Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2016
Sales and Use Tax Annotations
330.0000 LEASES OF TANGIBLE PERSONAL PROPERTY—IN GENERAL—Regulation 1660
(a) IN GENERAL
330.2793 Sale of Rental Units to Related Entity. A lessor is in the business of leasing television converter boxes (units) which are taxable continuing sales in month to month leases. The lessor plans to sell the units to a related entity (corporation). The corporation wishes to pay tax on the purchase price of the units and then lease them without having to collect use tax on rentals payable. Also, it proposes to have the sale occur, retroactively, as of eight months back.
A person who purchases property subject to an existing lease is bound by the seller/lessor's tax treatment of that property. Thus, if the units are sold subject to existing taxable leases, those leases continue to be subject to use tax measured by rentals payable. However, if the lessor were to notify each lessee that his or her existing month to month lease agreement will be terminated as of a specific time and date (more than 30 days from date of notice to properly terminate month to month leases), then as of that time the units would no longer be subject to an existing lease. That notice could also inform each lessee that the unit he or she is currently leasing is being sold as of time and date specified in the lease termination notice and that the lessee's continued use of the unit after that time and date is acceptance of a new lease from the new owner. Under these circumstances, the corporation would not be regarded as purchasing the units subject to the existing leases. If such were the case and the corporation is regarded as purchasing the unit at fair market value as if at arms length, it would have the election to pay tax measured by the purchase price. The sale to the related party, however, will be disregarded for sales and use tax purposes if the sales price does not include all costs of the seller, including the cost of the property and any overhead properly allocated to the cost of that property.
The sale cannot be made retroactively. The determination of how tax applies to a transaction is based on the date the transaction occurs, not based on a retroactive date in the contract. 12/30/93; 4/7/94.