December 27, 1996

You request a letter ruling *************** concerning the application of the Massachusetts sales or use tax to a sale and leaseback transaction entered into as part of a financing arrangement. [1]

Facts

The facts set forth in your request are summarized as follows. *************** ("Finance Corp") is in the business of providing financing to its customers in the form of consumer credit and credit cards, real estate loans and other collateral based loans and leases for a wide array of borrowers ("Customers"). In this case, the financing transaction would involve a Customer that owns personal property consisting of manufacturing equipment, furniture, store fixtures, office equipment, machine tools, food and beverage processing equipment, electronic test equipment, computers, construction equipment, and miscellaneous business equipment ("Property"). The Customer will be the owner of the Property and will claim depreciation on such property for both financial reporting and federal income tax purposes. The Customer will have paid all applicable Massachusetts sales and use taxes on the acquisition of the Property.

The Customer proposes to enter into a transaction to refinance existing debt associated with the Property, or, alternatively Finance Corp will provide cash to the Customer, in such manner that the Property (and debt, if any) are removed from the Customer's financial reporting balance sheet. [2] To effectuate the transaction, the Customer will present Finance Corp with a document entitled "Bill of Sale" for the Property for the purpose of providing Finance Corp with a security interest. Finance Corp will file financing statements with the Secretary of State. For financial reporting purposes, Finance Corp will treat the transaction as a financing.

After the transfer, and as an integral part of the transaction, Finance Corp will "lease" the Property back to its Customer in Massachusetts under a Master Lease Agreement. The payments due to Finance Corp under the agreement will correspond to a three-year principal and interest amortization schedule for loaned funds. At the end of the initial three year term of the agreement the Customer may either "purchase" the property from Finance Corp for a predetermined specified amount, or extend the agreement for an additional term for a predetermined "rental" amount, which may differ from the original "rental" amount. At the end of the extension period, the Customer may "purchase" the property for a nominal price, typically $1.00. If the Customer does not extend the agreement or repurchase the property by paying off the loan amount, the Customer and Finance Corp will sell the property to a third party. The proceeds of the sale will be applied to the loan amount and the Customer will have to provide funds in the event of a shortfall. Also, any gain on the sale will be passed on to the Customer.

The agreement provides that Finance Corp will not claim any tax benefits available to an owner of the Property. It provides that the Customer will assume or bear the entire risk of any loss, theft, damage to or destruction of the Property and it requires the Customer to keep all of the property insured. The Customer assumes all obligations to maintain the Property and to keep it in good working condition. The taxpayer represents that the sale and leaseback transaction will be treated as a financing for federal income tax purposes because the Customer retains all the benefits and burdens incident to ownership of the property ( citing, Frank Lyon Co. v. U.S., 435 U.S. 561, 572‑574 (1978); Swift Dodge v. Commissioner, 692 F.2d 651 (9th Cir. 1982); National Office Technical Advice Memorandum, Private Ruling 9307002, October 5, 1992).

Discussion

Massachusetts imposes a five percent sales tax on all sales at retail in Massachusetts by any vendor, unless otherwise exempt. G.L. c. 64H, § 2. A complementary use tax is imposed on tangible personal property purchased for storage, use or other consumption in Massachusetts, unless otherwise exempt. G.L. c. 64I, § 2. A "sale" is defined to include "any transfer of title or possession, or both, exchange, barter, lease, rental, conditional or otherwise, of tangible personal property...for a consideration, in any manner or by any means whatsoever." G.L. c. 64H, § 1. In Zayre Leasing Corp. v. State Tax Commission, 365 Mass. 351, 353 n.6 (1974), the Massachusetts Supreme Judicial Court indicated that "leases" and "rentals" were included in the definition of a sale to prevent evasion of the sales tax by structuring a sale as a lease. As stated in the facts of this letter ruling, however, a Massachusetts sales tax was paid by the seller-lessee on its initial purchase of the equipment.

Leases are generally subject to the sales or use tax. However, in consideration of the apparent intent of the statute, the Department will treat a sale and leaseback transaction as a non-taxable financing arrangement if the facts and circumstances indicate that the transaction is merely a financing, and neither title nor possession transfer to the financing agency. Although no factor is conclusive, the following factors will generally indicate that a transaction is a financing arrangement: title and possession remain with the seller-lessee and the seller-lessee retains all the benefits and burdens of ownership of the property such as risk of loss, entitlement to gain, maintenance of insurance, responsibility for taxes, and ability to take federal income tax deductions and credits.

Ruling

Based on the facts as stated in the request, and for the reasons discussed above, we determine that the sale and leaseback transaction was entered into as part of a financing arrangement. The transaction does not fall within the definition of a "sale" subject to tax. Thus, payments received by Finance Corp will not be subject to the Massachusetts sales or use tax.

Very truly yours,

/s/Mitchell Adams

Mitchell Adams
Commissioner of Revenue

MA:HMP:dmm

LR 96-6



[1] The Finance Corporation's transaction will be treated by the Customers as operating leases under Financial Accounting Standards Board Statement No. 13 because (a) there will not be a bargain purchase option at the end of the initial lease term, (b) there is not an automatic transfer of ownership of the property to the lessee, (c) the lease term will not exceed 75% of the estimated economic life of the property, and (d) less than 90% of the fair market value of the property at lease inception will be recovered through the present value of minimum lease payments. Consequently, neither an asset nor a liability is recorded on the lessee's balance sheet, thus providing an "off balance sheet" financing. Finance Corp, the "lessor," will treat the transaction as a financing for financial reporting purposes. We express no opinion on the permissibility or appropriateness of the accounting treatment of the sale and leaseback transaction.

[2] This ruling does not express any opinion on the income tax consequences of the transaction.