When Utah sales-tax law changed during an equipment lease, was taxability determined separately for each payment or fixed when the lease was signed?

Plain-English summary

Utah Private Letter Ruling 98-056 said an equipment lease was one sales transaction occurring when the lease was signed.

The law in effect on the signing date determined whether the lease was taxable or exempt. A later statutory exemption did not retroactively change an earlier lease, and a later loss of exemption did not reclassify a lease that qualified when made.

Lease payments still mattered for calculation. The tax rate in effect when each payment was made applied to that payment. For certain replacement-equipment leases, the scheduled exemption percentage also changed by payment date.

Sale transaction versus payment

Utah Code section 59-12-102(21)(e) treated a lease granting possession or use of tangible personal property as a sale for sales and use tax purposes.

The Commission distinguished:

• The sales transaction: signing the lease and obtaining possession for a definite period.
• The financial liability: each later payment due under the lease.

Paying an installment was not a new sale.

Taxability fixed when the lease was signed

The Commission compared a lease with an outright sale.

A buyer who paid sales tax on property could not later claim a refund merely because the property later became exempt. Financing the purchase and continuing to make payments did not change when the sale occurred.

The same principle applied to leases. Whether the lease was taxable or exempt was determined under the law in effect when the parties entered the lease.

Rate determined when each payment was made

Although each payment was not a new transaction, Utah collected tax as each lease payment became due.

The Commission said the sales-tax rate in effect on the payment date applied to that payment.

It described each payment as separate only for calculating the correct rate, not for deciding whether a new taxable sale had occurred.

Property later brought into Utah

The request asked about equipment leased outside Utah and later brought into the state.

Utah Admin. Code R865-19S-32 made tax applicable once the leased property had Utah situs.

The Commission said the law in effect when the lease was transacted still determined taxability. Entry into Utah triggered Utah tax collection but did not create a new lease transaction.

New or expanding manufacturing equipment

If personal property qualified for the new-or-expanding-manufacturing-equipment exemption on the lease date, every payment under that lease received the same exempt status.

The Commission agreed with the requester on that point.

Normal operating replacement equipment

The ruling treated normal operating replacement equipment under the law and exemption schedule in effect at the time.

A lease entered before July 1, 1995 did not qualify for the later exemption, even for payments made after that date.

A lease entered on or after July 1, 1995 could qualify under Utah Code section 59-12-104(14). The applicable exemption percentage for individual payments followed the statutory schedule in effect on each payment date.

The response gave a historical example for a lease signed August 1, 1995:

• Payments through June 30, 1996 received a 0% exemption.
• Payments from July 1, 1996 through June 30, 1997 received a 30% exemption.
• Later payments followed the later scheduled percentages.

Holding

Under the ruling:

• A lease was one sales transaction at signing.
• Taxable or exempt status was fixed under the law on the lease date.
• A later law change did not retroactively reclassify the lease.
• The tax rate for each payment came from the payment date.
• Utah situs triggered tax on an out-of-state lease but did not reset taxability.
• A qualifying new-or-expanding-equipment lease retained its exempt status for all payments.
• A qualifying replacement-equipment lease used the historical scheduled exemption percentage applicable to each payment.

What this means for you

Equipment lessors and lessees

Keep the executed lease date and original terms. They can control whether a later payment belongs to a taxable or exempt lease.

Manufacturers

Separate eligibility for an exemption from the rate or percentage applied to each payment.

Accountants and tax professionals

Review renewals, amendments, new terms, situs changes, rates, and exemption schedules under current law. This ruling did not decide when a modification becomes a new transaction.

Common questions

Q: Was every lease payment a new sale?

A: No. The lease was one sale when signed.

Q: Could a later exemption make an old taxable lease exempt?

A: No, under the ruling.

Q: Did each payment use the same sales-tax rate?

A: Not necessarily. The rate in effect on each payment date applied.

Q: What happened when leased equipment entered Utah?

A: Utah tax applied once situs existed, but taxability still came from the law on the original lease date.

Q: Did all payments on qualifying new or expanding manufacturing equipment remain exempt?

A: Yes, if the equipment qualified on the lease date.

Q: How were normal replacement-equipment payments treated?

A: Lease-date law determined eligibility, while the historical exemption percentage followed the schedule applicable when each payment was made.

Key source language

• Transaction date: “the sales transaction for a lease occurs at the time a lease is signed”
• Taxability: “Sales tax liability is determined at the time the transaction takes place, not at the time ones financial liability becomes due.”
• Payment status: “each lease payment is not a separate transaction in the sense that a separate sale has occurred.”
• Rate calculation: “the sales tax due on each lease payment is calculated with the sales tax rate in place on the date of the payment.”

Citations and references

• Utah Code Ann. § 59-12-102(21)(e)
• Utah Code Ann. § 59-12-104(14)(a)-(b)
• Utah Admin. Code R865-19S-32
• Utah Advisory Opinion 95-017DJ (July 12, 1995)

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 98-056
• Date note: the request is dated January 15, 1998; the official response is dated January 20, 1999.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

98-056

Response January 20, 1999

REQUEST LETTER

January 15,1998

Dear Commissioners.

Regarding: Changes
in the law during the period of a lease.

As recently as July 1995 (see the attached advisory
opinion dated July 12, 1995, regarding the sales tax exemption for authorized motor carrier vehicles) the commission viewed leases as new transactions only at the point of initiation or renegotiation. Although we are not certain when that position changed, we have been advised in more than one instance that the commission's current interpretation is that for sales or use tax applications, each lease payment is treated as a separate transaction.

This position has caused us to reevaluate our
application of the sales and use tax laws.

A few of our interpretations follow:

1- If there
is a change in a law affecting taxation of a lease, the lease payment

becomes taxable or exempt, as the case may be, with
the first lease payment

following the statute change.

2- If a
lease is initiated out of state on equipment that is subsequently brought to Utah for use, the first lease payment after the equipment reaches Utah would be taxable or exempt as determined by Utah law.

3‑ All
lease payments on machinery or equipment qualifying for the exemption available to new or expanding manufacturing operations would qualify for the full exemption. Allowing only the first lease payment the full exemption and restricting subsequent lease payments to the partial exemption for replacement equipment is not the intent of the month‑to-month application.

4- Leases
payments on equipment initially leased as replacement equipment would be taxable to the point of the change in the law. Thereafter, lease payments on the same equipment would be allowed the exemption rate for replacement equipment that is in place at the time of each lease payment.

We would appreciate your written evaluation of our
interpretations. Thank you for the

time and effort you invest in these matters.

Sincerely,

RESPONSE
LETTER

January 20, 1999

RE: Advisory
Opinion - Sales Tax Applicability for Individual Lease Payments

Dear NAME,

We have received your request for an advisory opinion
concerning the application of sales tax on lease payments. You refer to a situation where, after a lease transaction is made for a taxable item of tangible personal property, a law is passed that exempts that item from taxation. For such a situation, you ask if each lease payment should be considered a Aseparate transaction,@ in the sense that each separate payment is exempt or taxable depending upon the state of the law at the time each payment is made.

In Utah Code Ann. '59-12-102(21)(e),
a Asale@ is defined for
purposes of sales and use tax to include Aany
transaction under which right to possession, operation, or use of any article of tangible personal property is granted under a lease or contract and the transfer of possession would be taxable if an outright sale were made.@ The words Awould be taxable if an outright sale were made@ suggest an attempt to equate the taxation of a lease with that of a regular sale where title passes to the purchaser.

When a sale is made, sales tax is due on the entire
purchase price at the time of the transaction.
Should that sold property on which sales tax was paid subsequently become exempt from taxation, the owner of that property may not ask for a refund of a portion of the sales tax he or she has paid. The tax was due at the time of the transaction. This is true even if the purchaser has financed the item and is still making payments on it.

Just as a sale is one method by which a person may
obtain possession of personal property, a lease is another. Section 59-12-102 provides that both methods of obtaining personal property are taxable events. If the entire lease payment (purchase price) is paid at the time the transaction occurs (signing the lease), sales tax is due at that time on the entire payment. When the lease purchase price is instead paid over a period of time in lease payments, the sales tax is collected at the time each lease payment is made. But the payment of a liability (the individual lease payment) is not a sales transaction, whereas the act of purchasing or signing a lease is.

Accordingly, the sales transaction for a lease occurs
at the time a lease is signed, when the lessee obtains legal possession to that personal property for a definite period of time. Sales tax liability is determined at the time the transaction takes place, not at the time ones financial liability becomes due. To do otherwise would impose a different tax liability on lessees with extended lease payments than that imposed on purchasers and lessees who pay the entire lease purchase price at the time the lease is signed.

Thus, each lease payment is not a separate transaction
in the sense that a separate sale has occurred. There is only one sale transaction, and that occurs at the time the lease is signed. However, the sales tax due on each lease payment is calculated with the sales tax rate in place on the date of the payment. So for tax calculation purposes only, each lease payment must be looked at as a separate transaction to determine the correct tax rate. This opinion reinforces the Commission=s previous response in the July 12, 1995, Advisory Opinion 95-017DJ, which provided that a newly enacted statutory exemption did not apply retroactively to lease agreements entered prior to the effective date of the new exemption.

Let us apply this policy to the four situations you
present.

1. No. The entire lease is taxable or nontaxable
   depending upon the law at the time the lease is transacted.

2. No. While sales tax is not due until the leased
   personal property has situs in Utah, taxability would be determined by the law in effect on the date the lease was transacted. Utah Admin. Code R865-19S-32 clarifies that Utah sales tax is applicable once situs exists in Utah.

3. Yes. If personal property qualifies for the sales
   tax exemption for Anew or expandingA
   manufacturing equipment on the date of the lease transaction for that equipment, then each lease payment made on that lease is subject to the same exemption.

4. Whether
   there is tax liability for Anormal
   operating replacements@ is determined by the law in effect on the date the lease for those replacements is transacted. Utah Code Ann. '59-12-104(14)(a) establishes a sales tax exemption for normal operating replacements purchased or leased on or after July 1, 1995. Should a lease for normal operating replacement equipment occur before that date, there is no exemption from sales tax on lease payments, even on those payments made after July 1, 1995.

For a lease of normal operating replacement equipment
that is transacted on or after July 1, 1995, an exemption from sales tax does exist under Section 104. Subsection 104(14)(b) provides the rate of the exemption for the individual lease payments made under such a lease. For example, if the lease is signed on August 1, 1995, the lease payments are subject to whatever exemption is provided on the date the lease payment is made. Accordingly, lease payments made on or before June 30, 1996, would receive a 0% exemption, lease payments made between July 1, 1996, and June 30, 1997, would receive a 30% exemption, and so forth.

Please contact us if you have any other questions.

For the Commission,

Joe B. Pacheco, CPA

Commissioner

^^