Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 330.2112


330.2112 Conversion of Ex-Tax Leased Property to Tax Paid. A lessor purchased equipment ex-tax and did not make a timely election to report tax based upon the purchase price. Since all of the lessor's other rental equipment is on a tax paid status, it would like to convert the item in question to a tax paid status, as well. The lessor proposes to accomplish this result by "selling" the property for fair market value to an unrelated "liquidation company" for immediate "resale" back at the same price. Tax would be paid by the "liquidation company" and the equipment could then be leased tax paid by lessor.

The incidence of taxation in a transfer of property depends on the substance of the transaction and is not controlled solely by the means employed to transfer title (Commission v. Court Holding Co., 324 U.S. 331). Also, a taxpayer may carry out its business transactions in a fashion calculated to minimize the tax liability so long as the transfer has business substance and is not a mere sham (U.S. v. Cumberland, 338 U.S. 451).

Under lessor's proposal, there is no business substance. The sole purpose is to subvert the tax law and, therefore, it is recognized as a sham and should not be given any effect for sales and use tax purposes. 10/21/88.