Most people are familiar with the concept of leasing a car, but with the rising desire for flexibility among businesses, traditional purchasing is being replaced by leasing. With rates and collection time specifications varying from state to state, it quickly becomes tedious for companies to track and comply with individual laws. Companies with straight-forward contracts that are valid in one location may not face too many complications; however, if you are running a multi-jurisdictional operation or have assets with wheels, your business may face the complexity of multiple tax laws. To avoid difficulties in the long run, it's important to calculate the correct tax results on daily transactions. In addition to remaining compliant with the multitude of laws up front, Lessors are responsible for keeping up with constant changes over the term of a lease as well. Check out our SlideShare for more information on some of the confusing tax laws that impact your business and find out how Taxware can help you navigate these complexities.

1. Legal Disclaimer: The information provided in this document is for informational
purposes only. By publishing this document, Taxware, LLC is providing information
of a general nature which should not be construed by the reader as specific tax or
legal advice or services. Taxware, LLC recommends that you engage a qualified
professional before taking any action that affects your business.

2. The flexibility of leasing transactions is appealing and has
caused rapid growth in the leasing industry in the past 50 years.
Everyone is familiar with leasing a car, but did you know you
can also lease an airplane, a copier, a computer, a horse
trailer or an excavator?
Leasing is an agreement
between a lessor and a lessee,
where the lessor conveys the
right to use an asset for an
agreed upon period of time in
return for an agreed upon
payment or series of payments.

3. Dissecting a leasing transaction for tax purposes can be extremely
difficult because of the many different issues that must be considered
from the beginning to the end of the lease.
The following looks at why leasing transactions can cause such a
headache and what it takes to keep up with sales and use taxes
within the leasing industry.
Taxware understands the
challenges faced by lessors
and lessees in a leasing
transaction and we support
robust functionality to help
you get the right tax result.

4. In the U.S., upon entering the leasing arena, it is necessary to
first determine the type of lease and the location where tax
must be paid/collected.
Operating Lease A lease of goods without option to own up on lease termination.
Nominal Lease A lease where the lessee may purchase the goods at the end of the lease on
payment of a small, fixed amount (according to the Streamlined Sales Tax
Project, a nominal lease results when a buyout is less than $100 or 1% of the
total required payments).
Fair Market
Value Lease
A lease that allows the lessee to purchase the goods for the fair market value of
the property upon termination of the lease.
Conditional Sale A conditional sale is defined to include the situation where the customer/lessee
takes possession of the item but title remains with the lessor/seller until such
time as payments are complete. In order to protect their interests; the
lessor/seller takes a security interest in the item being leased/sold. At the end of
the “conditional sale” contract, there may be a final balloon payment and once
that final payment is made, title will vest with the purchaser/lessee. Conditional
sales are not a lease according to the Streamlined Sales Tax Project.
Types of Leases

5. Determining both the lease type and the tax collection point is:
• If your contracts are straight-forward
• If all of the assets you are dealing with originate
and terminate in the same location
• If you begin a multi-jurisdictional business
• If your assets have wheels
Easy
Challenging
In order to determine where to properly
pay/collect tax, you must be familiar with
each state's individual sourcing rules, which
dictate where the tax obligation lies at all
stages of the leasing transaction and vary
widely from state to state.

6. In the past decade, many states have attempted to make
sourcing rules and lease tax obligations more clear by
joining the Streamlined Sales Tax Project (SSTP).
To date, there are 24 states
that are full and associate
members of the project,
which is a collaborative
effort among member
states to simplify sales
and use tax collection
and administration.

7. Robust tax software solutions have incorporated the
SSTP and non-SSTP state sourcing rules into their
systems concurrently, thereby allowing users to pass
standard transaction parameters throughout the life of
the lease to help you achieve:
• the right tax rate
• in the right jurisdiction (at all levels)
• at the right time

8. After determining the sourcing location of
a leasing transaction, you must look at:
As if figuring out the nuances that determine the amount
of the tax is not enough, there are multiple variations on
the laws governing the mode by which sales and use tax
can/must be paid, domestically.
• Amount of tax that needs to be paid
• Time when the tax must be paid
(during the life of the lease)
• Who must pay the tax

9. The amount of tax to be paid can be a
result of the general sales and use tax rate
or can be the result of a special lease tax
rate, which may or may not take the place
of the general sales and use tax rate.
Massachusetts Applies the same tax rate to leases as they do to sales.
Alabama Has completely separate lease/rental rates.
City of
Chicago
Is more complex in that it does not apply the general Illinois
sales tax rate, but instead applies an additional 8% tax on
the lease of personal property inside the city.
Examples of Applied Tax Rates for Leases:

10. Upfront
States
Treat leases the same as any other sale of tangible personal
property and require that tax be collected in full at the
inception of the lease. This results in the lease stream
payments being exempt from tax.
Stream States Allow tax to be collected upon each individual lease payment.
Adding another layer to the complexity, some states also give
the lessor the choice of collecting tax upfront or on the lease
stream.
Exempt
States
(i.e. Maine)
Exempt leasing transactions altogether and require that
the lessor pay tax when the asset is purchased for future lease.
This does not preclude the lessor from passing the tax on to its
customer down the line; however, it does not make the task of
tracking any easier.
There is no single “U.S.” rule to follow; individual state laws apply.
Sample Tax Collection Scenarios

11. To add to the confusion, the duration of the lease can also
result in additional rates of tax, surcharges, limitations,
jurisdiction-based exemptions or tax reductions.
Texas Duration of the lease can also result in additional rates of tax
or surcharges.
South
Carolina
In order to qualify for the $300 maximum sales tax, leases of
motor vehicles, certain light weight construction equipment,
and horse trailers must be in writing and remain in effect for
more than 90 continuous days.
Urban
Enterprise
Zones
If a qualified business is located in one of these zones, the
lease of certain equipment used in that area may qualify for
an exemption or a reduced rate of tax.
Examples

12. Then the issue of how to tax
the initial piece of the
transaction arose, as well as
how to track what.
It was not until companies got creative with their
categorization of what they define as a lease (possibly in
order to get a tax advantage, such as a deferred tax
payment) that laws slowly became more complex.

13. With the end of a true operating lease, the lessee takes
the asset and goes along his/her way.
But what if…
• The lease ends because of an early termination?
• A buy-out option is exercised?
• It’s an early termination in a state that taxes the lease up-
front? Should the lessee be entitled to a refund of the tax
already paid?
• What about the next lessee, should they have to pay tax?

14. Buy Outs
At first glace, buy-outs may seem simple; simply tax the buy-
out after the lease is over, the same way you would tax a
regular sale of tangible personal property.
Most states agree, but some, like Wisconsin and
Kentucky, disagree. These two states actually say
that buy-outs must be taxed at the initial inception
of the lease.
What if the lessee decides not to exercise the buy-out option?

15. Tax Exempt Example: Maine
How about in Maine where leases are
generally exempt from tax?
Once a buy-out is exercised, tax must be paid on the buy-
out amount, as well as on all lease payments made up to
that point!
Imagine if you have hundreds of leasing transactions running
in Maine and you have to track each individual one?

16. With recent technology developments in automated tax
calculation software, figuring out these transactions can
actually be as easy as:
1. Passing information to the software
that indicates that a buy-out is
being exercised
2. Allowing the software to
recalculate the tax for you

17. Despite market challenges that all global businesses face,
the interest in leasing in the worldwide arena is also on
the rise. In general, the lease of equipment is subject to
VAT, CST or GST internationally.

18. Fair Market Value leases and conditional sales are usually
used for equipment and the VAT treatment varies
depending on the country.
Azerbaijan Fully exempt lease transactions
Czech Republic & Russia Fully tax lease transactions
Bulgaria Only the interest element is exempt from VAT
Taxable equipment leases are usually subject to standard VAT rates, which range from
2% to 27% depending on the country. Additionally, the classification of the lease will
dictate whether supply of goods or supply of services rules apply. Many of the same
issues that face a customer in the U.S. are also a concern worldwide and must be
analyzed and addressed by the tax calculation system.
Examples

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