Information Release

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.

Definition

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 accelerated tax.

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.