Were payments taxable when an equipment-financing arrangement was labeled a lease for accounting purposes but operated as a loan?

Plain-English summary

A business proposed refinancing equipment on which it had already paid sales tax. It planned to retain tax ownership and book the transaction as a loan, while seeking operating-lease treatment for accounting purposes. Title would not transfer, and the financing party described as the “lessor” would never have title to or possession of the equipment.

The Comptroller treated the arrangement according to those facts as a loan, so the loan payments were not taxable. Calling the transaction a lease for accounting purposes did not control its sales-tax treatment.

The letter explained that a lease is treated as a sale for sales-tax purposes and quoted a Tax Code provision, printed there as “151.0050 (1),” under which a sale or purchase includes a transfer of title or possession of tangible personal property. Because the supposed lessor did not receive or convey either title or possession, the Comptroller would not treat the described transaction as a lease.

What this means for you

The substance of an equipment-financing arrangement matters more than its accounting label. This ruling addressed a structure with no transfer of title or possession. It did not approve a different transaction in which those facts actually change.

Common questions

Were the described loan payments subject to sales tax? No.

Why was the arrangement not treated as a lease? The financing party never had title to or possession of the equipment and conveyed nothing to the business.

Did operating-lease accounting treatment determine the tax result? No. The letter relied on the actual transaction facts.

Are leases generally sales for Texas sales-tax purposes? The letter said yes and quoted the provision printed as “151.0050 (1),” defining a sale or purchase by reference to a transfer of title or possession.

Did the letter decide a true sale-leaseback involving actual title transfers? No. The taxpayer asked about that variation, but the response's holding was expressly based on the described loan facts with no transfer of title or possession.

Citations and references

• Tex. Tax Code 151.0050(1) (citation as printed in the letter; sale or purchase includes a transfer of title or possession of tangible personal property)
• FASB-13 (as cited in the letter; mentioned as the accounting reason for seeking operating-lease treatment)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9102L1078C12

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller February 20, 1991

Dear ****:

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

Facts: The intent to the parties and the substance of the transaction is
a refinancing. Our client has already paid tax on the equipment at the time of
its purchase. For tax purposes they will continue to be regarded as the owner
of the equipment and the transaction will be booked as a loan. As their tax
ownership does not change, they will continue to claim any tax benefits of
ownership. The goals of this arrangement are to refinance the equipment in a
form where our client will retain ownership for tax purposes and will qualify
as an operating lease for accounting purposes under FASB-13. As a
loan/refinancing we do not believe this transaction is taxable.

On January 25, 1991, I FAXED you a request for additional information and
asked the following questions.

Your letter leads me to believe that your client has title to the
equipment. Is this correct?

The word tax is used five times throughout the letter apparently
referring initially to sales tax and the remaining four times to Federal Income
Tax. Is this correct?

Would you please provide me with a copy of the lease to review?

You responded as follows. This letter will confirm our conversation
relating to my most recent request for a letter ruling on a proposed
sale/leaseback transaction. In answer to your questions, title to the
equipment will not be transferred. However, we would like to address in your
response whether a simultaneous title transfer to the lessor and back to the
lessee as a sale/leaseback would change the result.

Facts Continued: The term taxes used in my January 10th letter (copy
enclosed) refers to federal income tax treatment. We do not have a copy of the
lease to provide you because this is a prospective transaction. (Note: In a
subsequent conversation you told me that the first reference to tax referred to
your client's payment of sales tax.)

Response: Assuming that your client is taking out a loan on their
equipment, the loan payments are not taxable. This has been confusing because
the transaction is not actually a lease of equipment as you ask me to believe.
In neither situation does the "lessor" convey anything to the "lessee".

As you know, leases are considered to be sales for sales tax purposes.
Tax Code 151.0050 (1) defines sale or purchase to mean "a transfer of title or
possession of tangible personal property."

You say that your client will treat this transaction as a refinancing of
the equipment. They will book the transaction as a loan, and the person you
call the "lessor" will never have title to or possession of the equipment. I
had asked you about this earlier and you said there were accounting benefits to
showing the transaction as a lease rather than a loan. I am sure you are right
about that, but given the facts, I am not able to treat the transaction as a
lease.

This opinion is based on the facts you presented. Other facts, though
similar, may yield different results.

If you have questions or need more information, please call feel free to
call me. My direct line number is 512463-4680 (FAX (512) 475-0900). You may
write to me care of Tax Administration Division.

Sincerely,
Al Van Allen
Tax Administration Division