Sales tax is complicated no matter the industry you are in. But the leasing industry brings out even more complicated nuances depending on the type of lease, support activities and even the leased item itself.
Some sales tax concepts for the leasing industry are quite simple while others are more complicated. For example, a lessor by definition owns property and leases the use of said property to a lessee. This property that is owned by the lessor creates sales tax nexus wherever the equipment resides. This concept is generally straightforward. However, the taxability of the lease itself and certain related services is much more complex.
‘Rental’ versus ‘lease’
Most tax laws describe a “rental” agreement as those with a commitment of 30 days or less. While a “lease” is generally a longer-term commitment, typically 12 months or more in most states. (Short-term or rental agreements, in some jurisdictions, carry a higher tax rate.)
Among other important definitions when it comes to sales and use tax in the leasing industry are “real property” and “tangible personal property.” In most states, the lease of real property long-term is generally not a taxable event. Tangible personal property is generally taxable whether through sales, lease or rental.
‘Operating’ versus ‘finance’
Operating and finance (capital) leases also have different tax treatment by tax authorities.
For sales and use tax purposes, an operating lease is for temporary use of an item with no intention to transfer ownership of that property at the end of the term of the lease. In most states, sales tax is imposed on the stream of payments for an operating lease, and sales tax is imposed on the upfront purchase price for a capital lease. On an operating lease, responsible parties can charge sales tax up front if the tax initially charged is the same as what would be due over the course of the arrangement.
A finance lease is considered a sale with tax imposed on that sale, though payment of the sales tax can be somewhat built into the lease terms. Note that finance charges in a finance lease are generally not subject to sales tax.
The structure of the contract for the finance lease needs to include that the intent of ownership will remain with the lessee. This means either that the terms of lease are such that the full value of the item is paid for during the course of the lease arrangement or, if it has a residual value at the end of the lease, there’s a nominal purchase price.
Ancillary, or vertical, services
These can include such services as support, maintenance and delivery – and they can all come with their own sales and use tax wrinkles. Delivery can be taxable or exempt depending on the state and type of product delivered. And with operating leases, many items become part of the gross receipts and are taxable. For example property tax and interest and finance charges often become part of the gross receipts and will be considered taxable. In a finance lease, however, these items can often be excluded from the sales tax calculation if separately stated in the contract and/or the invoicing.
Among other arrangements to consider in terms of sales tax:
Set up and dismantling. This comes up often when leasing such items as stages, lights, sound systems and other equipment that require technical set-up and delivery. This is generally going to be taxable – but if a company sold a stage, in some states the sale would be taxable but the installation service, if separately stated, would not be.
Rental/lease with operator. Let’s say a company is providing the above lighting equipment for a concert but the equipment is so sophisticated that the leasing company must also provide an operator. In most states, that rental or lease with an operator is not subject to sales tax but instead is essentially considered a professional service.
Maintenance. Leased, sophisticated equipment must frequently be maintained in a certain way. Often too, the lessor wants to be involved in that maintenance and requires that the lessee contract for ongoing maintenance. In an operating lease, this again is considered part of the gross receipts and will likely be taxable.
Tax situs is the location in which a taxing event occurs. In situations where property is in a fixed location, the tax situs is quite simple. However, in some situations, the property may not be in a fixed location. Multi-state usage happens with contractors using large, industrial equipment leased long-term. These contractors may move the equipment state to state depending on the project. (Note: Equipment which can be driven without a trailer on the open road usually means a transition from a sales tax event to one of a motor vehicle tax.)
The lessor might not know where the equipment is being used for a given time and so may not be able to apply the appropriate sales tax at any given time. The tax responsibility can shift in some such cases to the lessee.
TaxConnex has assisted companies in many industries to alleviate the burden of sales tax. We are experts when it comes to navigating tax regulations and managing your filings. Contact us to learn more about how TaxConnex can take sales tax off your plate entirely.
To learn more check out our webinar on sales tax complexities within the leasing industry.