Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 330.5030


330.5030 Cross-Border Lease. An investment company (company A) desires to borrow money by means of a German cross-border lease. To facilitate this transaction, a wholly owned subsidiary of Company A, a paper manufacturing company (Company B), will sell certain of its paper-making machinery to Company A for an amount equal to the fair market value of the equipment. The sale of the equipment will be followed by a lease back to Company B for $1 per year and provide for an option for B to purchase the equipment for $1 at the end of the lease.

After completion of the leaseback, Company A will enter into the German cross-border lease transaction in which it will sell the equipment to a German leasing company and lease it back for a period of nine years. At the end of lease, Company A will have an option to acquire the equipment for payment of the lesser of 10% of the original purchase price or the fair market value of the equipment at that time. The economic effect of the German cross-border lease is borrowing by Company A, secured by the equipment, at an interest rate approximately 100 basis points below Company A's normal borrowing rate.

Based solely on these facts, the sale and leaseback by Companies A and B will be regarded as a financing transaction which is not subject to tax. (Regulation 1660(a)(3)(A)(1).) Because the sale and leaseback between Companies B and A is regarded as a financing transaction, Company A's interest in the equipment is that of a secured lender. Thus, the German cross-border transaction is regarded as merely a sale and leaseback of the lender's (A) interest in the transaction, and is also not subject to tax. The transaction does not involve a sale or a lease of tangible personal property under the California Sales and Use Tax law. 11/6/90.