A company already owns and has paid tax on computer equipment. It then transfers title to a lender for cash (roughly 10 times the equipment's fair market value) and simultaneously leases the same equipment back, keeping possession, depreciation for federal income tax purposes, and all the risks and costs of ownership. Are the lease payments subject to Texas limited sales tax?

Plain-English summary

A borrower already owned computer equipment it had bought and paid tax on. Later, the borrower and an unrelated lender executed a "Bill of Sale" transferring title to the equipment for a price roughly 10 times the equipment's actual fair market value, and simultaneously signed an "Equipment Leasing Agreement" for the same equipment. Throughout, the borrower kept possession and use of the equipment, remained responsible for maintenance, property tax, insurance, and risk of loss, and — for federal income tax purposes only — kept title so it could keep depreciating the equipment. The total lease payments equaled the funds advanced under the Bill of Sale plus interest, and at the end of the lease, the lender had a "put option" (forcing the borrower to pay a set amount, based on funds advanced, and take back title) while the borrower had a matching "call option" to buy the equipment back for that same amount.

The Comptroller ruled that these lease payments are not subject to Texas limited sales tax. Because the borrower never truly gave up possession, risk of loss, or (for income tax purposes) title, and because the "sale" and "buyback" prices were tied to the funds advanced rather than to the equipment's fair market value, the transaction was treated as a nontaxable financing arrangement — not a taxable financing lease of tangible personal property. The Comptroller compared it to the arrangement discussed in Bullock v. Citizens National Bank of Waco.

What this means for you

Businesses considering a sale-leaseback for financing

If you already own equipment on which you've paid tax, and you're looking to raise cash by "selling" that equipment to a lender and leasing it back, this letter shows the Comptroller will look past the sale/lease labels to the economic substance of the deal. Factors that pointed toward a nontaxable financing arrangement here included: the "sale" price and lease payments were tied to funds advanced (not fair market value), the borrower retained possession and all the practical burdens and benefits of ownership (maintenance, insurance, property tax, risk of loss), the borrower kept title for federal income tax depreciation purposes, and the end-of-lease put/call options were structured so the borrower could never actually walk away without repaying the full amount advanced.

Lenders and lessors structuring equipment-backed financing

The letter suggests that structuring a transaction as a sale/leaseback rather than a conventional secured loan does not, by itself, create sales tax exposure on the resulting payments — what matters is whether the substance is really a financing arrangement (a disguised loan secured by the equipment) rather than a genuine lease of tangible personal property.

Accountants and tax professionals

This letter is a useful illustration of the multi-factor, facts-and-circumstances approach the Comptroller uses to distinguish a taxable financing lease from a nontaxable financing arrangement: prior ownership and use, retention of possession, risk of loss and title (for income tax purposes), pricing tied to funds advanced rather than fair market value, and the practical inability of the "borrower" to escape repayment obligations.

Anyone relying on this letter

This ruling turns on a specific, detailed set of facts supplied by one taxpayer, and the Comptroller explicitly noted the opinion was rendered without reviewing the actual bill of sale or lease agreement. Different, even similar, facts could lead to a different answer.

Common questions

Q: Are payments under a sale-leaseback financing arrangement always exempt from Texas sales tax?
A: Not automatically. In this letter, the Comptroller found the transaction was not a taxable financing lease of tangible personal property, but a nontaxable financing arrangement — based on specific facts including retained possession, risk of loss, and title (for income tax purposes), and pricing tied to the funds advanced rather than fair market value. A differently structured deal could come out differently.

Q: Does it matter that the borrower had already paid sales tax on the equipment before the sale-leaseback?
A: Yes — the Comptroller specifically noted the borrower had already paid tax on the equipment, used it, and never relinquished possession, risk of loss, or (for income tax purposes) title, as part of what made this a financing arrangement rather than a new taxable lease.

Q: What was the significance of the "sale" price being about 10 times the equipment's fair market value?
A: It supported the conclusion that the Bill of Sale wasn't a real sale at fair market value, but rather a mechanism to advance financing, with repayment (via lease payments and the put/call options) keyed to the amount advanced rather than to what the equipment was actually worth.

Q: What case did the Comptroller rely on in reaching this conclusion?
A: The letter cites Bullock v. Citizens National Bank of Waco as discussing a similar nontaxable financing arrangement.

Q: Can this taxpayer's counterparties or other businesses rely on this specific letter for their own sale-leaseback deals?
A: No. Texas STAR letter rulings bind only the taxpayer to whom they were issued. The Comptroller here expressly said the opinion was based on the facts presented and without reviewing the actual bill of sale and lease agreement, and that different, though similar, facts might lead to a different answer.

Q: Does this ruling mean sale-leaseback arrangements are never subject to sales tax in Texas?
A: No. This letter addresses one specific fact pattern where substance-over-form analysis pointed to a financing arrangement, not a lease. A genuine sale followed by a genuine lease of tangible personal property at fair market terms could be taxed differently.

Citations and references

• Bullock v. Citizens National Bank of Waco — cited as discussing a similar nontaxable financing arrangement. No statute or administrative rule citation appears in the letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1181D12

Original ruling text

July 1, 1992

Dear **:

Thank you for your recent letter and for the additional information you
provided on the telephone. As I understand the given facts:

1. Your client ("Borrower") bought, paid tax on and used certain computer
   equipment in its business.

2. Some time later, with an unrelated company ("Lender"), Borrower executed a
   "Bill of sale" transferring title to the equipment in exchange for $z, an
   amount roughly 10 times the actual fair market value of the equipment.

3. Borrower retained title for federal income tax purposes only, meaning
   Borrower could continue to depreciate the equipment.

4. Lender simultaneously executed an "Equipment Leasing Agreement" with
   Borrower.

5. The total amount due under the lease equals the amount of funds advanced
   under the Bill of Sale, plus interest.

6. Borrower has retained possession of and used the equipment throughout the
   course of these transactions.

7. Borrower remains responsible for maintenance, property tax, insurance, risk
   of loss, and other risks and benefits of ownership of the equipment.

8. Under the lease, Borrower has the option to substitute for the computer
   equipment other TPP whose value exceeds 30% of the amount originally funded.

9. Lender has a "put option" at the end of the lease pursuant to which Lender
   may require Borrower to pay $x (an amount based solely on the amount of funds
   advanced and unrelated to the fair market value of the equipment) and take back
   title to the equipment.

10. Borrower has a "call option" permitting it to buy the equipment at the end
    of the lease for $x.

11. The put and call options ensure that Borrower cannot terminate its
    obligation to repay Lender the full amount of funds advanced. Presumably, the
    obligation to pay is not terminated even if Borrower tries to transfer the TPP
    to Lender instead of paying the funds. Borrower and Lender decided to structure
    this transaction as a sale/leaseback rather than a conventional loan secured by
    collateral for business purposes unrelated to the limited sales and use tax.

Question: Are the payments made under the Equipment Leasing Agreement subject
to limited sales tax?

Response: No. The facts recited above indicate that this transaction is not a
taxable financing lease of TPP, but a nontaxable financing arrangement like
that discussed in Bullock v. Citizens National Bank of Waco.

Borrower has already paid tax on the equipment, used it, never relinquished
possession, risk of loss, or title for income tax purposes, has a right to
substitute other TPP for the original leased equipment, and has no option but
to "purchase" the equipment at the end of the lease by repaying the remainder
of the funds originally advanced.

As we have discussed, I render this opinion based on the facts presented in
your letter and without having reviewed copies of the referenced bill of sale
and lease agreement. This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If you have further
questions, feel free to write or call me at 1-800-252-5555, ext. 3-3559.

Sincerely,

John Christian
Tax Administration Division
Attorney