September 5, 1984

__________ ("Company") will transfer airplanes and yachts under agreements that will qualify as "finance leases" for federal tax purposes ( see I.R.C. § 168(f)(8), as amended by the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248)). You inquire about the Massachusetts sales and use tax treatment of such transactions.

The lease agreements will require the lessee to make monthly payments for terms of up to 15 years. The lessee will have an option to purchase the leased property at the end of the lease term for a price that equals ten percent of the original cost of the property to the Company.

In some cases, the yacht or airplane that the Company leases under a finance lease will have been purchased by the Company from the lessee.

For an agreement to qualify federally as a finance lease, the transaction must have economic substance independent of tax benefits, and not merely be cast in the form of a lease for purposes of using the lessor's tax base. The lessor must reasonably expect to derive a profit from the transaction independent of tax benefits. Also, the transaction must not in substance be a financing arrangement or conditional sale in which the lessee has an investment in the property. H. Conf. Rep. No. 97-760 at 490, reprinted in [1982] U.S. Code Cong. & Ad. News 1190, 1268.

For Massachusetts sales and use tax purposes, "sale" generally means "[a]ny transfer or title or possession, or both…of tangible personal property for a consideration, in any matter or by any means whatsoever." G.L. c. 64H, § 1(12)(a). Leases and rentals are specifically included in the definition of "sale". Id. Sales for resale in the regular course of business are exempt. G.L. c. 64H, § 1(13).

A true lessor of tangible personal property must collect the sales or use tax on each rental payment as it comes due, and his "gross receipts" subject to tax for a given period are those amounts coming due during that period by the terms of the governing rental agreements. (This rule does not relieve the lessor of his liability to pay to the Commissioner any tax due, regardless of whether the lessee reimburses him).

In the case of installment sales, the vendor's "gross receipts" subject to tax for a given period are measured by the total sales price for all sales made during the period, with no allowance for credit extended by the vendor; however, separately-stated interest charges under installment sales are not subject to tax so long as they are set in good faith.

Whether a transaction is a lease or an installment sale depends upon all the facts and circumstances in each case, including the good faith of the taxpayer; the taxpayer's characterization of the transaction is not determinative of its substance. However, a transaction is more likely to be regarded as an installment sale rather than a lease if, at the end of the term of the agreement under which property is transferred:

(a) title vests in the transferee;

(b) the transferee has the option to purchase the property for a nominal sum; or

(c) the fair market value of the property will be nominal because of obsolescence, depreciation or any other reason, and the transferor has the express option to abandon the property instead of retaking possession of it. See Sales and Use Tax Regulation 830 CMR 64H.06(2).

Based on the foregoing, it is ruled that the "finance leases" are true leases for Massachusetts sales and use tax purposes. Therefore, with respect to yachts and airplanes leased in Massachusetts or leased for use in Massachusetts, the Company must collect the sales or use tax on each monthly payment as it comes due, and the Company's gross receipts for a given period are those amounts coming due during that period by the terms of the lease agreements.

If a lessee exercises the ten percent purchase option at the end of the lease term, the amount due on the exercise of the option is also subject to the sales or use tax.

Where the Company purchases a yacht or airplane from a lessee and leases it back to him under a finance lease, the Company's purchase of the yacht or airplane is exempt as a purchase for resale in the regular course of business, but the sales or use tax applies to the lease (and to the exercise of the purchase option), as in the case of property acquired by the Company from a third party.

You also ask what documentation you must present on registering the yachts and airplanes to establish that no tax was due on your purchase ( see G.L. c. 64H, § 25A; G.L. c. 64I, § 26A). If the Company is registered as a Massachusetts vendor and certified on the Commissioner's Master Leasing List, it may fill out a Claim of Exemption from Sales or Use Tax (Form ST-6E) for each yacht or aircraft to be leased, and have it approved at the Excise Bureau of the Department of Revenue, 215 First Street, Cambridge, MA 02142. The Company should present a copy of the approved form upon registering the yacht or airplane to show that no tax was due on its purchase.

Very truly yours,

/s/Ira A. Jackson

Commissioner of Revenue

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LR 84-75