Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 335.0064

335.0064 Option to Purchase. A truck dealer sold truck tractors which are mobile transportation equipment (MTE) to a leasing company on May 21, 1990, with sales tax reimbursement billed on the invoice. On May 23, 1990, the lessor entered into a lease agreement with a rancher for a term of forty-eight months under which the rancher had an option to purchase the equipment at the end of that term.

The purchase option price at the end of the lease is covered by three provisions in the lease contract. One of the lease contract clauses states that the rancher "shall be deemed the highest bidder on the equipment and shall purchase the equipment at scheduled termination for said Actual Residual Value." A subsequent contract clause states, in part, that if the lessor and the rancher cannot agree on the "Actual Residual Value" of the equipment, then the rancher has the duty to obtain bids for the equipment from other prospective purchasers. In that case, both the rancher and the lessor would be free to bid on the equipment with the equipment being sold to the highest bidder. The third provision to the contract goes into effect if certain tax benefits sought by the lessor are not available and it voids the two provisions regarding the sale of the equipment.

This transaction is a true lease and not a sale at inception because the rancher is not certain to own the MTE at the end of the lease term. There is a possibility that other provisions of the agreement could go into effect. Also, the rancher is not responsible for disposal of the MTE and the option price is not nominal.

Therefore, no further sales or use tax is due with respect to this lease transaction since the lessor paid sales tax reimbursement to the dealer when it purchased the MTE. However, if the rancher purchases the MTE at the end of the lease, tax will be due on that transaction. 3/23/95.