This information was prepared by the Ohio Department of Taxation and originally appeared on the Ohio Department of Taxation website.
JANUARY 2002
To All Ohio Vendors:
The Ohio 124th General Assembly recently passed Amended Substitute House Bill 405, which made significant changes in the way Ohio sales and use tax is applied to the lease of motor vehicles, watercraft, outboard motors, and aircraft. The change in the law also applies to leases of tangible personal property used for business purposes. Effective February 1, 2002, the sales tax on most leases of these types of property will be computed and paid at the beginning of the lease rather than on the monthly payments. The following information will explain the changes of the law and how they may apply to your business.
Statutory Law
Section 5739.01 (H) (4) has been added to the definition of "Price". It states:
"In the case of the lease of any motor vehicle designed by the manufacturer to carry a load of not more than one ton, watercraft, outboard motor, or aircraft, or the lease of any tangible personal property, other than motor vehicles designed by the manufacturer to carry a load of more than one ton, to be used by the lessee primarily for business purposes, the sales tax shall be collected by the vendor at the time the lease is consummated and shall be calculated by the vendor on the basis of the total amount to be paid by the lessee under the lease agreement. If the total amount of the consideration for the lease includes amounts that are not calculated at the time the lease is executed, the tax shall be calculated and collected by the vendor at the time such amounts are billed to the lessee. In the case of an open-end lease, the sales tax shall be calculated by the vendor on the basis of the total amount to be paid during the initial fixed term of the lease, and then for each subsequent renewal period as it comes due."
Additions similar to the above were made to the Use Tax code in Section 5741.01 (G) (6).
Section 5739.01 (VV) has been added. It defines the term "lease".
"Lease" means any transfer for a consideration of the possession of and right to use, but not title to, tangible personal property for a fixed period of time greater than twenty-eight days or for an open-ended period of time with a fixed period of more than twenty-eight days.
| Explanation |
This change in the sales and use tax law applies to qualifying lease contracts entered into on and after February 1, 2002. The tax will be collected at the time the lease is consummated. Sales and use tax apply to the total amount that will be paid throughout the term of the lease. Tax on charges that are not or cannot be calculated at the time the lease is consummated must be collected at the time those charges are billed to the lessee. Examples of this type of charge would be an excess mileage charge or a reimbursement of personal property tax.
There are many questions that arise as a result of the law change. Below you will find questions and answers to assist you in implementing the new law. At a later date, there will be more detailed information available on the Department of Taxation website.
Questions and Answers
| (Q1) | To what items does the new law apply? |
| (A1) | The law specifically lists motor vehicles, watercraft, outboard motors and aircraft. (Note the exclusion of motor vehicles designed by the manufacturer to carry a load of more than one ton. A lease of this type of vehicle will still be subject to the tax on each monthly lease payment as treated under prior law). Also included under the new law is "tangible personal property used primarily for business purposes." This includes, but is not limited to, leases of computers, computer peripherals, canned software, furniture, machinery, plants, wall hangings, communication equipment, and any other personal property used by a business. |
| (Q2) | How is the "price" determined for computing sales tax due at the time the lease is consummated? |
| (A2) | The price on which to compute the sales tax is the total amount to be paid by the lessee under the lease agreement. The change in the law requires that price includes the sum of all lease payments over the term of the lease. For example, if the lease calls for 48 payments of $300.00, total payments would be $14,400.00. "Price" includes this amount. As under prior law, "price" also includes other amounts that represent consideration for the lease of motor vehicles, watercraft, aircraft and other personal property including, but not limited to: down payments, manufacturer rebates, interest, and documentary fees. Refundable deposits, to the extent those deposits are actually refunded to the lessee, are not part of the price. Should part of the deposit be held at the end of the lease to cover taxable charges and fees, the tax on that amount will be collected at the time the charge is imposed. |
| (Q3) | How will trade-ins be handled? |
| (A3) | Trade-ins are similar to charges such as down payments or manufacturer rebates in that they reduce the cost of the leased property on which the lease payments are computed. As a general rule, items taken in trade on a sale or lease are part of the price. Tax will apply on trade-in amounts in the same manner as for down payments or manufacturer rebates. However, under Ohio law, the credit afforded a lessee for a trade-in of a used motor vehicle on the lease of a new motor vehicle is not included in the taxable price of the transaction. Likewise, the credit afforded a lessee for the trade-in of a used watercraft or outboard motor on the lease of a new or used watercraft or outboard motor from a watercraft dealer registered with the Ohio Department of Natural Resources is not included in the taxable price. In these types of transactions, no tax need be collected on the credit afforded the lessee for the trade–in. If the lessee owes an outstanding balance on the motor vehicle, watercraft or outboard motor that is traded, and that balance is financed as part of the lease, the financed amount is part of the price of the lease. |
| (Q4) | Who is responsible for collecting and remitting the tax? |
| (A4) | The vendor collects and remits the tax. In the case of the lease of a motor vehicle, the vendor is the dealer with whom the lessee negotiates the transaction and from whom delivery of the leased vehicle is taken. In all other cases, it is the person to whom the down payment or initial lease payment is made. The vendor will pay the tax on the appropriate Ohio sales or use tax return. The vendor is entitled to the .75% discount of the tax for returns that are paid and received in a timely manner. |
| (Q5) | When should the tax be collected and remitted? |
| (A5) | The tax should be collected at the time the lease is "consummated." For purposes of sales and use tax, the lease will be considered to be consummated when the property which is the subject of the lease is delivered or the initial payment under the lease is required to be made, whichever is earlier. Charges payable under the terms of the lease during the period the lease property is being produced, and which compensate the lessor for the cost of acquiring the leased property, are not considered to be the initial payment on the lease. Such charges are part of the taxable price of the leased property and tax should be collected and remitted on these charges on the sales or use tax return for the period in which the lease is consummated. |
| (Q6) | What is the rate of tax to collect? |
| (A6) | In the case of a lease of a motor vehicle, watercraft or outboard motor, the dealer must collect the tax at the rate of the lessee’s county of residence. In the case of the lease of an aircraft or federally documented watercraft, the vendor should collect the tax at the rate where the aircraft or documented watercraft is based. For other tangible personal property used for business purposes, the vendor should collect tax at the rate in effect for the county where the property is to be primarily located and used. Non-Ohio vendors must collect the tax at the point of use of the property. |
| (Q7) | What is the appropriate sales or use tax account on which to report and pay the tax? |
| (A7) | In-state businesses that facilitate lease transactions will need two accounts to report their sales and lease transactions: a regular county vendor’s license and an Ohio transient vendor’s license, license number 89-X5XXXX. Out-of-state sellers will need an Ohio seller’s use tax account, account number 99-XXXXXX. |
| (Q8) | What is to be reported on each of the sales and/or use tax returns? |
| (A8) | For leases where a dealer collects the tax on the leasing transaction, the dealer is effecting two sales for purposes of reporting on sales and use tax returns. One for the sale of the property to the leasing company and the other for the tax collected on the amount paid for the term of the lease. For the sale to the leasing company, the sale price should be reported on the return for the retailer’s regular vendor’s license (Form ST-10) as an exempt sale. The amount of the sale would be reported on line 1, Gross Sales, and subtracted on line 2, Exempt Sales. For the other sale to the lessee, the sale and tax will be reported and remitted on the return for the transient vendor’s license (Form UST-1). The amount of the sale and the tax will be listed on the supplemental portion of the return on the line for the county rate that was collected. It will be included with all other taxable transactions on line 1, Gross Sales. The amount of the sale is everything included in the "price" as described in A2, above. If the lease is not subject to the tax, it should be included on line 2, Exempt sales, and not reported on a county line in the supplemental portion of the return. For leases by an Ohio leasing company where the leasing company is collecting and remitting the tax, the tax will be reported and paid under a transient vendor’s license. An out-of-state leasing company in the same situation will report and pay the tax on a seller’s use tax account. |
| (Q9) | If the lease is terminated prior to the lease term, is there a refund for any of the sales tax previously paid? |
| (A9) | No. There is no provision in the Ohio Revised Code for a refund of the tax, unless the entire purchase price is refunded to the customer. |
| (Q10) | Is sales tax due on charges that are not or cannot be calculated at the time the lease is consummated? |
| (A10) | If the lessor assesses charges for items such as property tax reimbursement, or excessive wear or mileage, either during the lease period or at the end of the lease, sales tax must be collected on these charges at the time they are billed to the lessee. This tax collected should be reported and paid on the lessor’s regular sales or use tax return. Tax is due on any early termination charge unless that charge represents a compensation for the unpaid amounts on the lease that have already been subject to taxation at the consummation of the lease. |
| (Q11) | If the lessee decides to purchase the leased property, what is the tax consequence? |
| (A11) | If the customer decides to purchase the property, tax should be collected on the purchase price and any other charges associated with the transfer of ownership. For motor vehicles, watercraft and outboard motors, tax should be paid to the Ohio Clerk of Courts at the rate in effect in the customer’s county of residence. For other property, the tax should be paid on the leasing company’s Ohio transient vendor’s License. |
| (Q12) | What about existing leases entered into prior to February 1, 2002? |
| (A12) | The method of tax collection on these leases will remain the same as under prior law. Tax should be collected on each monthly payment through the end of the lease. Tax should be charged on any fee for the early termination of such a lease. Similarly, additional fees such as property tax reimbursement, or excessive wear or mileage charges would be taxable as they are billed. Lease contracts entered into prior to February 1, 2002 may provide for extensions of the original lease. If the extension contains the same provisions of the original lease, the tax shall continue to be collected and reported on the monthly lease payments. However, if the provisions of the original lease are changed by the extension, this constitutes a new lease and tax would be collected up front according to the terms of the new lease contract. |
| (Q13) | When is a lease "entered into" as it pertains to the February 1, 2002 date? |
| (A13) | For purposes of applying the "grandfather" provision of Sub. H.B. 405,the Department of Taxation will consider a lease "entered into" when the parties are obligated to the terms of the lease, the specific motor vehicle, watercraft, outboard motor, aircraft, or tangible personal property that is the subject of the lease is identified, and steps toward performing the lease have been undertaken. For example, assume that prior to February 1, 2002, a lessor and a lessee have agreed to the lease of an airplane. Also prior to February 1, 2002, an order has been placed and the airplane is being manufactured for delivery to the lessor. In this case, the parties have obligated themselves to the lease, the specific property has been identified and performance has been undertaken by having production of the airplane initiated. This lease would qualify under the grandfather clause as one to be treated under the terms of the law that existed prior to that date. Often lessors and lessees will enter into agreements whereby a lessor will agree to lease property to a lessee where the specific items that may be subject to the lease are not identified in the agreement or the property leased may change over time. Some examples of this type of agreement may be styled master lease or fleet lease. Many of these contracts have been in existence for many years. In determining the application of the "grandfather" provision to these agreements, the Department of Taxation will look to the date when each specific motor vehicle, watercraft, outboard motor, aircraft, or other tangible personal property was identified and included in the lease. In other words, we will consider each item to be separately leased under the terms of the pre-existing contract. For example, a lessee with an agreement to lease a fleet of motor vehicles from a lessor orders new vehicles to be covered by the lease on March 1, 2002. The lease of these newly identified vehicles would be taxable at the time the lease is consummated on the total amount to be paid under the lease agreement for those vehicles. The existing fleet on January 31, 2002, would continue to be taxed on the monthly installments. |
| (Q14) | A lessor may advance the tax money to the lessee and finance the tax over the term of the lease. If this is done, is the repayment of the tax and any interest on that repayment subject to tax? |
| (A14) | The repayment of the financed tax and any interest on that financed tax are not part of the tax base of the lease for sales and use tax purposes where the records of the vendor and the lease clearly document the total price on which the tax was calculated and the tax collected on the lease. It would be preferable, though not required, that the financed tax portion of the lessee’s payment be separately stated on lease billings. |
| (Q15) | Will existing sales and use tax exemptions and exceptions apply to leased property after February 1, 2002? |
| (A15) | Yes. Current exemptions and exceptions based on the use of the item, the identity of the item, or the identity of the purchaser will still apply. |
| (Q16) | If the lessee has a Direct Payment Permit, should tax be paid to the vendor at the time the lease is consummated? |
| (A16) | No. The Direct Payment holder will report tax on their direct payment tax return. |
| (Q17) | Would non-taxable items such as customized software and professional services that are included in the lease of taxable personal property be subject to the tax? |
| (A17) | No, provided that the payments for non-taxable items are separately stated within the records of the lease document, and that the records of the vendor and the lease clearly document the total price on which the tax was calculated and the tax collected on the lease. |
| (Q18) | How should tax be calculated on a lease with no definite term? |
| (A18) | Tax should be collected on the total amount to be paid for the initial established term of the lease in the manner described in this letter at the time the lease is consummated. Tax should then be collected for each renewal period as payment for that period becomes due. |
| If you have any questions regarding the matters discussed above, or require any assistance concerning Ohio tax matters, please contact Mr. G. Brint Ryan, Managing Principal of Ryan & Company, at 972.934.0022. Mr. Ryan can also be reached via e-mail. | |