When a vehicle leasing company restructures using a titling trust to hold legal title to leased vehicles, are the vehicle transfers into and within that structure subject to Utah sales tax?

Plain-English summary

A nationwide motor vehicle lessor asked the Commission to confirm the sales tax treatment of a proposed restructuring of its Utah leasing business. Under its current structure, a car dealer originates a lease with a customer, then sells (assigns) the lease and vehicle to the finance company, which becomes the lessor of record and collects/remits sales tax on ongoing lease payments. Under its proposed structure, the finance company would instead create a titling trust to hold legal title to leased vehicles and leases, while the finance company retains the economic (beneficial) interest and can sell or pledge portions of that beneficial interest to third-party investors to help finance its leasing business — without ever having to retitle or re-register the underlying vehicles, since legal title stays with the trust throughout.

The taxpayer's own detailed request letter argued at length that (1) the trust's acquisition of vehicles/leases from dealers should be tax-exempt as a resale, (2) transfers of the beneficial interest in the trust (an intangible) shouldn't be taxable retail sales at all, and (3) the arrangement is really a financing transaction. The Commission's response, while shorter, agreed with the core outcome:

• A lessor may acquire a vehicle tax-free under the resale exemption (Utah Code Ann. § 59-12-104(26)) — but must then collect sales tax on each lease payment and remit it to the Commission.
• If the vehicle and lease are subsequently transferred to another lessor — as happens when Company A transfers a vehicle/lease into the titling trust, or when the trust directly acquires a vehicle from the dealer — that transfer is also exempt under the resale exemption.
• Whichever entity ends up holding the vehicle/lease (Company A or the trust) becomes responsible for collecting and remitting sales tax on the ongoing lease payments going forward.
• The proceeds the trust passes to Company A (the cash generated by the leases, flowing from the trust to the finance company as the holder of the beneficial interest) is not itself subject to sales tax.

What this means for you

Vehicle and equipment lessors using or considering a titling trust structure

Structuring a lease-financing business so that legal title sits in a separate trust (while your company retains the beneficial/economic interest) does not create new Utah sales tax exposure on the vehicle and lease transfers themselves — each transfer between lessors qualifies for the resale exemption, as long as whichever entity ends up holding the leases is properly registered to collect and remit tax on the ongoing lease payments.

Finance companies securitizing or selling interests in a lease portfolio

The cash proceeds a titling trust distributes back to your company aren't a separately taxable event — the tax obligation runs with collecting tax on the underlying lease payments, not on the internal financing cash flows.

Accountants and tax professionals

This is an early (1996) example of the titling-trust doctrine the Commission later confirmed more explicitly in PLR 98-040 and PLR 99-030 (automobile lease securitization trusts) — useful as a companion citation, though the Commission's response here is comparatively brief and doesn't walk through the taxpayer's own "beneficial interest is intangible property" analysis point by point; it reaches essentially the same result through the resale-exemption chain instead.

Common questions

Q: Does moving vehicles and leases into a titling trust trigger sales tax as a new sale?
A: No — each transfer between lessors, including into the trust, is exempt under the resale exemption, as long as the receiving entity is registered and collects tax on future lease payments.

Q: Who is responsible for collecting sales tax on lease payments after the restructuring?
A: Whichever entity legally holds the vehicle and lease at the time — the trust, once the vehicles are transferred to it.

Q: Is the cash the trust distributes to the finance company taxable?
A: No — the Commission found that proceeds transfer isn't subject to sales tax.

Citations and references

Statutes:

• Utah Code Ann. § 59-12-104(26) (resale exemption)

Related Commission rulings (later titling-trust confirmations):

• PLR 98-040 (business trust holding vehicle title as lessor-owner in a securitized leasing structure)
• PLR 99-030 (bare-legal-title titling trust for automobile lease securitization; dealer licensing angle)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-116.htm

Original ruling text

96-114

Response July 25, 1996

Request

Roger O. Tew

State Tax Commission

Heber M. Wells Bldg.

160 E. 300 South

Salt Lake City, UT 84134

Dear Mr. Tew:

XXXXX is a nationwide lessor of motor vehicles with
its headquarters located in XXXXX, Illinois. In contemplation of restructuring
one of its leasing operations (Company A) we are requesting written
confirmation/letter ruling concerning the taxability for Utah sales and use tax
purposes of the proposed structure described herein.

FACTS

Current Structure

Company A currently provides motor vehicle lease
financing in Utah. The typical transaction is structured as follows:

• A motor vehicle dealer (�Dealer�) submits a credit
  application for a prospective lessee to Company A to determine whether Company
  A will purchase a lease entered into between the Dealer (as initial lessor) and
  the prospective lessee;

• Company A approves the credit, a lease (the �Lease�)
  is executed between the Dealer, as lessor, and the applicant, as lessee;

• Any sales/use tax due on lease down payments and
  first month�s rent are collected and remitted to State by the Dealer who is the
  initial lessor and the State�s fiduciary for purposes of collecting and
  remitting the tax;

• Company A acquires the Lease and the related leased
  vehicle (the �Leased Vehicle�) from the Dealer and the applicable sales and use
  taxes are paid or the proper resale certificates are given by Company A in connection
  with the acquisition of the Leased Vehicle and Lease. Further, the certificate
  of title to and registration of the vehicle are issued in the name of Company A
  to evidence its legal ownership of such leased vehicle; and

• Company A (as assignee of the Lease) becomes the
  lessor of the Leased Vehicle. From this point forward, Company A collects and
  remits the applicable sales and use tax from the lessee to the state.

The volume of motor vehicle leasing has increased
tremendously, both nationwide and in Utah. Due to restrictions imposed by
titling and registration laws on the ability of a finance company (such as
Company A) to access funding sources, this business has resulted in certain
inefficiencies and increased cost to consumers. Company A would like to change
its typical transaction structure as described below.

Proposed Structure

Company A plans to use a titling trust structure for
titling and registering Leased Vehicles. The essential elements of the
structure are as follows:

• Company
  A will create a trust (�XXXXX�) that will obtain all applicable licences in
  Utah. The activities of the XXXXX will primarily be limited to acquiring and
  serving as record holder of legal title to Leased Vehicles and the Leases;

• the certificates of title to the Leased Vehicles
  will be issued in the name of the XXXXX or in the name of the trustee for the
  XXXXX (the �Trustee�) and the XXXXX (as assignee of the Leases) will become the
  lessor under the leases. The primary assets of the XXXXX will consist of (I)
  the Leased Vehicles; (ii) the Leases and (iii) proceeds of the foregoing; and

• the applicable sales and use taxes will be paid or
  proper resale certificates will be given by the XXXXX (or Trustee, if
  applicable).

The XXXXX structure is essentially the same as the
current structure described above except that the Trust, instead of Company A,
will acquire the Leased Vehicle and the Leases. The implementation of this
structure will not adversely effect, or otherwise have any impact on, lessees
who will continue to maintain possession of the Leased Vehicles.

As provided above, the Leased Vehicles will be owned
by the XXXXX (through the XXXXX of the Trustee being named as owner on the
certificates of title) and Company A will own 100 percent of the beneficial
interest in the Leased Vehicles or the Leases but instead will be entitled to
receive the cash proceeds generated from the XXXXX assets. Lessees will not be
affected by the new titling and registration procedures. Company A (or its
subservicer) will be the Servicer for the Trust and continue to provide lease
related services to the lessees. A diagram of the XXXXX is illustrated in
Exhibit A.

Company A may from time to time transfer all or a
portion of its beneficial interest in the XXXXX. Such transfers are intended to
facilitate for financing by Company A of its motor vehicle leasing business and
can take the form of a pledge or sale to one or more third parties (each, a
�Transferee�). A diagram of these transfers is illustrated in Exhibit B.

We believe that none of these transfers of
beneficial interests requires retitling or reregistration because legal title
to the Leased Vehicles and the Leases will continue to be vested in and held by
the XXXXX. Because legal title to the Leased Vehicles never changes, no
retitling or registration is required.

Similarly, the Transferees will be able to sell or
pledge their beneficial interest in the XXXXX assets without retitling or
reregistering the Leased Vehicles. However, legal title to the Leased Vehicles
remain with the XXXXX and possession of the leased Vehicles will remain with
the lessees even though the beneficial interest may be transferred.

Adoption of the XXXXX structure will help Company A
contain costs and allow it to continue to provide competitive financing to
motor vehicle lessees.

Issues

1. Whether the Utah sales and use tax will be imposed on
   the XXXXX�s acquisition of title to the Leased Vehicles and the Leases from the
   Dealers if the XXXXX (or the Trustee) is properly registered for sales and use
   tax purposes with the State of Utah? Is the Trust or the Trustee to be
   considered the state�s fiduciary who must be registered for Utah sales and use
   tax purposes?

2. Whether the gross receipts received by Company A from the
   transfer of beneficial interests in the XXXXX are subject to the Utah sales and
   use tax?

3. Whether the gross receipts received by the transferees
   from subsequent transfers of the beneficial interests in the XXXXX are subject
   to the Utah sales and use tax?

Law

The Utah sales and use tax is a general sales tax
applicable to all retail sales of tangible personal property that are not
specifically excluded or exempted and specified services 1. Leases
and rentals of tangible personal property are considered taxable sales

Use tax is an excise tax imposed on the storage,
use, or other consumption of tangible personal property in Utah on which no
sales tax was paid 5.

For purposes of the sales tax, �retail sale� means
any sale within the state of tangible personal property or any other taxable item
or service other than a resale of such property, item or service 6. �Tangible personal property� subject to
sales tax is defined as all goods, wares, merchandise, produce and commodities,
and all physically existing articles�

A �retailer� is a person engaged in a regularly
organized retail business selling tangible personal property on any taxable
item or service to the user or consumer, and not for resale9. For sales and use
tax purposes, �person� includes a �trust� ** 10**. Under the Sales and
Use Tax Act, any person required to collect the sales or use tax must obtain a
licence by filing an application with the Tax Commission before engaging in
business

Analysis

Sales or use tax will not be imposed upon the
transfer of title to the Leased Vehicles and the Leases from the Dealers to
XXXXX because the transaction is exempt as a sale for resale. XXXXX, as lessor
of the leased vehicles, will be allowed to purchase the property as tax exempt.
However, sales tax will be imposed upon the gross receipts that Company A
collects from the Lessees on behalf of XXXXX.

Sales or use tax will not be imposed upon the gross
receipts received by Company A from the transfer of beneficial interests in the
XXXXX to the Transferees. The beneficial interests issued by XXXXX are
intangible property because the do not fit in the Utah definition of tangible
property. Intangible property is not
subject to the Utah sales and use tax. Therefore, the transfer of beneficial
interests does not constitute a sale at retail subject to tax. Similarly, the
gross receipts received by the Transferees from their transfers of the
beneficial interests in XXXXX are not subject to the Utah sales and use tax.
Furthermore, the proposed structure is being undertaken to improve the
efficiency of financing the Leased Vehicles. Therefore, it constitutes a
financing transaction under Utah law, and, as such, is exempt from sales tax.

As stated above, the requirement to obtain a licence
is imposed on persons who make retail transactions. The XXXXX as lessor of
vehicles is a person who may be deemed to be making retail transactions.
Therefore, XXXXX must obtain a licence. While Company A (or its
Subservicer)collects the sales and use tax from lessees it is not a person
required to collect sales and use tax. Company A (or its subservicer) is merely
the lease servicing agent for XXXXX.

**Conclusion Requested **

For the reasons stared above, we respectfully
request the issuance of a ruling that the transfer of title in the Leased
Vehicles and related Leases from the Dealer to XXXXX or the Trustee are tax-exempt
sales for resale. The transfer of beneficial interests in the XXXXX from
Company A to the Transferees and the subsequent transfer of beneficial
interests from the XXXXX by the Transferees are not subject to Utah sales and
use tax since they would be sales in intangibles or considered financing
transactions. XXXXX will obtain a registered retail merchant�s certificate. We
further request that Company A (or its subservicer), as the servicing agent for
XXXXX will be allowed to remit sales or use tax directly to the State of Utah,
on behalf of XXXXX.

We would appreciate written confirmation of this
conclusion. Accordingly, please sign this letter evidencing your agreement with
this conclusion on the line designated below.

Thank you for your time and consideration of this
matter. If you have any questions, please call me at XXXXX.

Sincerely,

XXXXX

Enclosures: XXXXX Diagram

XXXXX

Advisory Opinion - Sales tax on automobile leases
and subsequent transfer of leases.

Dear XXXXX

We
have received your request for sales tax information pertaining to automobile
leases and the ramifications of subsequent transfers of the leases. We find as follows:

A
vehicle may be acquired tax free by the lessor under the resale exemption set
out in section 59-12-104 (26) Utah Code Ann.
However, the lessor is required to collect sales tax on each lease
payment and report and remit the tax to the Tax Commission. If the lease and ownership of the vehicle is
subsequently transferred to another lessor, that transfer is also exempt under
the resale exemption. It is the
responsibility of the new lessor to collect and remit sales tax on the lease
payments.

Under
the lease arrangement that you propose, if Company A acquires the vehicle from the
dealer the transaction is tax free under the resale exemption. If Company A then transfers the lease and
ownership of the vehicle to the �XXXXX,� that transfer is also exempt under the
resale exemption. Alternatively, the
�XXXXX� itself may acquire the vehicle from the dealer tax free. In either case, the trust is responsible for
collecting and remitting sales tax on the lease payments. The transaction between the trust and
Company A, in which proceeds from the lease are transferred from the trust to
Company A is not subject to sales tax.

For the
Commission,

Alice
Shearer,

Commissioner