Private Letter Ruling

Ruling Number:P-2004-041
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Financing by "off-balance sheet" transactions.
Approval Date:07/06/2004

Office of Policy & Research

July 6, 2004


Re: Your Correspondence XXXX


This letter responds to the above-referenced correspondence. XXXX. Your letter provides the following facts:

You also indicate that XXXX will not depreciate the asset and has only a security interest in the asset.

You ask, on the purchase of new equipment by XXXX to be financed by an “off-balance sheet” transaction, would sales/use tax be charged to lessee upfront or over the rental stream? If upfront, would tax be based on the equipment cost only or on the total lease receivable?

Response: K.A.R. 92-19-55a sets forth the sales tax treatment for leases. K.A.R. 92-19-55a provides in part: “Any transaction or series of transactions that is in the form of a lease, but is treated as a loan or financing transaction for federal income tax purposes, shall be treated as a loan or financing transaction for sales tax purposes. . . . Periodic payments made under a transaction that is treated as a financing transaction shall not be subject to sales or use tax, since the initial acquisition of the property being financed by the owner-lessor is taxable.” The fact that the lessee, not the lessor, takes depreciation on the equipment for federal income tax purposes would indicate that the “off-balance sheet” transaction described above should be treated as a financing transaction for sales tax purposes, not an operating lease. Sales tax should be charged upfront, based on the equipment cost.

You further ask, on the financing of equipment which was previously purchased and used by the customer for a period of months or years (sales tax paid to the vendor at time of purchase), would sales/use tax be charged again on the rental stream?

Response: Assuming what you are describing is a refinancing transaction and XXXX and your customer treat it as such for federal income tax purposes (i.e., the customer—not XXXX--claims all depreciation deductions or tax credits), sales tax would not be charged on the payments.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. If I may be of further assistance, please contact me at (785) 296-3081.

Very truly yours,

Richard L. Cram

Date Composed: 07/06/2004 Date Modified: 01/14/2005