Did Utah's revised lease rule apply retroactively, and how were operating leases and conditional-sale leases taxed?

Plain-English summary

Utah Private Letter Ruling 92-033 addressed a finance company's treatment of operating leases and capital or financing leases.

The Commission said its 1991 revision to Rule R865-19-32S applied prospectively.

It then explained the lessee's tax election for a conditional-sale lease, who collected tax, how interest was treated, and the treatment of vehicles and operating leases.

Prospective rule change

The changes to Rule R865-19-32S took effect January 28, 1991.

The Commission described them as changes in its position rather than changes in statutory interpretation and treated them prospectively.

It also said the requester's prior audit payment was outside the statutory refund period even if retroactive treatment had been allowed.

The response did not state the dates or amount because those details were redacted.

Conditional-sale lease election

A lease was not automatically a conditional sale, and a lessor was not automatically required to pay tax at lease inception.

For a conditional-sale “lease”—described as a capital or financing lease rather than an operating lease—the lessee could choose to treat the transaction as either:

• A lease, taxable on the total lease payments; or
• A sale, taxable on the sale amount without the interest factor.

The lessee made the election, not the lessor.

When the lessee elected sale treatment, the lessor collected tax from the lessee at the lease's inception.

The election changed the tax treatment but did not change the contract's underlying nature.

Motor vehicles

For a motor vehicle under sale treatment, the lessor was the retailer.

The lessor collected tax only if it was also a bonded vehicle dealer.

Otherwise, tax was paid to the Motor Vehicle Division at registration.

Operating leases

For a true operating lease, the lessor bought the equipment tax-free for resale.

It then collected tax on the total amount of lease payments.

Holding

Under the response:

• The 1991 rule change applied prospectively.
• An ordinary lease was not automatically a conditional sale.
• A conditional-sale lessee chose lease or sale tax treatment.
• Lease treatment taxed total payments.
• Sale treatment excluded the interest factor from the sale amount.
• The lessor collected sale-treatment tax at inception.
• A vehicle lessor collected only when it was also a bonded dealer.
• Otherwise, vehicle tax was paid at registration.
• An operating lessor bought equipment tax-free for resale.
• The operating lessor collected tax on total lease payments.

What this means for you

Finance and equipment lessors

Classify the agreement first. Do not assume that using a lease document alone determines whether the conditional-sale election is available.

Lessees

The ruling assigned the tax election to the lessee. Document that election and its timing.

Vehicle businesses

Confirm who is authorized to collect tax and whether payment instead belongs at registration.

Common questions

Q: Did the revised rule apply retroactively?

A: No. It applied prospectively.

Q: Who chose lease or sale treatment for a conditional-sale lease?

A: The lessee.

Q: Was interest included under sale treatment?

A: No. The sale amount excluded the interest factor.

Q: How was an operating lease taxed?

A: The lessor bought the asset tax-free for resale and collected tax on total lease payments.

Q: Did every vehicle lessor collect tax?

A: No. The lessor collected only if it was also a bonded vehicle dealer; otherwise tax was paid at registration.

Key source language

• Effective date: “The changes are treated prospectively.”
• Election: “the lessee, at its option, may treat the lease as either a lease ... or a sale.”
• Interest: “The sale amount would not include an interest factor.”
• Operating lease: “purchase the equipment tax-free, for resale, and collect tax on the total amount of the lease payments.”

Citations and references

• Utah Code Ann. § 59-12-103
• Utah Admin. Rule R865-19-32S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 92-033
• Scope note: the source redacted the earlier audit dates and amount, so this page does not infer them.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
July 27, 1992

July
27, 1992

XXXXX,
Tax Manager

Re:
Rule R865-19-32S

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on whether the changes made to rule R865-19-32S can be applied retroactively and whether it is required that a conditional sale lease be taxed up front. Also, you wanted to know who should collect the tax.

The
Tax Commission policy is to refer such requests to the division most qualified to analyze the request and make recommendations concerning it. As such, your request was referred to the Tax Commission's Auditing Division for their analysis and recommendations. Your questions are answered in the same sequence as your letter. The division's recommendations are as follows:

A.
The changes made to Sales Tax Rule R865-19-32S, effective January 28, 1991, were changes in the position of the Tax Commission, not changes in the interpretation of the statute. The changes are treated prospectively. Even if the changes were allowed on a retroactive basis, the payment of your audit assessment made in XXXXX is past the statutory period to make a refund.

B.
A lease is not a conditional sale and the lessor is not required to pay tax at the inception of the lease. The rule says that if the lease agreement is a conditional sale "lease," (a capital or financing type lease as distinguished from an operating lease), the lessee, at its option, may treat the lease as either a lease, taxable on the total amount of the lease payments, or a sale. The sale amount would not include an interest factor. The lessor, in this case, should collect tax from the lessee at the inception of the lease. The lessor does not make this election; the lessee does.

C.
This question is answered in B, above.

D.
Again, the election of the lessee does not change the nature of the contract. It allows the lessee to "treat" the lease as a sale. The lessor would be the retailer, and in the case of a vehicle, would collect tax only if the lessor was also a bonded vehicle dealer. Otherwise, tax should be paid to the Motor Vehicle Division at the time of registration.

E.
If the lease is an operating lease, the lessor should purchase the equipment tax-free, for resale, and collect tax on the total amount of the lease payments.

For
the Commission,

Joe
B. Pacheco

Commissioner

Utah
State Tax Commission

1600
East Third South

Salt
Lake City, Utah 84134

ATTN:
Sales Tax Division

RE:
Request for Advisory Opinion

Tax
Commission:

In
March of XXXXX, XXXXX paid an audit assessment of $$$$$ of tax and interest as the result of a sales and use audit by Tax Commission Auditors. The issue of the audit was XXXXX's sales tax treatment of our finance lease portfolio. We had treated the "leases' as a sale between the Utah dealer and our finance "lessee" with the dealer paying Utah sales tax to the State. The Tax Commission ruled that if the transaction was on a lease document, it was a lease and tax was due on each rental payment from XXXXX. We have since changed our sales tax treatment of these "leases" in order to comply with the audit findings.

It
has now come to our attention that the Tax Commission has revised Rule R865-19-32S "Leases and Rentals Pursuant to Utah Code Ann.
�59-12-103". The revised rule now includes language to the effect that leases which are in fact conditional sales may, at lessees option, have the sales tax collected by the lessor on the full purchase price of the property at the time of the purchase, rather than on each rental. There has apparently been no change in the statutes rather just a change in interpretation by the Commission. This revision appears to support our previous practices regarding the tax treatment of our finance lease portfolio and leads us to question our current practices. XXXXX requests assistance from the Tax Commission in order to make certain that our sales tax treatment of both operating and finance leases is proper.

We
request a written response from the Commission to the following questions:

A.
Is the rule change retroactive or prospective? If retroactive, will we be allowed a refund or credit for the audit assessment paid?

If
the lease is in fact a conditional sale and the lessor is required to pay tax at the inception of the lease, does the "full purchase price" include finance charges, or are separately stated finance charges exempt from the tax.

If
the lease is in fact a conditional sales contract with XXXXX providing third party financing using a lease document, can the tax be paid by the originating dealer (seller) or must the finance company (lessor) pay the tax?

D.
If the lease is in fact a conditional sales contract and the tangible property subject to the lease is a motor vehicle and the titled in the "lessees" name, should tax be paid upon titling or should tax be collected from the lessee on each rental?

If
the lease is in fact a true or operating lease, please confirm that the lessor should continue to purchase for resale and collect Utah sales tax on each rental.

I
have attached copies of several lease documents which we use. Please call me if you have any questions or need additional information. Thank you for your assistance in this matter.

Sincerely,

XXXXX

Tax
Manager