Leasing Companies and Sales Tax: The Six Questions Executives Need to Ask
by Nancy A. Geary January/February 2017
The larger an equipment leasing company gets, the harder it becomes to keep up with sales tax compliance. ECS Financial Services Shareholder Nancy A. Geary outlines six essential questions executives need to ask ahead of time to avoid common missteps in sales and use tax processing.
Nancy A. Geary, CPA, CLFP, Shareholder, ECS Financial Services
Sales tax compliance can be a daunting task for any company to take on, but it is especially difficult for an equipment leasing company. Why? Because it is a complicated area made even more complex by the types of business activities leasing companies encounter every day.
There are variations on sales, use and rental tax for the types of equipment a company is financing, and the complexity grows exponentially as a leasing company branches out with leased equipment located in multiple states. Each state’s laws are different and require a thorough understanding to properly assess, report, file and pay the correct amounts to the proper jurisdictions. Companies also must deal with a myriad of exemptions that may apply within each state or jurisdiction. A leasing company must consider all of these issues when deciding to expand operations with customers located across the country.
How can a leasing company be certain of compliance with all sales and use tax issues in every jurisdiction of its operation? By asking the right questions and addressing common compliance hurdles ahead of time.
1. What state-by-state regulations do we need to consider?
An equipment leasing company must register for business licenses in every state where it will be conducting business and where the equipment on lease will be located. It is best to file these types of registrations online, and some states require the filing of an annual renewal for the business license to remain in effect. Sales tax licenses must be obtained in a similar manner. Keeping a checklist by state of the forms to file, with due dates, will aid in compliance.
For most equipment leases, the state where the equipment is located drives the taxability and corresponding tax rates. There are also differences in how tax is paid. Certain states require payment of sales tax up front, while others require application of sales tax to each rental payment due.
2. What type of leases are we entering into?
A lease can be set up as a financing arrangement with a bargain purchase option, commonly referred to in tax jargon as a conditional sale, or as a rental agreement with a fair market value end of term option, referred to as an operating lease. The type of lease will determine how sales tax is assessed and when it is paid. These rules differ by state. Consult with equipment leasing experts for guidance based on the type of lease contract and the specific equipment involved.
3. Are we up to date on tax rate changes?
An equipment leasing company with leases located all across the country must have access to correct state-by-state sales tax rates and must update these rates periodically to ensure that the proper tax is being charged and remitted. Many tax service companies can provide this type of information.
Based on the type of leasing software used to service a lessor’s portfolio, tax rates for each locality can be uploaded into the system and maintained going forward through periodic updates to ensure a leasing company is calculating the correct amount of sales or use tax.
4. Are we taking all of our exemptions?
A variety of sales tax exemptions are available to leasing companies based on the equipment financed, and these exemptions vary by state. A customer also may be exempt from sales tax for various reasons, such as having governmental agency or non-profit organization status.
Properly documenting any sales tax exemption is extremely important. The customer can provide tax exemption certificates and, if the exemption relates to the specific equipment involved, exemption forms must be filled out online. All of these forms and certificates need to be maintained in an orderly fashion in the event the transactions are audited by the relevant state or local jurisdiction. 5. Are we accounting for all the different sales tax rules that affect our business?
Titled vehicles are a perfect example of the varying rules that exist and how each state may have a different view on whether sales tax is charged and the rate that will ultimately be charged. A combination of the type of vehicle leased, the state where the equipment is located and the type of lease (true tax lease, conditional sale, etc.) determines how sales tax will be assessed.
For instance, sales tax will be assessed on each periodic rental payment that is due for a tractor/trailer operating or true lease in California. If the lease was a conditional sale, the sales tax will be assessed and paid on the gross receipts due when the lease commences.
There are a variety of rules, exemptions and forms that apply to titled vehicles, and the sales tax implications of specific transactions can be best interpreted by tax professionals who specialize in titled vehicle leasing.
6. Are we using the correct tax forms?
Different forms of tax are assessed on leasing transactions. Some states simply call them a sales tax and others will reference them as a use tax. The differences between sales tax and use tax may require a company to file different forms for one state.
This distinction is important because if the incorrect tax is assessed, the leasing company may be assessed penalties and interest. These additional costs will make compliance burdensome and affect the overall profitability of the company. Completing the correct forms and charging the correct rate are essential to achieving proper tax compliance.
Most sales and use tax reporting is done electronically and requires a company to both set up accounts and pay online. Keeping track of the online account information and making sure that there are adequate controls in place will help ensure that this information remains secure.
Many of the checkpoints and procedures outlined in this article exist to help avert any missteps in sales and use tax processing. However, no matter how strong the controls are, there is a good chance one or many of the jurisdictions involved will proceed forward and audit a company’s transactions. This is standard procedure for the taxing jurisdictions, and equipment leasing companies should expect this when doing business in multiple states.
The stronger and tighter the controls that a company puts in place, the better it will perform in an audit of its transactions. There are no guarantees, but equipment finance companies can reduce the risks of additional assessments and penalties by taking care when setting up the proper assessment and remittance of sales tax. Obtaining help from a trusted source and knowledgeable tax group can limit mistakes and increase overall efficiency.
Kenneth P. Weinberg,
Baker, Donelson, Bearman, Caldwell & Berkowitz
Usury laws vary from state to state, which can make a lease or loan more complicated when the lessor is in one state and the lessee in another. Kenneth Weinberg discusses how this has played out so far in the courts, with favorable rulings for a lessor often depending not only on who files first, but where they file from.
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