Did this computer-equipment contract qualify as a financing lease, and how did Texas tax its payments and purchase option?

Plain-English summary

The Comptroller classified the computer-equipment contract as an operating lease rather than a financing lease under Rule 3.294.

That classification made the entire $2,542.53 monthly payment taxable, including its interest component. For 36 payments, the letter calculated $1,941.28 of additional tax beyond the $4,412.90 already stated on the contract, using the 6.125% rate identified in the letter.

If the purchase option was exercised for 10% of the equipment's original cost, sales tax also applied to that purchase price.

Common questions

Was the contract a financing lease? No. The Comptroller said it was an operating lease.

Were separately identified interest charges excluded from tax? No. Rule 3.294(e)(5), as applied in the letter, required tax on interest charged under an operating lease.

Was the purchase option taxable? Yes. Tax applied to the option price of 10% of the original equipment cost.

Are the dollar calculation and rate current? The letter used the contract amounts and 6.125% rate applicable to this 1989 transaction; they are historical facts, not current-rate guidance.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8908L0949D08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller August 25, 1989

Dear ***:

Thank you for your letter of August 8, 1989, concerning the appli-
cation of Texas sales and use tax to the transaction covered under
the accompanying lease contract between CORP A (lessor) and CORP X
(lessee).

The lease is not a financing lease as that term is defined in
paragraph (1) of section (a) of Rule 3.294 - Rental and Lease of
Taxable Items. The lease is an operating lease as that term is
defined in paragraph (2) of that section.

Sales tax will be due on the purchase option (10% of the original
equipment cost). See section (g)(1) of the rule.

Section (e)(5) of the rule requires the lessor to charge sales tax
on interest charges made on an operating lease. This means that
the $2542.53 monthly lease payments are taxable in total which
results in additional sales tax due of $1,941.28. This figure
is the difference in the tax at 6.125% on 36 payments of $2542.53
less the $4412.90 tax amount stated on the contract.

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

If you have any questions or need more information, you may call
toll-free 1-800-252-5555, ext 3-4683. The regular number is
512/463-4600. You may write me at Tax Correspondence, Comptroller
of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence

August 8, 1989

Comptroller of Public Accounts
Capitol Station
Austin, TX 78774

Attn: Tax Correspondence Section

Enclosed you will find a copy of a lease contract between
CORP X (lessor) and CORP A (lessee). The lease is for com-
puter equipment used by CORP A in its business in Dallas,
Texas. Sales tax was paid by CORP A to CORP X at the com-
mencement of the lease.

The lease terms call for the lessor to purchase the equipment
for 10% of the original cost. The lessee, by contract, has the
right to require this purchase if they so choose. If CORP A
purchases the equipment under the terms of the lease, will sales
tax be due on the purchase price (10% of original cost)? Or does
this lease qualify as a finance lease, with no additional sales
tax due.

Please address your answer to me:

Sincerely,