Did assigning or factoring equipment leases accelerate Texas sales tax, and who remained liable?

Plain-English summary

For a financing lease, the letter said tax applied to the entire sales price, including all lease payments, when the lessee took possession or the first payment became due, whichever occurred first.

For an operating lease, assigning or factoring the right to receive payments generally made tax due on all remaining lease payments. The exception was an assignment serving as loan collateral. Because the requester said these assignments were loan collateral, and assuming cash-basis accounting, tax could continue to become due as the payments were received.

The lessor remained a retailer and was ultimately responsible for collecting and paying the tax. An earlier letter contemplated allowing the investor to remit tax directly only under a signed agreement making the lessor responsible if the investor failed to pay, and only after review of the actual agreement; the later Policy Committee follow-up confirmed the lessor's ultimate responsibility.

Common questions

When did tax become due on a financing lease? On the full sales price when possession transferred or the first payment became due, whichever was earlier.

Did assigning an operating lease accelerate tax on remaining payments? Generally yes, unless the assignment was made as loan collateral.

What happened under the stated loan-collateral and cash-basis facts? Tax continued to become due as lease payments were received.

Who remained ultimately liable for collection and payment? The lessor, as retailer.

Citations and references

• Section 151.007(a)(2) — identified in the source as addressing the taxability of interest.
• "Section 141.044" — cited in the source for financing-lease timing; the reproduced text appears exactly this way.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8508L0727A01

Original ruling text

August 20, 1985

Dear ***:

This is a follow-up to my letter of July 29. Members of our Policy Committee
have read your letters and agree that you as lessor are a retailer and are
ultimately responsible for collection and payment of the tax.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at
the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division

July 29, 1985

Dear ***:

I have reviewed your recent letters and appreciate your arguments.
However, two points that you attribute to our policy are simply
legislative enactments reflected in our rule.

Section 151.007(a)(2) deals specifically with the taxability of interest.

Section 141.044 requires a lessor to collect sales tax on the entire
sales price, including all lease payments, of a financing lease at the
time the lessee takes possession of the property or when the first
payment is due whichever is earlier.

If you wish to have either of these changed you would need to work thru
your legislator.

Regarding operating leases, we have ruled that if a lessor factors or
assigns his right to receive lease payments to a third party that tax is
due on all remaining lease payments unless the assignment is made as
loan collateral. In our phone conversation, you said that the
assignments were in fact loan collateral, therefore, assuming a cash
basis of accounting, tax would continue to be due as the payments are
received.

By law you as lessor are a retailer. As such you are ultimately
responsible for collection and payment of the tax. It is difficult
for me to see how the state can enforce collection of the tax from
an assignee in the event of default.

If you were not ultimately liable, the states' interests would not be
adequately protected. however, I am referring your request (not to be
liable in the event of tax nonpayment by an investor) to our Policy
Committee. Due to vacations, the Policy Committee will not meet again
for several weeks. I am sorry for any inconvenience this may cause you.

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

If you have any questions or need more information, please call us at
1-800-242-5555 toll free from anywhere in Texas. you may write us at
the Tax Administration Division.

Sincerely,

Tax Administration Division

July 2, 1985

Dear ***:

Thank you for your recent letter to ***. I have been asked to
respond.

As I understand the situation, you make operating leases of equipment and
then assign the leases at a discount to an investor. In your assignments
the assignee has no recourse against you in the event of default by the
leasee. His recourse is solely against the lease and the equipment but you
retain title to the equipment.

At the time a lease is assigned, tax is due on all remaining lease payments
unless the lease is assigned as loan collateral. Assuming that the lease
is assigned to the investor as loan collateral, we will allow the investor
to remit the tax directly to the state only if there is an agreement signed by
both parties that in the event of nonpayment of tax by the investor, you will
be responsible for payment.

Before giving final approval to this we would want to review the actual
agreement signed by both parties and have it reviewed by our legal staff.

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

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

Sincerely,

Tax Policy Section
Tax Administration Division