Do You Know Where Your Leased Assets Are?

Transcription

1 Do You Know Where Your Leased Assets Are? Jeanne Hill Director, Tax De Lage Landen Philadelphia, PA Carlos V. Hernandez Sr. Manager EY Boston, MA

2 DISCLAIMER The following information is being presented on the understanding that it is intended for information purposes only. De Lage Landen, Ernst & Young LLP nor the presenters have been engaged for the purpose of providing legal, accounting, taxation, or other professional advice. No person should act based upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific cases are considered. 2

3 States Imposing a Sales Tax on Leases States with no sales tax on leases: Montana New Hampshire Oregon All states that impose a sales and use tax will impose a tax on leasing (45 States, plus the District of Columbia) Add: Delaware Lessee Use Tax Alaska Certain local jurisdictions 3

4 Lease Terminology Parties to a lease: Lessor: Generally the owner of the equipment Lessee: Generally user of the equipment Creditor or guarantor: Party with the credit that can guarantee lessee will fulfill the lease terms Assignee: Party receiving rights and interest in lease, with or without title to equipment Assignor: Generally the lessor; assigns rights under lease to assignee with or without ownership 4

5 Lease Terminology Types of Leases Operating/True Lease: Purchase options at end of lease term: Fair market value; no purchase option Financing/Capital Lease: Purchase options at end of lease term: $1; 10% or less of original cost; Mandatory purchase Lease term: Greater than X% of useful life Net lease: Lessee responsible for tax, maintenance and insurance TRAC Lease: Vehicle lease with risk of gain/loss to lessee 5

6 Lease Terminology Types of Leases Lease designation can vary by the three guiding disciplines: Accounting: Operating, capital, direct finance, sale Tax: True lease, finance lease, conditional sale, installment sale Legal: Lease, security interest, UCC finance lease, synthetic 6

7 True Lease - Tax Due Stream (on each rent payment) Most states Upfront (at lease inception) e.g., Illinois, New Jersey Election e.g., California MTE Upfront and Stream e.g., Louisiana (April 1, 2016), Chicago Special treatment for titled vehicles e.g., Texas 7

8 Louisiana 1st Extraordinary Legislative Session: ACTS 25 & 26 ACT 25 established changes to state tax exemptions, including: Resale: TPP for lease or rental (other than automobiles) Non-profits: Parochial and Private Schools Different reduced rates for 2 separate time periods ACT 26 imposed additional 1% state sales tax (5%) Timeline March 23, 2016 March 29, 2016 Louisiana Department of Revenue Actions Act 25 enacted DOR issued revised rate chart April 1, 2016 Effective date: Phase 1 rates (4/1/16 through 6/30/16) July 1, 2016 Effective date: Phase 2 rates (7/1/16 through 6/30/18) July 1, 2016 ** 2 nd Extraordinary Session begins ** 8

9 Other Types of Taxes on Leases Sales Most states Use e.g., Missouri Rental e.g., Alabama Excise Hawaii Retail (4%)/Wholesale (0.5%) Gross receipts Special motor vehicle taxes 9

10 Tax Imposition and Rates Tax Primarily on Lessee Most states Tax Primarily on Lessor e.g., Alabama, Illinois Reduced Rate e.g., South Carolina motor vehicle max tax of $ Historical Rate e.g., California MTE when election on rents 10

11 Complexity of a Lease 11

12 Leased Equipment Movement Jurisdictions may impose multiple levels of tax on leasing transactions: California MTE risk of double-taxation exists for mobile property if election to pay on stream. Or too much tax if paid upfront Risk of whipsaw longer statute of limitation or statute waiver in place Asset marked exempt in system - Exemption does not apply in moved-to state or no exempt cert for new state 12

13 Leased Equipment Movement Determining correct tax jurisdictions through lessee proactive communication is critical to reducing the number of incorrectly filed returns. 13

14 Leased Equipment Movement Tax rate changes - may not be grandfathered to existing lease contracts Exemption certificates - from new state not on file or acceptance of good faith exemption may be questioned Exemption claimed may not apply to leased equipment. Tax may be imposed on lessor, making the exemption certificate not applicable. 14

15 Leased Equipment Movement Bundled transactions may be taxed differently in new destination state California Nortel Networks Inc. v. Board of Equalization, 119 Cal. Rptr. 3d 905 (2011) New Jersey Equipment upfront, maintenance contract on each payment Missouri Use tax vs. sales tax Maximum local tax and single article tax e.g., Florida, Tennessee Tangible and intangible 15

16 Leased Equipment Movement Tax Credits and double-taxation? If structured improperly and lessor does not timely and accurately take credits, tax could be due on full purchase price to one state AND pay tax based on lease payments to another state (e.g., Illinois). 16

17 Leased Equipment Movement Lease taxed in state where lessee first takes possession and control vs. state of primary use Tennessee: Williams Rentals, Inc. v. Tidwell, 516 S.W.2d 614 (Tenn. 1974) and TDOR Ruling No Leases of equipment delivered in Tennessee for use solely outside State of Tennessee nonetheless taxable in Tennessee. SSTP protection 17

18 Property Tax Ad valorem tax Based on the value of the property Each state has a lien date Ownership of the asset determines reporting responsibility 18

19 Property Tax Based on the assessed value of the asset. The tax is determined by multiplying the assessed value by the tax rate in the jurisdiction. Example: Cost x %Good = Value x Tax Rate = Tax Amount Year 1 $10000 x.90 = 9000 x 2.5% = $ Year 2 $10000 x.80 = 8000 x 2.75 % = $ This font size is not recommended for content. nt. 19

20 Property Tax Property Tax is billed annually Bills are consolidated and do not show detail by asset. Once DLL pays the bill to the jurisdiction, we allocate it to the asset level and process a billing file to invoice the lessee for the amount we paid. Property Tax Clause in the Contract 20