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

Annotation 330.5251

(e) Sales and Leaseback Transactions

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330.5251 Sale and Leaseback—Financing Transaction. A company purchased a piece of equipment five years ago and paid sales tax reimbursement. Now it wishes to refinance the equipment. The company will sell the equipment for the appraised value. Title will transfer to a buyer/lessor who will lease the equipment back to the company. The lease would have an estimated imputed interest rate of 8.8% compounded annually. At the end of the eleven year term of the lease, the equipment can be purchased for an option price of one dollar.

The company will report the proposed transaction as a loan for income tax purposes, deducting the interest expense portion of the payments. Despite the transfer of title for security purposes, the benefits and burden of ownership will be retained by the company. The company will continue to depreciate the equipment as it has done in the past. The buyer/lessor will treat the transaction consistent with that of the seller/lessee.

Under Regulation 1660(a)(3), a transaction structured as a sale and leaseback will qualify as a financing transaction if three conditions are met: (1) if the lease transaction would be regarded as a sale at inception, (2) if the purchaser-lessor does not claim any deduction, credit or exemption with respect to the property for state or federal income tax purposes, and (3) if the amount which would be attributable to interest, had the transaction originally been constructed as a financing agreement, is not usurious under California law. (Regulation 1660(a)(3)(A).)

Based on the information submitted, it appears that the proposed transaction satisfies each of these three requirements and would qualify as a financing transaction for sales and use tax purposes. Thus, it would not be subject to the tax. 8/12/94.