Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013

Sales and Use Tax Annotations

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Annotation 200.0106

200.0106 Financing Contracts. A firm is in the business of financing woodworking machinery. Transactions are generated from customers who are not capable of obtaining credit directly from vendors or by vendors who refer customers to the taxpayer for financing of the machinery. After confirming the price quoted by the vendor of the machinery with its client, the firm obtains a loan commitment from a bank to acquire the machinery for its client. The firm then enters into a letter agreement with the client which is designated as a "lease." Under the agreement, the client is committed to make all payments required under the lease and can acquire the property outright at the termination of the "lease" for a nominal sum of $25. The client, by contract, agrees to pay a higher rate of interest than the firm has to pay in its loan commitment to the bank. The higher rate of interest appears on the lease. Additionally, the cost of the machinery and sales tax on the face of the lease is identical to the amount the firm paid to the vendor. Shortly after execution of the lease, the firm discounts the lease to the bank which had provided the flooring loan to acquire the machinery.

Under this scenario, the lease is actually a contract of sale in which the firm retains a security interest. The firm's purchase of the machinery from the vendor is a sale for resale by the firm to its client. Therefore, a taxable sale occurs between the firm and its client under Regulation 1641. Since the increased interest rate and the sales price of the machinery, including sales tax, is clearly shown on the lease agreement, there is sufficient accounting of principal and interest to allow the exclusion of interest from the measure of tax. The difference between the bank's interest charge and the interest paid by the customer does not constitute a mark-up on the machinery. 6/25/92.