Revenue Ruling

Ruling Number:19-1996-1
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Industrial Revenue Bonds
Keywords:
Approval Date:06/06/1996


Body:
REVENUE RULING 19-1996-1
JUNE 6, 1996

Issues:
I. Must sales tax be paid on purchases of tangible personal property at retail, where the purchase was made with the proceeds of a local government's industrial revenue bond (IRB) issuance?

II. Must sales tax be paid on "lease payments" made by a Company to a local government pursuant to an IRB related lease agreement?

Relevant Law:
K.S.A. 79-3603(a) and (h),
K.S.A. 79-3606(b) and (d),
K.S.A. 79-3640,
K.A.R. 92-19-55.

Brief Discussion:
I. If tangible personal property is purchased at retail entirely with the proceeds of an IRB issuance, the transaction is exempted from sales tax. If property is purchased at retail in part with the proceeds of an IRB issuance, the transaction is subject to sales tax. However, for that fraction of the property purchased with IRB proceeds, sales tax may be refunded.
II. Determination of sales tax applicability to "lease payments" by a Company to a local government, or a local government's trustee, pursuant to an IRB related agreement will be made on a case-by-case basis. Sales tax will not be collected where 1) the economic reality of the transaction is that the "lease payments" are made in consideration of financing rather than in consideration of a lease or sale of tangible personal property, and 2) the transaction is in fact treated by the Company as a loan or financing transaction for federal income tax purposes.
DISCUSSION

I. Sales Tax on Purchase of Property Utilizing the Proceeds of an IRB Issuance.

If tangible personal property is purchased at retail, whether by a Company, a Company's contractor, or a trustee in an IRB arrangement, entirely with the proceeds of a local government's IRB issuance, the transaction is exempted from sales tax under K.S.A. 79-3606(d). If such property is purchased at retail in part with the proceeds of a local government's IRB issuance, the transaction is subject to sales tax. However for that fraction of the property purchased with IRB proceeds, sales tax may be refunded under K.S.A. 79-3640. If tangible personal property is purchased at retail by a local government and such property is intended for resale or for lease to another party, then it is not a sale at retail and no sales tax is imposed under K.S.A. 79-3603.

II. Sales Tax on Lease Payments Made Under an IRB Related Lease Agreement.

The determination of whether sales tax must be collected on "lease payments" by a Company to a City or County under an IRB arrangement will be made on a case-by-case basis. In each case, the economic reality of the "lease agreement" will first be reviewed to determine whether payments under that particular agreement are made in consideration of a lease or sale of tangible personal property, or are made in consideration of financing. If payments are consideration for a sale or lease by a local government of tangible personal property at retail to a Company, then sales tax will be collected in accordance with K.S.A. 79-3603(a) or K.S.A. 79-3603(h) respectively. However, to the extent lease payments are instead simply a financing transaction, no sales tax is imposed under K.S.A. 79-3603.
Several provisions of a lease agreement will be reviewed in determining whether the payments thereunder are in consideration of financing rather than property. These provisions include, but are not limited to, those which establish the Company's payment amounts and schedule. Are the payments and terms established in a manner calculated to cover the value of tangible personal property purchased by the Company from the local government, or are the payments and terms calculated to ensure the local government's ability to pay maturing principal of, and interest on, IRBs which generate a pool of proceeds used as a source of financing for the Company's purchases? Other provisions which will be reviewed include those characterizing the local government's title interest in the property purchased with the proceeds of the revenue bonds. Under the terms of the agreement, does the local government have the benefits and burdens of ownership of the property, or does it hold title in the property as security for the financing?
In addition to considering the economic reality of the lease agreement, the Company's actual treatment of the agreement for federal income tax purposes will also be considered by the Department in determining the applicability of sales tax provisions. Department Regulation K.A.R. 92-19-55 states that "Except as provided in subsection (k), sales tax shall be imposed on the operation of [a lease or rental] contract, regardless of what the transaction may be called or termed." The exception in subsection (k) states that "[a]ny transaction or series of transactions which is in the form of a lease, but is treated as a loan or financing transaction for federal income tax purposes, shall be treated in a similar manner for sales tax purposes." Therefore, in determining whether lease payments under an IRB lease agreement are a financing arrangement, which would not be subject to sales tax, or a sale or lease, which could be subject to sales tax, the Department will consider whether the Company treated the lease payments as a loan or financing transaction for federal income tax purposes.

APPROVED:


John LaFaver
Secretary of Revenue




Date Composed: 01/09/1998 Date Modified: 10/11/2001