The equipment leasing industry is constantly changing due to regulatory, legislative and competitive market driven influences. Tax professionals are all too familiar with challenges that leasing brings. Transactions are often complicated and sales tax compliance can be difficult to manage. Equipment Leasing transactions may contain multiple elements that affect the taxability of a lease. Determining how to tax the assets under lease and determining how to tax lease isn’t a simple matter. The most common challenges faced by tax departments in the equipment leasing industry include:
- 1. Taxing the assets – The majority of leases continue multiple assets that are used in various ways. A decision must be made to determine if the asset is subject to tax and how to track the taxability if it is not. For example, a manufacturer may lease similar assets where one is used in the office and other is used in the manufacturing process. This could result in differing tax treatment depending upon the state regulations.
- 2. Ancillary Charges – Some customers want to finance any ancillary charges related to their equipment such as freight, installation, consulting, usage fees, upfront sales taxes and a variety of other charges. Often these items have a different tax treatment than their related equipment.
- 3. Bundled Services – It is common for equipment leases to include a maintenance agreement or charges for professional services. Computer equipment lease may include IT services, such as consulting or cloud computing. Customers don’t necessary know the pricing breakdown between the equipment and the service component. If the charges are not separately stated on the customers invoice, the taxability of the various transactions may change the tax treatment; services that may have been exempt are now taxable.
- 4. Taxing the Lease – Once the taxability of the assets and any related fees have been determined, the tax on the lease must be determined. Is the tax calculated on the stream of payments, upfront on the cost of the equipment, or upfront on the stream of payments? Each jurisdiction can treat the taxability of an asset and its related services and each lease type (fair market value, conditional sales agreement, etc.) differently. Additionally, tax regulations and rates are always changing.
- 5. Asset Moves – Customers with multiple locations throughout the country have the ability to move their equipment from one location to another. Since jurisdictions treat leases differently, a new taxing decision needs to be made when the equipment moves to determine the taxability impact and if additional tax is due. For example, if equipment on an FMV lease is moved from Illinois to Ohio, the lessor needs to calculate and remit upfront tax on the remaining stream of payments.
- 6. Lease Upgrades – Upgrading or replacing equipment before the end of the original lease term is common practice throughout the industry. Sometimes the equipment is returned and sold back to the vendor and sometimes it is rolled over to a new lease. When these situations arise, additional taxing decision questions need to be answered: Is the refinance balance of the returned equipment subject to sales tax? For equipment that remains on lease, is there a change in the tax treatment?
- 7. End-of-term Options – Customers have many choices at the end of the lease term: return the equipment, purchase the equipment, and or extend the lease. Each of these options requires different tax treatments.
Sales tax complexity exists at every stage of the leasing lifecycle. Addressing these challenges in a manual fashion can be burdensome and costly to organizations, which is why having a technology partner with an automated tax solution is key.
Vertex offers the only tax automation solution that is fully integrated with LeaseWave. Companies can leverage the combined centralized, enterprise wide software system and take advantage of Vertex’s comprehensive data set – which includes many taxability categories for equipment types, as well as rates and rules that drive leasing tax calculation results. This enables companies to eliminate the need to research and maintain taxability rules, tax basis rules, tax rates, and surcharges for countries across the globe – including over 14,000 U.S. state, county, city, and district jurisdictions.
For more information, contact Odessa today.