Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013
 

Sales and Use Tax Annotations


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330.0000 LEASES OF TANGIBLE PERSONAL PROPERTY—IN GENERAL—Regulation 1660

Annotation 330.1874.040

(a) IN GENERAL

330.1874.040 Assignment of Leases. Company A (who is basically a financing company) enters into a loan and security agreement with the lessor/borrower C for the first three types of agreements. These loan and security agreements provide the property to be leased will be security for the loan and that the rentals will, in effect, be used to pay the amounts due under the loan. In addition, Company C executes a loan receipt for each loan. Company A has the authority, but not the obligation to collect tax on the rentals. Company C does not have personal liability for the loan except under certain specified circumstances.

(1) Company C assigned to Company A all of its rights and remedies and all rentals and other sums due and to become due, except the purchase option. At the end of the lease agreement the lease option reverts back to Company C for exercise of the option. Company A is the one collecting and billing all the rentals and the tax. Company A sells its loan receipt to a Trust Company B and assigns to Company B all the rights and remedies.

Initially, it appears that title to the property was not transferred to Company A except for purposes of security. Although Company B could serve a copy of the assignment on the lessee, it appears that Company B did not do so and the lessee was not notified. Based on the documents submitted, it is concluded that the assignment to Company A was of rental income with Company C retaining the obligations of the lessor. Therefore, Company C is obligated to collect and report the tax even though rentals are paid to Company A. Since Company A assigned Company B only those rights in the lease contract that had been assigned to Company A by Company C, Company C remains obligated to collect and report the tax.

(2) Companies A and C entered into the general loan and security agreement which refers to a purchase money security interest in leased equipment. Company C executed a loan receipt which refers back to the loan and security agreement and indicates that Company A has a purchase money security interest in the equipment. Company C executed an assignment of lease in which it assigned to Company A "all of its right, title and interest in, to and under, but not its obligations under, the above-referenced lease . . . , including without limitation the leased equipment . . . " Company A, in turn, makes an assignment (with similar language) to Company B.

The language in the assignments indicates that full title to the equipment was transferred to Company A and then to Company B. However, the language in the loan receipt is directly contrary in that it transfers only a security interest in the equipment. Furthermore, other language in the lease assignments, quoted above, retains obligations under the lease to Company C. That is, not all right, title and interest was transferred.

It appears that Company A drafted the documents. The general rule of construction is to construe ambiguities in contracts against the drafter. Applying this rule, Company C transferred to Company A only a security interest in the equipment together with an assignment of the rental income from the lease. Company C retained the obligations of lessor under the lease agreement. In addition, Company A could assign to Company B only what it had. The tax application is the same as situation (1) above.

(3) Company C assigns Company A all the rights and remedies. A does all the billing for the rentals and the tax. Company A in turn assigns to Company B "all right, title and interest . . . "

Company A cannot assign to Company B more than it has. The situation is similar to situation (1) above with Company C being responsible for the tax.

(4) Company A is the original lessor and assigns the right to receive the rental income to a bank. Company A also grants the bank a security interest in the leased property.

In this situation, Company A, the original lessor, owes any tax due.

In conclusion, in all the above situations, the original lessor would owe any additional tax due. However, if the lessor elects to pay sales tax reimbursement or timely pay use tax measured by the purchase price, the leases would not be continuing sales and purchases and would not be subject to tax. Accordingly if the assignment were merely of the rental stream and not a sale of leased property, there would not be any sales or use tax. If there was a sale of the leased property, that sale would be subject to sales tax measured by gross receipts. 2/26/88.