Opinion ID: 2519779
Heading Depth: 2
Heading Rank: 1

Heading: sale and leaseback transaction

Text: ¶ 15 ZCMI sought capital financing from Matrix. To that end, ZCMI and Matrix entered into a Master Lease Agreement, which provided for the transfer of title of certain personal property from ZCMI to Matrix. ZCMI and Matrix executed both a Sale and Leaseback Agreement (the Agreement) and an Equipment Schedule to the Master Lease Agreement to initiate each such transaction. The Commission asserts that two transactions occurred as a result of the parties' agreements: (1) a sale of equipment from ZCMI to Matrix, and (2) Matrix's lease of the equipment to ZCMI. Sales tax in Utah is a transaction-oriented tax governed by the Utah Sales and Use Tax Act. Within this Act, section 59-12-103(1) defines what transactions are subject to taxation: There is levied a tax on the purchaser for the amount paid or charged for the following: (a) retail sales of tangible personal property made within the state; ... (k) leases and rentals of tangible personal property if the property situs is in the state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state. Id. § 59-12-103(1)(a), (k) (2000). [4] Under this section, both sales and lease transactions are subject to sales tax. Matrix raises several arguments against the taxable nature of the transactions, which we address in turn.
¶ 16 Determining the meaning of the word sale under sections 59-12-102(1), -103(1)(a) (1992) is a question of law for which this court must grant the Commission no deference, applying a correction of error standard. Id. § 59-1-610(1)(b) (2000). ¶ 17 A sale for Utah sales tax purposes is defined as any transfer of title, exchange, or barter, conditional or otherwise, in any manner, of tangible personal property or any other taxable item or service under Subsection 59-12-103(1), for a consideration. Id. § 59-12-102(24) (2000). [5] The Commission found that ZCMI transferred title of tangible personal property under the Agreement which states, The parties agree that title to the Equipment shall pass from the Seller [ZCMI] to the Buyer [Matrix] on the Closing Date. It is undisputed that sales tax is not imposed on this transaction since Utah Code Ann. § 59-12-104(26) (2000) exempts transactions where tangible personal property is purchased for resale. [6] The Commission does not dispute that Matrix's purchase of the property would be for resale within the ambit of the statute since Matrix intended to lease the property to ZCMI with the option to purchase the property at the end of the lease. ¶ 18 At issue is whether title actually passed from ZCMI to Matrix under this first transaction. If title passed to Matrix, the subsequent leaseback to ZCMI would be taxable. Id. § 59-12-103(1)(k). If a sale transaction did not occur, ZCMI retained title and the subsequent leaseback would be in form only, not in substance, and therefore could not be taxable. Matrix urges this court to analyze whether a transfer of property occurred under the Utah Uniform Commercial Code (UUCC), which Matrix argues requires the conclusion that title to the property was not actually transferred to Matrix. The Commission asserts that because a sale occurred under the Sales and Use Tax Act, title necessarily was transferred. For the reasons set out below, we hold that we need not analyze this transfer of title issue under the UUCC. ¶ 19 In support of its argument that the UUCC must be applied to assess whether a transfer occurred, ZCMI relies on Hales Sand & Gravel, Inc. v. Utah Tax Comm'n, 842 P.2d 887 (Utah 1992). In Hales, this court was faced with the question of whether title passed at the point of shipment or at the point of delivery where there was no explicit provision in the sales agreement. Id. at 891-94. Applying the UUCC, this court held that unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods. Id. at 892 (quoting Utah Code Ann. § 70A-2-401(2) (1997)). This section describes the point at which title transfers; it does not refer to whether title has passed and is therefore inapposite to the issue at hand. Further, the parties in the case at bar otherwise explicitly agree[d] in the Agreement that title passed at closing. Id. ¶ 20 In arguing that the UUCC should govern the transaction, Matrix has failed to address a central UUCC provision. Section 70A-1-102(3), entitled Purposes-Rules of construction, states: The effect of provisions of this act may be varied by agreement, except as otherwise provided in this act and except that the obligations of good faith, diligence, reasonableness and care prescribed by this act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable. Utah Code Ann. § 70A-1-102(3) (1997) (emphasis added). ¶ 21 Under this section, the parties in the case at bar were free to enter into a contract inconsistent with the provisions of the UUCC, so long as the underlying obligations of good faith, diligence, reasonableness, and care were preserved and the standards in the contract not manifestly unreasonable. See id. ¶ 22 The Agreement states: 3. Title. The parties agree that title to the Equipment shall pass from Seller [ZCMI] to Buyer [Matrix] on the Closing Date. The contract is clear; title passed on the closing date from ZCMI to Matrix. Matrix cannot come before us now and undo its contract by reference to the UUCC when the UUCC itself states that an agreement between the parties as to issues pertaining to the transfer of title supersedes the UUCC. ¶ 23 Matrix and ZCMI also had before them the July 11, 1991, advisory opinion that sales tax would be due on the lease payments made by ZCMI. On July 16, 1991, Matrix and ZCMI entered into a Master Lease Agreement, a Sale and Leaseback Agreement, and Equipment Schedule No. 1. The terms of these agreements were identical, in all relevant respects to the proposed transaction on which Matrix had sought the advisory opinion. Matrix entered the transaction understanding the potential sales tax implications. We therefore hold that title passed to Matrix from ZCMI under the clear provision of the Agreement. This sale is tax exempt, however, as a purchase for resale. Utah Code Ann. § 59-12-104(26) (2000).
¶ 24 Next, we must determine whether the lease transaction from Matrix back to ZCMI was taxable. Matrix emphasizes that we should analyze the leaseback transaction under the UUCC to determine whether it was a lease (true lease) or a security interest (lease intended as a security). Matrix argues that if the transaction is viewed as a lease intended as a security, ZCMI retained title and the resulting transaction is nontaxable. We disagree. ¶ 25 We begin by reviewing the applicable portion of section 59-12-103, which states: (1) There is levied a tax on the purchaser for the amount paid or charged for the following: (a) retail sales of tangible personal property made within the state; ... (k) leases and rentals of tangible personal property if the property situs is in this state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state. Id. § 59-12-103. Subsection (k) requires a taxpayer to remit taxes on leases of the taxpayer's tangible personal property located within Utah. We agree with Matrix's assessment that the vital issue in this case is whether title transferred to Matrix. We have determined that title indeed transferred to Matrix from ZCMI via the Sales and Leaseback Agreement. Having determined that it did, we find that Matrix leased certain tangible personal property located in Utah to ZCMI as described by section 59-12-103(k) (2000). Therefore, a taxable event occurred under the Utah Sales and Use Tax Act. ¶ 26 Moreover, even if viewed as a lease intended as a security arrangement as urged by Matrix, the transaction would be subject to sales tax. In that case, there would be a sale back to ZCMI with Matrix retaining a security interest in the property. This transaction would be taxable under section 59-12-103(1)(a). A sale is further defined in section 59-12-102(24), which provides: Sale means any transfer of title, exchange, or barter, conditional or otherwise, in any manner, of tangible personal property or any other taxable item or service under Subsection 59-12-103(1), for consideration. It includes: .... (d) any transaction if the possession of property is transferred but the seller retains title as security for the payment of the price. Id. § 59-12-102(24)(d). Matrix's argument assumes that if the transaction is a lease intended as a security arrangement, title necessarily remained with ZCMI throughout the transactions. However, by the terms of the Agreement, we have concluded that title passed to Matrix on the closing date. A sale had taken place at that time, but this sale was exempt from sales tax. Thus, if ZCMI held title during the course of the lease, the title necessarily was transferred back to ZCMI by Matrix through the Agreement, with Matrix retaining a security interest. ¶ 27 We agree with Matrix that further evaluation of the terms of the leaseback transaction could establish the nature of the lease, whether it is a true lease or a lease intended as security arrangement under the UUCC. This evaluation would determine whether the resulting lease is an operating lease or a capital lease for financial reporting purposes. [7] Here, we need not make such a distinction because the same amount of tax is payable on both true leases and leases intended as security. Addressing this issue, the court of appeals stated: The leaseback transaction from Matrix to Customer is, however, subject to sales tax regardless of whether it is a true lease or a lease intended as security. If the leaseback transaction is a true lease, it is clearly subject to sales tax under Utah Code Ann. § 59-12-103(1)(k) which levies a tax on leases and rentals of tangible personal property. If the leaseback transaction is a lease intended as security, it is subject to sales tax as a sale from Matrix to Customer under Utah Code Ann. § 59-7-102(10)(e) (1992). Matrix Funding v. Utah State Tax Comm'n, 868 P.2d 832, 834 (Utah Ct.App.1994). We adopt the rationale of the court of appeals and hold that because title transferred from ZCMI to Matrix, the subsequent transaction was either a true lease or a lease intended as security, both of which are taxable transactions.
¶ 28 Matrix urges this court to ignore the form of the Agreement and hold that the substance of the transactions at issue is nontaxable financial arrangements. For support, Matrix cites cases from other states that have held that because the substance of a leaseback transaction was not a lease but a secured transaction, it should not be taxable. [8] Approximately twenty states have addressed whether sale and leaseback agreements are subject to sales tax. [9] At least three states, Minnesota, Arizona, and Indiana, have made decisions that closely follow the approach taken by the Commission and the court of appeals. ¶ 29 In Midwest Federal Savings & Loan Ass'n v. Commissioner of Revenue, 259 N.W.2d 596 (Minn.1977), the Minnesota Supreme Court recognized two distinct transactions in a sale and leaseback similar to those in the instant case and held that the lease was subject to use tax. Midwest agreed to sell its equipment to NCR and simultaneously execute a lease agreement under which the equipment would be leased back to Midwest. Refuting Midwest's argument that assessing the use tax would result in double taxation, and concluding that two transactions had occurred under the sale and leaseback agreement, the Minnesota court stated: No tax was paid on the sale of the equipment to NCR, since it was located in New York. The use tax imposed by the commissioner is based on the lease of the equipment to [Midwest], the third of three distinct transactions. Id. at 599. The three transactions found by the court were: (1) Midwest's original acquisition of the equipment; (2) NCR's purchase of the equipment under the sale and leaseback agreement; and (3) Midwest's lease of the equipment from NCR pursuant to the sale and leaseback agreement. Id. ¶ 30 Likewise, in Monarch Beverage v. Department of State Revenue, 589 N.E.2d 1209 (Ind.Tax 1992), the Tax Court of Indiana held that three distinct transactions occurred among three parties: Hackney, Monarch, and Gelco. According to the agreement, Monarch was to purchase trucks from Hackney and then enter into a sale and leaseback agreement with Gelco whereby Gelco would purchase the trucks from Monarch. Gelco would then lease the trucks back to Monarch. The court rejected the argument that Matrix asserts in this case, that only one transaction occurred in substance. The court held that [s]ales and use taxes are transactional taxes imposed upon the gross income received from a retail transaction. Therefore, sales or use tax can be collected more than once on the same item if the item is the subject of more than one nonexempt retail transaction. Id. at 1214 (citations omitted). ¶ 31 The court in Monarch reasoned that the sale from Hackney to Monarch was taxable. The court also held that the leaseback of the equipment by Monarch from Gelco was taxable. Only the sale of the equipment by Monarch to Gelco was exempt from taxation since Gelco purchased the equipment to lease it back to Monarch. Id. at 1214 n. 14. ¶ 32 In Honeywell Bull, Inc. v. Arizona Department of Revenue, Ariz. Bd. Tax.App. No. 646-89-S, January 23, 1990, the tax court of appeals found two transactions in a sale and leaseback agreement. In Honeywell, Blue Cross of Arizona entered into an agreement wherein Blue Cross sold its computer to CAR and CAR leased the equipment back to Blue Cross. The Arizona Department of Revenue determined that two transactions occurred: (1) Blue Cross's sale of the computer to CAR, and (2) the leaseback of the computer by Blue Cross. The Honeywell court rejected the taxpayer's argument that it intended the agreement to be one transaction, stating that such an argument was not a sufficient basis to justify treating it as a single transaction. Id. ¶ 33 Similarly, we reject Matrix's contention that the substance of the transaction before us should be viewed as a nontaxable financing transaction for sales tax purposes. Certainly, for GAAP purposes, Matrix intended the transaction to be viewed as an operating lease, which would not require disclosure as a liability on ZCMI's balance sheet. The application of our tax laws is not, of course, subordinate to GAAP principles. Still, when a party structures a transaction to conform to GAAP in an effort to meet a particular accounting objective, that party should not be permitted to recast the form, substance, and intention of the transaction for sales tax purposes. Accordingly, we conclude that sales tax should be assessed on the transaction outlined in the Agreement. [10]