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Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations


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L


330.0000 Leases of Tangible Personal Property—In General—Regulation 1660

Annotation 330.2522.600

(a) In General


330.2522.600 Option to Purchase Price Paid in Advance. Equipment with a combined value of $231,000 was leased for a fixed term of five years. The lease called for a monthly payment of $4,537.15. By the terms of the contract, title to the equipment remained in the lessor and lessee had the option to purchase the equipment which may be exercised during the last six months of the lease term. However, the option purchase price of $23,189 was required to be paid in cash at the time of the execution of the lease agreement.

Even though the option price was more than a nominal amount (Regulation 1660(a)(2)(A)), the requirement that the purchase price be paid in advance in effect renders the true option price to be paid at the end of the lease to be zero dollars. In other words, at the end of the lease term, the only requirement to exercise the option will be for the lessee to give written notice to the lessor. Also, Regulation 1641(b) states that if property is for all intents and purposes sold, but is treated as a leasing agreement for purpose of retaining title in the seller as security for payment of the purchase price, the transaction is deemed to be taxable as a sale under a security agreement. Therefore, the lease constitutes a present sale of the equipment and subject to tax at its inception of the lease. 6/30/86.