Leasing & Financing Don’t “Rent To Own” Sales Tax … · Leasing & Financing Don’t “Rent To Own” Sales Tax Problems ... State & Local Tax Advisory ... Leasing Session

2017 IPT Annual Conference – Charlotte, North Carolina 2017 IPT Annual Conference – Charlotte, North Carolina

Leasing & Financing Don’t “Rent To Own” Sales Tax Problems

Jeanne Hill Director of Indirect Tax

DLL Financial Services, Inc.

Wayne, PA [email protected]

Ed Ben, CPA Senior Director

Altus Group U.S., Inc. State & Local Tax Advisory

Sparks, MD [email protected]

2017 IPT Annual Conference – Charlotte, North Carolina 2017 IPT Annual Conference – Charlotte, North Carolina 2

Leasing Session Outline

• Refresher and Overview • Jurisdictional Issues – transfer of title/possession • Leases of mobile property • Exemption certificate issues • End of lease issues • Streamlined sales tax issues • Recent rulings and audit issues • Traps for the unwary


Quick Refresher – Types of Asset Based Financing

• Operating Lease – True lease or FMV lease Generally, tax collected on each lease payment

• Capital Lease – Finance lease or Conditional Sale Generally, tax collected up front

• Loan – Security or Finance Agreement Generally, tax collected up front


Jurisdictional Issues

• Jurisdiction in which title transfers Know where title/possession transfers

• Subsequent movement of property Credit for taxes paid to other states Was tax paid by lessor or lessee?

Know when to take credit Ex. – Property leased in TN moved to CA Ex. – Property leased in TX moved to CA


Leasing of Mobile Property

• Web of taxes, fees and laws Sales tax, excise tax, motor vehicle laws

• International Registration Plan Base location versus “Garage” location

• Commerce Clause Regency Transportation v. MA Comm. of Revenue Interstate Carrier Exemption

• Documentation is key Certification/Notification Use of Matrices


Accelerated (Up Front) Lease Payments or Continued Tax on Lease

Payments

• 4 states impose some type of accelerated tax for certain leases

• 17 states do not provide credit for accelerated tax payments

• Several other states continue to tax lease periodic payments based on origin location, even when property is moved to another state

6


Accelerated (Up Front) Lease Payment Credit or Continue to Tax Lease Payments Based on Origin Location

AK

HI FL

limited

ME

RI

VT NH MA

CT

NY

PA NJ

DE MD

VA WV

NC TN

SC

GA

IL OH

IN

MI WI

KY

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR

ID

NV

CA

DC

limited to state tax

Source: COST Sales Tax Administration Scorecard – To Be Published

17

Do not provide credit for accelerated lease payments Provide credit for accelerated lease payments

Unknown

Continue to tax the stream for certain leased property delivered and later removed from the state States that impose accelerated sales tax on certain leases


Exemption Certificate Issues

• Each state has different exemption certificate forms, rules, and applicability. High volume of transactions Diverse industries served

• Applicability of exemptions will vary by: Lease type(financial product) Type of equipment Use of leased assets by the Lessee

• High volume and inexperience could lead to significant audit exposure and customer service issues


Leases – Separately Stated Charges

• Rent-A-Center East, Inc. v. Finance and Admin. Cabinet Damage waiver fees not taxable – fee was for an

intangible liability coverage, not TPP [Kentucky Board of Tax Appeals, (Order No. K-25136), September 6, 2016]

• Rent-A-Center West, Inc. v. Utah State Tax Comm’n. Liability waiver fees not taxable – fee did not affect

the possession, use, or operation of rental property [Utah Supreme Court, No. 20140129, January 5, 2016]


End of Lease Issues – Termination Payments Judicial Decisions vs Statutory Rules

• Maryland – be careful with your agreements: Is payment pursuant to lease or termination agreement Is payment made in complete performance of a sale Is there transfer of title or possession

• Texas - A charge imposed for the early termination of the lease is included in the lease price and is taxable. 34TAC3.294(d)(5)

• Ohio – be careful with your research – statutory taxation of termination payments was terminated in 2003.


Louisiana – 1ST Extraordinary Legislative Session: Acts 25 & 26

• ACT 25 established changes to state tax exemptions Resale: TPP for lease or rental (other than auto) Non-Profit Organizations Parochial and Private Schools Isolated/Occasional Sales Established different reduced rates for 2 time periods

• ACT 26 imposed additional 1% state sales tax (4% 5%) Timeline Louisiana DOR Actions

March 23, 2016 Act 25 enacted

March 29, 2016 DOR issued revised rate chart

April 1, 2016 Phase 1 rates effective (4/1/16 – 6/30/16)

July 1, 2016 Phase 2 rates effective (7/1/16 – 6/30/18)


Louisiana – 2nd Extraordinary Legislative Session: ACT 12

• ACT 12 enacted to correct unintended consequences of ACT 25 • Re-established some state tax exemptions, including: • Non-Profit Organizations • Parochial and Private Schools • Isolated/Occasional Sales • NOTE: Exemptions are NOT applied retroactively for April 1st

through June 30th period • Some exemptions are still disallowed, including:

• Resale: TPP for lease or rental (other than automobiles) Timeline Louisiana DOR Actions

June 28, 2016 Act 12 enacted

July 1, 2016 Effective date for Act 12 revised exemptions/rates


North Carolina – Installment Paper Tax

• Every person engaged in the business of dealing in, buying, or discounting installment paper, notes, bonds, contracts, or evidences of debt for which, at the time of or in connection with the execution of the instruments, a lien is reserved or taken upon personal property located in this State to secure the payment of the obligations.

• Quarterly filings due by the 20th of January, April, July, October.

• Tax calculated at two hundred seventy-seven thousandths of one percent (.277%) of the face value of these obligations.


Mississippi – Finance Company Privilege Tax

• The MS Finance Company Privilege tax is imposed on every person or company doing business of lending money secured by tangible personal property located in the state.

• Tax is calculated @ 0.25% on the total amount of acquired indebtedness for the secured TPP, including: • Principal, service charges, interest, insurance • All other amounts that become a part of the face of the

instrument that the debtor is required to pay

• The tax is levied in lieu of all other privilege taxes upon such business.


Tennessee – Business Tax

• Gross Receipts Tax – Annual Filing Requirement Levied on all business transactions as of 01/01/14 Due April 15th (for prior calendar year)

• Tax Rate determined by Business Classification Predominant business activity for calendar year Retail Rate = 0.15% Wholesale Rate = 0.0375%


Puerto Rico – Patente Municipal (Municipal License Tax - MLT)

• A corporation engaged in trade/business in PR is subject to payment of municipal license taxes reflecting the volume of business realized by the corporation for the prior year.

• Also Known As: Volume of Business (VOB) License Gross Sales Tax (GST) or Gross Revenue Tax (GRT)

• Annual Filing and Municipal Rates: • Due 5th day following April 15th Non-Financial Business = Up to 0.5% on Gross Receipts Financial Business = Up to 1.5% on Income Includes: Rents, Interest, Fees, Profits, etc.


Streamlined Sales Tax • Lease or rental means any transfer of possession or

control of tangible personal property for a fixed or indeterminate term for consideration A lease may include future options to purchase or extend

• Lease or rental generally does not include:

Transfer of possession or control under a security agreement or deferred payment plan requiring transfer of title upon completion of payments;

Transfer or possession or control under an agreement requiring transfer of title upon completion of required payments and payment of an option price does not exceed the greater of $100or 1%of the total required payments


Traps for the Unwary - Illinois

• Illinois – Leases are exempt from tax Lessors pay use tax on value of leased TPP

• Conditional Sales are not considered leases and are therefore taxable

• Chicago – Transaction tax on leased TPP 50% rule struck down by IL Supreme Court

The Hertz Corp. v. The City of Chicago. Illinois Supreme Court, 1/20/17.


Traps for the Unwary - California

• Application of tax on leases Leases taxed based on lessor’s property cost

Timely irrevocable election must be made Leases taxed based on rental receipts Leases taxed based on fair rental values

• Leases to insurance companies – exempt but lessor must pay sales tax on rentals

• Tax paid to another state on leased property Credit available if timely election made to pay tax

measured by purchase price

• .


Traps for the Unwary - Colorado

• Leases of TPP for ≤ 3 yrs. – Exempt if lessor pays sales or use tax on acquisition of TPP Permission must be secured to collect tax on rental

payments instead of paying tax on purchase Application must be made prior to property

acquisition Permission remains in effect for all subsequent

purchases • Leases of TPP > 3 yrs. – Lessor must charge sales

tax on payments


Sales of Lease Portfolio

• Sale of lease portfolio – Due Diligence • Transfer tax issues • Lessee transfer issues


Leasing & Financing Don’t “Rent To Own” Sales Tax

Problems

Questions? Thank You!

Jeanne Hill Director of Indirect Tax

DLL Financial Services, Inc.

Wayne, PA [email protected]

Ed Ben, CPA Senior Director

Altus Group U.S., Inc. State & Local Tax Advisory

Sparks, MD [email protected]

Documents

Leasing & Financing Don’t “Rent To Own” Sales Tax … · Leasing & Financing Don’t “Rent To Own” Sales Tax Problems ... State & Local Tax Advisory ... Leasing Session