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Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations


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

Annotation 330.5265

(e) Sales and Leaseback Transactions

330.5265 Sale and Leaseback Transaction. A manufacturer proposes to enter into a transaction with a United Kingdom company whereby it will transfer legal title to certain equipment and continue to have all the incidents of ownership pursuant to a contract which is cast in the form of a lease.

The manufacturer's sole purpose in entering into the proposed transaction is to receive and retain $4.5 million by enabling the U. K. company to retain certain statutory tax benefits available in the United Kingdom when certain conditions are met. No U. S. benefits are available to the manufacturer or the U. K. company by reason of the proposed transaction.

Assets in the amount of $50 million that will be the subject of this transaction have been acquired sales or use tax paid. At the closing of the title transfer to U. K. company and as an integral part of that transaction, approximately $45.5 million of the total consideration of the $50 million paid to the manufacturer will be deposited by the manufacturer with a United Kingdom bank, an affiliate of the U. K. company that is acquiring legal title to the assets. As a result, manufacturer will receive net proceeds of $45 million. Interest and principal from the $45 million deposit will be precisely equal to, and will be used to pay, all rental due under the lease during the 15 year lease term, so that at the end of that term the deposit will be exhausted and manufacturer's rental obligations during the term will have been satisfied. The remaining $4.5 million will be retained by manufacturer. At the end of the 15 year lease term, manufacturer will have the right to: (1) continue to add the assets ad infinitum upon payment of a nominal annual rental for 5 years and a lump-sum payment of about $400,000, (2) sublease or assign its right to use the assets in perpetuity to whomever it chooses, or (3) if it has no other use for the assets, to sell them to a third party and retain all but 2½ percent of the proceeds.

Since the bank retains title to the property at the end of the lease term and does not relinquish title until such time as the property is disposed of by sale, the transaction is not merely a financing transaction but a sale of the property to the lessor. Accordingly, the transaction is subject to the sales tax. 11/5/81.