If you lease tangible personal property to, or from another entity (whether related or not), you are faced with sales tax issues that need to be addressed.
Most states impose sales tax on the leasing of tangible personal property. Some states also impose sales tax on the leasing of real property.
As a primer or helpful guide, I thought I would provide a brief list of issues or opportunities that you need to be aware of regarding the sales taxation of leases:
- What type of lease is it? Is it a "true" lease?
- Are you leasing equipment with an operator? If so, is it a service or lease of property?
- Where is the leased property located?
- Do any exemptions or exclusions apply?
- When is the sales tax due? Upfront or over the term of the lease?
- What state is the tax due to?
- What is included in the tax base?
- What is the tax rate?
- Are the parties (lessor and lessee) related?
- Is this a "sale/leaseback" transaction?
- What happens if the lessor "assigns" the lease to another party?
- How are lease "syndication transactions" handled? Who is responsible for the sales tax?
Some common audit issues are:
- Record retention - contracts for entire lease term
- Sampling periods - statistical sampling vs. actual basis
- Tax Rate changes - may not be "grandfathered" to existing lease contracts
- Exemption certificates - from lessee; not on file, or acceptance of "good faith" exemption may be questioned.
- Exemption claimed may not apply to leased property
- Tax may be imposed on lessor; making the exemption certificate "not applicable"
- Tax base issues (what charges are included?)
- Sale of equipment coming off lease (may be taxable)
- Claiming deduction for bad debts (may not be allowed)
- Auditors may not care who pays sales tax (lessor or lessee)
- Assignment of leases (transfer of title or assignment of rental stream?)
- Leased property may create nexus for lessor
- Use of property by lessor prior to leasing to lessee (may create use tax liability for lessor)
This is just a brief overview of the potential sales tax issues surrounding leasing transactions.
Please contact me at firstname.lastname@example.org to review the sales taxation of your leasing transactions.