When was Texas sales tax due on a financing lease, and when could separately stated interest be excluded?

Plain-English summary

The Texas Comptroller said financing leases were considered sales under the referenced Rule 3.294.

Effective October 2, tax became due when the purchaser took possession of the property or when the customer's first payment became due, whichever happened earlier.

Tax applied to the entire lease amount unless the lessor separately stated either the interest rate or the actual amount of interest charged in the lease.

What this means for you

Lessors using financing leases

The historical tax point was the earlier of possession and the first payment due date.

Businesses documenting lease interest

The letter tied exclusion of interest from the fully taxable lease amount to separately stating the interest rate or actual interest charge in the lease.

Accountants and tax professionals

The source gives October 2 as the effective date but does not identify a year in that sentence. Verify the current version of Rule 3.294 and current lease-tax timing.

Common questions

Q: How did the letter classify a financing lease?
A: As a sale.

Q: When was tax due?
A: At possession or when the first payment became due, whichever was earlier.

Q: Was the entire lease amount taxable?
A: Yes, unless the lease separately stated the interest rate or actual interest amount.

Citations and references

• Rule 3.294 (financing and operating leases, as cited in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8411L0621E03

Original ruling text

November 1, 1984

Dear ***:

Thank you for your recent letter regarding financing and operating
leases.

The terms financing and operating lease are defined in the attached Rule
3.294.

Financing leases are considered sales.

Effective October 2, tax is due at the time the purchaser takes
possession of the property or when first payment is due from the
customer, whichever is earlier. Tax is due on the entire lease amount
unless the lessor separately states in the lease either the interest rate
or the actual amount of interest to be charged.

This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.

Please feel free to contact me if you have additional questions. You may
call toll free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Tax Policy
Tax Administration Division