ST 2003-08 - Leases and Rentals - July 2, 2003
Am. Sub. H.B. 95 contains a number of changes intended to
bring Ohio statutes into compliance with the terms of the
Streamlined Sales and Use Tax Agreement. Information on the
Streamlined Agreement can be found at www.streamlinedsalestax.org.
Effective July 1, 2003, one change that was made in H.B. 95
was an amendment to the definition of "lease" or "rental" to
adopt language from the Streamlined Agreement. This revised
definition makes one substantive change to the application of
sales and use tax to certain lease transactions that have a
nominal option price at the end of the lease.
Prior to July 1, 2003, Ohio sales tax law had a definition of
the term lease. Essentially, that definition provided that a
lease was a transfer of possession of and a license to use,
but not title to, tangible personal property for a period of
time greater than 30 days. There was no statutory definition
of the term "rental."
Effective July 1, 2003, R.C. 5739.01(UU) [formerly (VV)] is
amended to define "lease" or "rental," for sales tax
purposes, as follows:
(1) "Lease" or "rental" means any transfer of the
possession or control of tangible personal property for a
fixed or indefinite term, for consideration. "Lease" or
"rental" includes future options to purchase or extend,
and agreements described in 26 U.S.C. 7701(h)(1) covering
motor vehicles and trailers where the amount of
consideration may be increased or decreased by reference
to the amount realized upon the sale or disposition of
the property. "Lease" or "rental" does not include:
(a) A transfer of possession or control of tangible
personal property under a security agreement or a
deferred payment plan that requires the transfer of title
upon completion of the required payments;
(b) A transfer of possession or control of tangible
personal property under an agreement that requires the
transfer of title upon completion of required payments
and payment of an option price that does not exceed the
greater of one hundred dollars or one per cent of the
total required payments;
(c) Providing tangible personal property along with an
operator for a fixed or indefinite period of time, if the
operator is necessary for the property to perform as
designed. For purposes of this division, the operator
must do more than maintain, inspect, or set-up the
tangible personal property.
(2) "Lease" and "rental," as defined in division (UU) of
this section, shall not apply to leases or rentals that
exist before the effective date of this amendment.
(3) "Lease" and "rental" have the same meaning as in
division (UU)(1) of this section regardless of whether a
transaction is characterized as a lease or rental under
generally accepted accounting principles, the Internal
Revenue Code, Title XIII of the Revised Code, or other
federal, state, or local laws.
This new provision makes one substantive change in the way
Ohio treats leases for sales and use tax purposes. Ohio has
always considered any lease agreement with an option to
purchase at the end of the lease term to be a lease for tax
purposes. There was no exception for so-called financing
leases with only a nominal option price. Effective for
leases entered into on and after July 1, 2003, under new
R.C. 5739.01(UU)(1)(b), if the option to purchase is for a
price that "does not exceed the greater of one hundred
dollars or one per cent of the total required payments,"
the transaction is not a lease for sales or use tax
purposes. This change applies only to sales and use
tax. It does not apply to Ohio personal property tax or any
other Ohio taxes.
For purposes of applying sales tax, a financing lease with
a nominal purchase option will be treated as a conditional
sale. For example, a lessor may acquire property for resale
and then enter a financing "lease" with a lessee that
provides an option to purchase for a nominal price. The
lessor is making a conditional sale and must collect tax
from the lessee on the total price of the property being
sold at the time the parties execute the "lease"
transaction. If the price of the option to purchase is not
included in the price at the time the property is sold, at
the time the option is executed the sales tax must be paid
on the option amount.
A similar result would apply where a lessee purchases the
leased property from a vendor and then enters into a
sale-leaseback type of arrangement with a purchase option
for a nominal price. The lessee’s purchase of the property
from a supplier would be exempt for resale. Likewise, the
lessor’s purchase of the property from the lessee would be
an exempt sale for resale. The leaseback to the lessee
would be a conditional sale. The lessor should collect tax
on the total price charged to the lessee for the property
at the time the parties execute the leaseback transaction.
The price of a conditional sale is the price to the
consumer of the property being sold, not including any
interest or financing charges.
Accelerated tax on leases
Since February 2002, certain leases have been subject to
tax on an accelerated basis. The provisions for this
acceleration were found in R.C. 5739.01(H)(4) and
5741.01(G)(6), as part of the definition of "price" for
sales and use tax respectively. H.B. 95 has moved the
provisions requiring accelerated taxation of leases from
these sections to the levying sections of the two taxes,
R.C. 5739.02(A)(2) and 5741.02(A)(2). This change should
not alter what transactions are subject to the accelerated
tax treatment nor any of the procedures for applying the
For further information on what leases are subject to
accelerated tax and how the tax is to be collected, see
this Department’s letter to vendors on leases, which is
available on the Department's Web site at Leases: Changes in the Tax Law, Revised March 2006.
If you have questions regarding any matter covered in this
release, please call 1-888-405-4039 (Ohio Relay Service for
the Speech or Hearing Impaired: 1-800-750-0750), or e-mail us
through our web site.