My local sales tax rate changed partway through a multi-year equipment lease -- do I owe the old rate or the new rate for the rest of the lease, and what happens when the lease is renewed?

Subject

Operating Lease — Renewals Or Extensions Considered New Leases — Tax Rate In Effect At Time Renewal Is Executed

Plain-English summary

A taxpayer asked the Comptroller about the sales tax rate on rental payments under a lease agreement for forklifts located in San Antonio, Texas, where the local (MTA) tax rate had changed partway through the lease term.

Financing leases are taxed differently. If the six equipment leases at issue are financing leases (as defined in Rule 3.294(a)(1)), the lessor reports tax as required by Rule 3.294(f)(3)(B), and the 8.25% rate was due.

Fixed-term operating leases lock in the rate at signing. If instead the leases are fixed-term operating leases (the letter gives a five-year lease as an example), the tax rate on all payments for the entire lease term is the rate in effect when the lease was consummated -- here, 8.25%. The April 1, 1993 change in the San Antonio MTA rate from 1% to 1/2% had no effect on these leases, because sales and use tax is imposed on the transaction, and the transactions were consummated back in 1991. The Comptroller notes the same principle works in reverse: if a local tax rate increases after a fixed-term operating lease is already consummated at a lower rate, the lessor does not start collecting the higher rate mid-lease.

Renewals are new transactions. Any renewal of an operating lease is taxed at the tax rate in effect at the time of the renewal -- not the rate from the original lease. A renewal or extension is treated as a new transaction for rate purposes.

Month-to-month leases aren't an issue. Each monthly lease is its own separate transaction, so it's automatically taxed at whatever the current rate is each month -- there's no rate "lock-in" question to resolve.

What this means for you

Lessors of tangible personal property (e.g., equipment like forklifts)

Determine first whether your lease is a financing lease or a fixed-term operating lease under Rule 3.294, since the tax treatment differs. For a fixed-term operating lease, charge and remit tax at the rate that was in effect when the lease was signed, for the life of that lease term -- don't adjust it up or down if the local rate changes mid-term.

Businesses renewing or extending an existing operating lease

Expect the tax rate to reset to whatever rate is currently in effect on the renewal or extension date, even if that's different from the rate under the original lease.

Businesses on month-to-month leases

No special tracking is needed for rate changes -- each month's payment is its own transaction taxed at the rate in effect that month.

Common questions

Q: The local sales tax rate changed during my 5-year equipment lease. Do I owe the new rate for the remaining payments?
A: No. For a fixed-term operating lease, the tax rate is fixed at whatever rate applied when the lease was consummated, for the entire lease term -- it doesn't change if the local rate later goes up or down.

Q: What happens when I renew or extend that lease?
A: The renewal or extension is treated as a new transaction, taxed at the tax rate in effect at the time the renewal is executed -- not the original lease's rate.

Q: Does this rate "lock-in" rule apply to financing leases too?
A: No. Financing leases (as defined in Rule 3.294(a)(1)) are taxed differently -- the lessor reports tax as required under Rule 3.294(f)(3)(B).

Q: What about month-to-month leases -- do I need to worry about rate changes?
A: No. Each month-to-month lease payment is a separate transaction, so it's simply taxed at the rate in effect for that month.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.294(f)(3)(B) (lessor's tax reporting requirement for a financing lease)
• 34 Tex. Admin. Code Rule 3.294(a)(1) (definition of a financing lease)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701251L

Original ruling text

January 10, 1997

Dear **:

Thank you for your letter concerning the sales tax rate charged on rental
payments under a lease agreement for forklifts located in San Antonio, Texas.

Under a financing lease, the lessor must report the tax on a financing lease as
required in subsection (f)(3)(B) of enclosed Rule 3.294, Rental and Lease of
Tangible Personal Property. If the six equipment leases are financing leases,
as defined in (a)(1) of the rule, the 8.25% tax rate was due.

If the six equipment leases are fixed-term operating leases (e.g., a five-year
lease), the tax rate on all payments for the term of the leases are 8.25%
because that was the tax rate in effect when the transactions (leases) were
consummated. The April 1, 1993, change in the San Antonio MTA tax rate from 1%
to 1/2% had no effect because the sales and use tax is imposed on transactions
and the transactions were consummated in 1991. Please note that the same holds
true when a local tax rate increases after a fixed-term operating lease has
already been consummated at a lower tax rate. In that case, the lessor does
not collect the increased local tax rate. Any renewals of the operating leases
are at the tax rate in effect at the time of the renewals. Of course,
month-to-month leases do not present a problem because each monthly lease
represents a separate transaction.

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

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,
David Somerville
Tax Policy Division