Who owed Texas sales tax when operating-lease payment rights were assigned without a written debt instrument and resold to investors?

Plain-English summary

The requester's arrangement was a taxable assignment of lease paper. Lessors assigned their rights to lease payments to the requester, which resold those rights to investors, but there was no written debt instrument and the investors did not acquire the underlying tangible personal property. The original lessor therefore had to report tax on all remaining operating-lease payments when the assignment occurred. The requester and investors had no tax liability under those facts.

The letter distinguished a nontaxable collateral pledge, where a written debt instrument exists and the lessor continues collecting lease payments and tax. It also distinguished a sale of both an operating lease and title to the property, where the purchaser begins collecting and remitting tax as income is recognized if the full tax has not already been paid.

What this means for you

The tax result turned on what was transferred. Selling payment rights without a debt instrument accelerated the original lessor's tax, while pledging leases as collateral or transferring both the lease and property followed different rules.

Common questions

Who owed tax in the described factoring arrangement? The original lessor, on all remaining operating-lease payments. The requester and investors did not.

Did selling the lease at a discount reduce the lessor's tax? No. The letter said no deduction was allowed for a discounted transfer.

What if the lease was only collateral for a loan? With a written debt instrument, the lessor would continue collecting and remitting tax as lease receipts became income.

What if the lessee later defaulted? The letter said the lessor might be able to claim a bad-debt deduction under Rule 3.302 if the lease was returned.

Citations and references

• 34 Tex. Admin. Code Rule 3.294(h) (taxable assignment, collateral pledge, and sale of lease and property)
• 34 Tex. Admin. Code Rule 3.294(f)(3)(A) (operating-lease reporting period)
• 34 Tex. Admin. Code Rule 3.302 (possible bad-debt deduction)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8710L0850C07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller October 14, 1987

Dear **:

Thank you for your letter inquiring about the taxability of the assign-
ment of leases.

The tax consequences for the assignment of leases are discussed below.

"Taxable Assignment" - defined in Rule 3.294(h)

A lessor may factor or assign to a third party the lessor's right
to receive all lease payments due under the agreement with the
lessee. At the time the lease agreement is factored or assigned,
tax is due on all remaining lease payments. The lessor is
responsible for reporting the tax to the Comptroller's department
at the time the lease agreement is assigned or factored. No
deduction in the amount of tax due and payable by the lessor is
allowed if a transfer at a discount is made to a third party.

This would only apply to operating leases because tax is due on financing
leases when the lessee takes possession of the goods or when the first
payment is due. The rationale for the Taxable Assignment is found in
rule
3.294(f)(3)(A). "Under an operating lease, tax must be reported in the
period in which the rental receipts are considered income under the
lessor's
method of accounting."

When a lessor factors or assigns a lease he receives payment and so tax
is
due in that period. If the lessee defaults in payment to the assignee
and
the lease is thrown back on the lessor, he may be able to claim a bad
debt
deduction as described in Rule 3.302 attached.

Non-Taxable Assignment - is also defined in rule 3.294(h) as
the assignment or pledge of lease contracts by a lessor to a third
party as loan collateral." In this instance there is a written
debt instrument between the lessor and the creditor. The lessor
would continue to collect the lease payments and tax from the
lessee. The lessor would remit tax to the state in the period in
which he considers the receipts as income based on his method of
accounting. The creditor is not involved other than to receive his
payments from the lessor.

"Sale of Lease and Property" - Occasionally a lessor may sell both
an operating lease and title to the leased property to a third
party. Assuming that the full amount of tax due over the life of
the lease has not already been paid by the lessor to the state, the
third party purchaser must begin collecting and remitting tax as he
recognizes the income under his accounting method. He must have a
sales tax permit and can give the original lessor a resale
certificate in lieu of tax. In this case the original lessor is
not responsible for remitting tax on the remaining lease payments.

During our telephone conversation, you indicated that leases assigned to
you
by the lessors are resold to investors.

This is a sale of the lease (paper) only with no written debt instrument.
Therefore, it is a "Taxable Assignment". The lessor should pay the tax
as
described under that heading. Your firm and the investors have no tax
liability. The investors are not considered to have ownership of the
tangible personal property. Rule 3.294 is enclosed.

Since you will not owe any tax based on the above arrangement, there is
no
need to be permitted for sales tax in Texas. You should issue a resale
certificate in your company's name, address, signature, location of the
property to be resold and your sales tax permit or registration number
issued
by your home state. An invoice describing the taxable item purchased and
showing exact street address or office address from which the taxable
item
will be resold must be attached to the resale certificate.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
Eddie C. Washington
Tax Policy Division