Opinion ID: 2519779
Heading Depth: 3
Heading Rank: 2

Heading: Leaseback Transaction

Text: ¶ 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.