Double Tax on Discounting Leases in California
For almost five years Bette Kerhoulas, CLP, has been trying to resolve an issue with the State Board of Equalization, who after an audit, charged Pacific-Capital, Irvine, California with not paying "sales/use tax" on documentation and filing fees ( if billed separately rather than on the invoice for first and last they would not be subject to tax, they ruled) plus leases the company assigned they consider "sold," meaning the assets were not only taken as collateral in discounting, but title changed hands, therefore the leases were subject to sales/use tax in the transfer. Several hundred thousand dollars are involved in “double taxation,” and Pacifica-Capital has spent close to $100,000 to date in defending their position. The "event" was discussed at several United Association of Equipment Leaisng Conference, particularly since Ms. Kerhoulas is a past president. On April 25,2006 she e-mailed UAEL members for any assistance or history they had regarding California sales/use tax: “April 25, 2006 “Dear UAEL Member: “As part of your UAEL membership benefits, UAEL is informing you of a tax case set for hearing on May 17, 2006 before the California Board of Equalization ("BOE"), which may be important to you. A synopsis of the Taxpayer's Brief which has been filed with BOE is attached to this email. If you want more information concerning this case or want to contribute to a lobbying effort, you may contact the following: Bette Kerhoulas, CLP Outline attached: http://leasingnews.org/PDF/TPOutline.pdf According to the June 6, 2006 edition of ELT News, "The Equipment Leasing Association (ELA) has filed comments with the California Board of Equalization in case #217918 in support of a leasing company contesting application of sales tax to discounted or assigned true leases where the assignment contracts ostensibly transferred title to the property but in reality title was not transferred as the leasing company retained the residual equity interest. The leasing company also argues that for those other transactions in which title was in fact transferred, if the assignment is considered a second sale, then leasing company is entitled to an offset for taxes it originally paid on the equipment. Also in contention is tax on documentation fees in $1 purchase option leases. It is viewed as a case of double taxation since tax was paid up front on the equipment cost providing the State all revenues to which it is entitled. "You can view ELA comments for the hearing scheduled July 18 at http://leasingnews.org/PDF/ELASub0506.pdf "ELA joined the claimant in arguing a second sales tax collection places form over substance by ignoring the reality that title was never transferred. ELA also echoed claimant's position that for those transactions where title was transferred, claimant is entitled to an offset because claimant did not "use" the property before re-selling it. Claimant leased the equipment and then immediately assigned the equipment to the funder. The funder had in each case pre-committed to fund the lease long before any delivery or acceptance under the lease occurred. To argue in the face of a pre-commitment to acquire that taxpayer lessor used the equipment under the lease before selling it and thus is not entitled to the §1701 offset is inequitable, contrary to the regulatory intent and punitive to taxpayer in particular. " A summary by the claimant outlining these issues is accessible at http://leasingnews.org/PDF/TPOutline.pdf "The issue of sales tax application to fees for preparing documents was the result of auditors interpreting transactions as two separate sales; one from the vendor to the lessor and one from the lessor to the customer. Auditors concluded lease financings are analogous to sales by dealers where documentation fees are gross receipts from sales. This analysis ignores the fact that the customer actually negotiates the purchase and purchase price with the vendor and that the lessor is in reality providing financing only. Auditors effectively applied tax to a service extended by the lessor rather than anything substantive that could be subject to sales tax. “ELA members wishing to learn more or assist as the case nears a hearing on July 18 should contact Bette Kerhoulas at bettek@pacifica-capital.com “ |
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