When was tax due on financing and operating leases, and could an equipment-acceptance certificate establish possession?

Plain-English summary

For the described financing leases, the taxable base included equipment cost, interest or profit over the contract term unless interest was separately stated, and the end-of-term balloon payment. Tax was due when the lessee received the equipment or the first payment became due, whichever occurred earlier. A prepayment penalty on early termination was taxed when billed.

Ordinary rentals or payments and the balloon payment at the end were not taxed again because they had already been included in the initial taxable base.

For non-motor-vehicle operating leases, cash-basis taxpayers recognized income as payments became due, while accrual-basis taxpayers recognized income and paid tax at the beginning of the lease. Financing- and operating-lease tax had to be filed and paid by the 20th of the month after the transaction period.

Because equipment shipped directly from vendors to lessees, the lessor asked to report based on its receipt of an equipment-acceptance certificate. When the first payment was not due until after possession, the certificate could be used as evidence of when the lessee received the property. It created only a rebuttable presumption; the Comptroller could look behind it at other facts.

Common questions

What came first for financing-lease tax timing? Possession or the first payment due. Was separately stated interest included? The letter said interest was included unless separately stated in the agreement or billings. Was the final balloon payment taxed again? No. Was an acceptance certificate conclusive? No; it was rebuttable.

Citations and references

The reproduced letter cites no numbered statute or rule and refers only to enclosed rules that are not reproduced.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8502L0616C14

Original ruling text

February 4, 1985

Dear ***:

Thank you for your recent letter to ***. I have been asked
to respond. Your facts are restated as follows:

We are a corporation principally engaged in the business of basing
personal property. Consequently, some of our leases will meet the
definition under current Texas law of a "Financing Lease." The
following summarizes my understanding, pursuant to our discussion,
of how we should compute the tax on these "Financing Leases."

Cost of equipment per vendor invoice + interest or profit to be realized
over contract term' + balloon payments at end of lease term = Taxable base
X Tax rate = Tax to be paid at time of first payment or date equipment
is received by lessee, whichever is earlier. (We have not yet resolved how
our lessee should reimburse us).

Items included in Contract ** per our financial statements.

Interest is included unless rate is separately stated on lease agreement
or separately stated on billings.

So, on "Financing Leases", the following events apparently trigger
the reporting tax:

1) Receipt of equipment or first payment, and 2) billing of prepayment
penalties on early termination (collect tax at time of billing).

Response: You are correct.

Rentals or payments are not subject to taxation and neither is the
"balloon payment" billed at the end of the lease (since it has already
been taxed).

Response: You are correct.

For leases other than "Finance Leases", tax is reported on
rentals at the time each rental is billed and on the sales price
at the time the equipment is sold (except for motor vehicles
where the tax is paid to the vendor or registrar at time of
purchase and to the seller at time of sale).

Response: Tax is due on non motor vehicle operating leases
based on your method of accounting. If you are on a cash
basis you would recognize the income as the payments are due.
Accrual basis taxpayers recognize the income and pay tax at
the beginning of the lease.

On both financing and operating leases, tax is due to be filed
and paid by the 20th of the month following the period of the
transaction. I am enclosing appropriate rules for your reference.

We have a problem with reporting tax at the exact time our
lessee receives the equipment and would like your opinion on
whether we can report the tax at a different time. All the
equipment we order from vendors on behalf of our lessees is
shipped directly from the vendor to the lessee. We do not
receive notification of the shipment until the lessee sends us
an "equipment acceptance certificate" (blank one enclosed)
which is an authorization for payment to the vendor.
Therefore, it is virtually impossible for us to report the sales
tax any earlier than the date the equipment acceptance
certificate is received. Would it be possible for us to report
on this basis? Please advise.

Response: Under a financing lease, tax must be collected at
the lime the purchaser takes possession of the property or
when first payment is due from the customer, whichever is
earlier. If the first payment is not due until after the lessee
receives the property, the equipment acceptance certificate
may be used. However we cannot be bound from looking "behind" the
certificate at other facts. The certificate merely constitutes
rebuttable presumption as to when the lessee takes possession.

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

You may write to the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division