Can a company undo sales tax owed on lease payments by dissolving the leasing LLC and unwinding the sale-leaseback back to the original purchase date?

Plain-English summary

A company had already paid sales tax on equipment it bought years earlier. On an attorney's advice, it set up a new LLC in 2001, sold the equipment to that LLC for liability-protection reasons, and leased the equipment back from the LLC. The problem: the lease the attorney drafted wasn't structured as a financing arrangement — it didn't let the company (as lessee) capitalize the property or ever obtain title — so it didn't qualify as a nontaxable "sale-leaseback" under Utah Code Ann. § 59-12-102(24)(c). That meant the LLC should have been charging and remitting sales tax on every monthly lease payment.

Once the company realized the mistake in 2002, it dissolved the LLC, terminated the lease and the underlying installment contract, and took the equipment back — hoping to unwind the whole arrangement retroactively to the original 2001 transaction date and avoid the tax altogether. The Commission said that doesn't work. Under prior Commission rulings, a lease is taxed at the moment it's signed — when the lessee gets legal possession of the property for a defined period — and that liability doesn't depend on what happens later. The company had possession of the equipment throughout, but under two legally distinct forms: first as owner, then as lessee. Both the original sale to the LLC and the lease-back were separate taxable events, and letting a later termination erase the lease period would ignore that the company genuinely had possession and use of the equipment as a lessee for that time.

So the outcome split in two: future lease payments that were never paid because the lease was cancelled are not taxed. But sales tax is owed on every lease payment that covered the period before termination, because that was a taxable lease for the time it was in effect. The Commission also flagged a lingering question: transferring the equipment back to the company when the LLC dissolved could itself be another taxable sale — unless the original installment contract between the company and the LLC already provided for returning the equipment if the LLC defaulted or dissolved, in which case that specific transfer would not be treated as a new taxable sale.

What this means for you

Business owners considering a sale-leaseback for asset protection

Have a tax professional check the lease terms against § 59-12-102(24)(c) before signing, not after. A sale-leaseback structured wrong for liability-protection reasons can create ongoing sales tax exposure that "undoing" the deal later won't erase — you'll owe tax on every lease payment made while the mistake was live.

Anyone unwinding a failed or regretted transaction

Utah taxes a transaction based on the facts and law at the moment it happened. Terminating an agreement, dissolving an entity, or reversing a deal only stops liability from accruing going forward — it does not retroactively erase tax already owed for the period the arrangement was in effect.

Businesses structuring the return of leased equipment

If you're unwinding a sale-leaseback and the equipment reverts to the original owner, check your installment contract's default/dissolution terms. If the contract already provided for the equipment reverting on default or dissolution, that specific transfer back may not itself be treated as a new taxable sale — but if it wasn't provided for, the Commission signaled it could be.

Common questions

Q: Does dissolving the LLC and canceling the lease erase the sales tax already accrued?
A: No. It only stops future lease payments (and the tax on them) from happening. Tax on lease payments already made while the lease was in effect is still owed.

Q: Why didn't this qualify as a nontaxable sale-leaseback in the first place?
A: Because the lease didn't meet Utah's definition in § 59-12-102(24)(c) — it wasn't a financing arrangement, and the lessee (the company) couldn't capitalize the property or ever obtain title to it. That made it an ordinary taxable lease rather than the specific nontaxable structure the statute defines.

Q: Is returning the equipment to the company when the LLC dissolved itself a taxable sale?
A: It could be — unless the original installment contract between the company and the LLC already contemplated the equipment being returned if the LLC defaulted or dissolved. The Commission left this fact-dependent.

Citations and references

Statutes:

• Utah Code Ann. § 59-12-102(24)(c) (definition of a nontaxable sale-leaseback — not met here)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/03-017.html

Original ruling text

REQUEST LETTER

03-017

NAME

ADDRESS

PHONE

FAX

Re: Request for Opinion on sales Tax Transaction

We respectfully request an opinion on a sales tax issue involving a sale and lease back corporate attorney they set up a new LLC to hold the equipment for the purpose of liability protection. The Company paid sales tax on the original purchase of the equipment.

The Company sold the equipment to the new LLC in 2001 and transferred title. The attorney drew up a lease agreement that was not a capital lease in that it was not a financing arrangement and it did not provide for the lessee Company the ability to capitalize the property or to obtain title to the property. The nature of the lease made it such that the monthly lease payments are clearly subject to Utah sales tax.

In 2002, upon pointing this out to the attorney, he advised the Company to terminate the LLC and the lease agreement and return the equipment to the Company. It was apparent to all that any perceived benefits of liability protection were far overshadowed by the duplicate sales tax that would be owed due to the attorney�s error,

Our questions on this transaction are as follows:

1. Is there any problem in rescinding the transaction as advised above by the attorney?

2. Since the Company paid sales tax on the original purchase of the equipment can the transaction be rescinded back to the original transaction date in 2001?

We thank you in advance for your attention to this matter and hope that you will have the ability to respond in a timely manner. Please call if you have any questions.

NAME

RESPONSE LETTER

September 9, 2003

NAME

ADDRESS

RE: Private Letter Ruling Request � Sales Tax on Lease Payments

Dear NAME,

We have received your request for a private letter ruling concerning the application of sales tax on certain lease payments. By telephone, you informed us that your client (�Company�) purchased various pieces of equipment between five and ten years ago. The Company paid sales tax on these purchases at the time of purchase. In 2001, the Company created a limited liability company (�LLC�), which bought the Company�s equipment on an installment contract and then leased the equipment back to the Company. As you pointed out in your letter, the lease between the LLC and the Company did not qualify as a nontaxable sale-leaseback transaction, as defined in Utah Code Ann. �59-12-102(24)(c). Accordingly, the LLC should have been collecting and remitting sales tax on the lease payments paid by the Company.

Approximately one year after creating the LLC and entering into the lease, the Company became aware of the tax consequence of its lease. It attempted to minimize its sales and use tax liabilities by dissolving the LLC and returning ownership of the equipment to the Company. When it dissolved the LLC, it terminated its installment contract and its lease with the LLC. You ask whether these actions are sufficient to absolve the Company and the LLC of any sales and use tax liabilities under these circumstances.

In prior rulings, the Commission has stated that the sales transaction for a lease occurs at the time a lease is signed, that is, the time a lessee obtains legal possession to that personal property for a definite period of time. For this reason, sales tax liability is not determined by subsequent events, but by whether or not the transaction was taxable at the time the parties entered into it. Accordingly, while the termination of a taxable lease may absolve the parties of future sales and use tax payments, it does not absolve the parties of sales tax liabilities back to original transaction date.

Although the Company has always had possession and control of the equipment, it has done so under two forms, first as the direct owner, and second as the lessee. Each of these transactions, the original purchase and the subsequent lease back, created a distinct and separate taxable event. Allowing a retroactive lease termination back to the original transaction date for sales and use tax purposes would ignore the second transaction and the period of time the lessee had possession and use of the equipment under the lease agreement.

In summary, the Company does not owe sales and use tax on future lease payments that were cancelled by the lease termination. However, the lease payments relating to the period prior to the termination still pertain to a taxable lease, and sales tax is due on these payments. We note that the transfer of title back to the Company once the LLC was dissolved could be another taxable sale of the equipment. However, if the initial installment contract between the Company and the LLC contemplated the return of the equipment if the LLC defaulted on payment or was dissolved, we would not consider this transfer a taxable sales transaction.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

03-017