangement
(Sales Tax)

DATE:

August 30, 1999

REFERENCE:

S. C. Code Ann. Section 12-36-910(A) (Supp. 1998)
S. C. Code Ann. Section 12-36-100 (Supp. 1998)
S. C. Code Ann. Section 12-36-110 (Supp. 1998)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1998)
SC Revenue Procedure #97-8

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it is
issued and only for the transaction or transactions to which it relates. A Private
Letter Ruling has no precedential value.

Question:
In the subject transaction, will XYZ Corporation’s Commercial Equipment Financing Division
(“XYZ”) purchase tangible personal property from a South Carolina customer (“customer”) and
subsequently lease the property back to that customer, or is the proposed transaction a financing
arrangement, therefore, not subject to the sales tax?
Conclusion:
In the Department’s opinion, whether a sale followed by a leaseback is subject to sales tax
depends upon the substance of the transaction. If the leaseback is a true lease, i.e. a lease for
income tax purposes, it is subject to sales tax. If the sale and leaseback is in substance a financing
arrangement, i.e. a loan for income tax purposes, it is not subject to sales tax.
The Department concludes that the proposed transaction between XYZ and Customer is a
financing arrangement for income tax purposes and is, therefore, not subject to the sales tax.
Facts:
XYZ’s Customer currently owns tangible personal property in South Carolina that is used in the
Customer’s business. Customer claims depreciation for financial reporting and for federal and

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state income tax purposes. Customer paid all applicable sales or use tax on the acquisition of the
property.
The Customer desires to obtain money using the property as security, but does not want to incur
indebtedness that will affect its balance sheet for financial reporting purposes. XYZ desires to
advance the money to the Customer and require an appropriate security interest in the property. To
achieve these business purposes, the Customer and XYZ will do the following:

1. Customer will transfer title to the property to XYZ via a bill of sale and XYZ will transfer
   money to Customer equal to the property’s fair market value.
2. Immediately after transfer of title to XYZ, and without Customer surrendering possession of
   the property, XYZ will “lease” the property back to Customer.
3. Payments due under the “lease” will correspond to a principal and interest amortization table
   for a loan of an amount equal to the cash transferred to Customer from XYZ at the rate of
   interest.
4. At the expiration of the “lease” term, Customer may either (1) extend the term of the
   agreement for increments of one year to a maximum of 5 years; (2) “purchase” the property
   back from XYZ for a predetermined fixed amount, which will return to XYZ in the form of a
   purchase price an amount equal to the unamortized portion of its original advance to the
   Customer; or, (3) decline to “purchase” the property and surrender it to XYZ , in which case
   the property will be sold to a third party. If the property is sold for more than the amount
   stipulated in the “lease,” XYZ will receive only the lease option price and Customer will
   receive the additional amount. If the property is sold for less than the lease option price, XYZ
   will receive the proceeds and Customer will pay some (but not all) of the difference to XYZ .
5. In the event of a voluntary or involuntary termination of the “lease” term, Customer must pay
   XYZ any accrued and unpaid “rent,” late charges and interest, plus the termination value
   (unpaid principal) under the “lease,” which is established according to the amortization
   schedule noted in 3 above.
6. Under the terms of the “lease,” Customer bears all risk of loss with respect to the property and
   is liable for all maintenance, insurance, and taxes due on the property.
7. For federal income tax purposes, Customer and XYZ must and will treat these transactions as
   a loan from XYZ to Customer secured by the property. Customer will continue to take
   depreciation deductions on the same basis as before these transactions and will treat a portion
   of the payments under the “lease” as interest, in accordance with the amortization schedule.
   XYZ will treat the lease payments as part interest income and part principal repayment in
   accordance with the amortization schedule. The Internal Revenue Service has informed XYZ
   that, for federal income tax purposes, the transaction in question is a loan.
   XYZ has asked if the sales tax is due on the described transaction.

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Discussion:
Code Section 12-36-910(A) imposes the sales tax “upon every person engaged or continuing
within this State in the business of selling tangible personal property at retail.”
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:
...any transfer, exchange, or barter, conditional or otherwise, of tangible personal
property for a consideration including:
(1)

any transaction in which possession of tangible personal property is
transferred but the seller retains title as security for payment,
including installment and credit sales;

(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, for purposes of the sales tax, a “sale” takes place when there is a transfer of tangible
personal property for a consideration. Transfer of the property can occur in different ways,
including transfer of title to or possession of the property.
We first consider whether possession of the property in question transfers to XYZ.
An examination of the facts reveals that possession does not transfer. The Customer currently has
possession of the property and will retain possession of the property. As support for this position,
fact number two above states “without Customer ever surrendering possession of the property,
XYZ will lease the Property back to Customer.” Further, the Master Lease Agreement provides
that “Customer is and will remain in possession of the Property at all times before and during the
lease term.”
Based on facts number one and two above, title will transfer to XYZ. However, because Customer
will retain all indicia of ownership (i.e., risk of loss and responsibility for the equipment’s
maintenance, insurance, and taxes), transfer of the property to XYZ will not occur. “[T]ransfer of
title” is used in Section 12-36-100(4) as an example of a “transfer, exchange, or barter” of tangible
personal property. In the opinion of the Department, it is not intended to convert the giving of a
security interest into a “sale.” As stated above, there must be a transfer of tangible personal
property for there to be a sale for sales and use tax purposes. The mere transfer of title as an

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of title as an indication of a debtor-creditor relationship does not constitute a “sale” as
contemplated under the sales and use tax laws. There must be a transfer of the ownership rights in
the property. In this instance, there is no transfer of ownership rights to XYZ.
The proposed transaction is not unlike someone surrendering the title to their vehicle to a financial
institution as evidence that the vehicle is collateral on a loan. While the financial institution may
have possession of the title, the institution does not take ownership of the vehicle. The borrower
retains ownership and is still responsible for insurance, maintenance, taxes, etc. on the vehicle.

The Alabama Department of Revenue, in Revenue Ruling No. 95-007, addressed this issue. The
facts in that ruling are substantially the same as those presented in this document. In ruling that the
transaction in question was a financing arrangement, the Alabama Department of Revenue
reasoned:
Based upon the particular facts of this case, the contemplated transactions between
Corporation “A” and its Customers do not qualify as a sale under Ala. Code Section 40-231 (1993 Replacement Volume), as there is no true transfer of ownership of the
property.....At all times, the Customer owns and controls the possession of the Property
subject only to Corporation “A’s” security interest in the property. The substance of these
transactions is that of a non-taxable financing arrangement or loan, and there is no sales,
use or lease tax applicable.
Alabama used the same above reasoning concerning transfer of title in Revenue Rulings No. 97013 and 98-008.
Likewise, in Cedars-Sinai Medical Center v. State Board of Equalization [California], 208
Cal.Rptr. 837 (1984), the Court of Appeal, Second District, Division 7, California, dealt with the
issue of transfer of title for use tax purposes.
In ruling that certain transactions between Cedars-Sinai were financing arrangements, as opposed
to sales of tangible personal property, the court reasoned:
For taxation purposes ‘sale’ includes ‘[a]ny transfer of title or possession.....in any manner
or by any means whatsoever, of tangible personal property for a consideration.’ (Rev. &
Tax. Code, Section 6006, subd. (a).)....Plaintiff [Cedars-Sinai] entered into the agreements
with the leasing companies in order to obtain alternative financing of the equipment. That
such was the object of the agreements, and the mutual intention of the companies, is shown
by reasonable inference....that the companies....had no use for the equipment and were not
interested in purchasing it from plaintiff. Indeed, following execution of the agreements,
the equipment remained at plaintiff’s facility and was used by plaintiff there, just as it had
been used after plaintiff purchased it from the vendors. Under the lease agreements
between plaintiff and the companies plaintiff was responsible for payment of all license
fees, assessments, and property, sales, use and other taxes imposed....upon any of the
equipment. Plaintiff assumed all risk of loss and liability in the operation, maintenance and
storage of the equipment, and for damages for injury or death to persons or property

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death to persons or property arising therefrom. Plaintiff was required to keep the
equipment insured against all risks of loss or damage as are customarily insured against by
companies owning equipment of similar character and engaged in a business similar to that
engaged in by plaintiff. The foregoing circumstances and provisions are inconsistent with a
‘sale’ of the equipment by plaintiff to the leasing companies and indicate that despite
plaintiff’s formal transfer of title to companies, plaintiff remained owner of the equipment.
(Emphasis added.)
Based on the facts presented and the above discussion, the proposed transaction between XYZ and
Customer will not be subject to the sales tax. There is neither a transfer of possession nor a
transfer of ownership between the two parties.
The transaction in question is merely a financing arrangement between XYZ and Customer, to
which the sales and use taxes do not apply. The question of sale and leaseback versus a financing
arrangement has been addressed by the department before in SC Private Letter Ruling #90-13. The
conclusions in this instance are consistent with that ruling.
Further, it is an accepted rule of statutory construction that administrative interpretations of
statutes by the agency charged with their administration and not expressly changed by the
legislative body are entitled to great weight. Marchant v. Hamilton, 279 S.C. 497, 309 S.E.2d
781(1983). When as in this case, the construction or administrative interpretation of a statute has
been applied for a number of years and has not been changed by the legislature, there is created a
strong presumption that such interpretation or construction is correct. Ryder Truck Lines, Inc. v.
South Carolina Tax Commission, 248 S.C. 148, 149 S.E.2d 435 (1966); Etiwan Fertilizer
Company v. South Carolina Tax Commission, 217 S.C. 354, 60 S.E.2d 682 (1950). See Statutes
Key Nos. 219(3) & 223.5(2).
Based on the above, the transaction in question is a financing arrangement and is, therefore, not
subject to the South Carolina sales tax.

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