Were lease payments taxable in a sale-leaseback of equipment the customer had used for years and already paid Texas tax on?

Plain-English summary

A financing company would buy equipment from a customer and lease it back. The customer had used the equipment for three to five years and paid Texas tax when originally purchasing it.

The customer would keep possession throughout, remain responsible for maintenance, property taxes, insurance, and risk of loss, and could regain title at the end for less than 10% of the equipment's value.

On those facts, the Comptroller treated the sale and leaseback as a financing arrangement rather than a taxable lease. Tax was not due on the lease payments.

Both lessor and lessee had to retain documents verifying the stated facts. The letter cautioned that other facts, even similar ones, could produce a different result.

Common questions

Were the lease payments taxable? No, on the exact facts stated.

Had tax already been paid on the equipment? Yes.

Who kept possession and bore the operating burdens? The customer.

Was documentation required? Yes, from both parties.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8910L0961G05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller

October 30, 1989

VIA FAX
Dear ****:

Thank you for your recent letter which is restated in part with response
below.
Facts:

• Fleet will purchase equipment from customer.
• Customer has used the equipment for 3 to 5 years and paid
  Texas tax on the equipment at the time of purchase.
• Fleet will lease the equipment back to customer by means
  of a financing lease. Customer will pay Fleet less than ten
  percent of the value of the equipment at the end of the lease
  term and will regain title to the equipment.
• The equipment will remain in customers possession from the
  time of sale to the time of re-purchase.
• Customer will be responsible for all maintenance, property
  taxes, insurance, and bear the risk of loss.

Response:

Tax is not due on the lease payments. Since the customer paid tax on the
equipment at the time of purchase, the subsequent sales and lease back will be
viewed as a financing arrangement. Both lessor and lessee must retain
documents to verify the above fact
situation.

This opinion is rendered on the above facts. Other facts, though
similar, may yield different results.

Feel free to call or write me if you have questions. You can reach me by
calling toll free 800-531-5441 or FAX (512) 475-0900.

Sincerely,
Al Van Allen
Taxability Section
Legal Services Division