New York – Conditional Sales or Lease Agreement

SALT Report 2794 – The New York Department of Taxation and Finance issued an advisory opinion regarding whether a Taxpayer’s agreement constitutes a lease or a conditional sale of computer hardware, software, and office furniture.

At issue in this case is a 36-month agreement the Taxpayer entered into with one of its customers. The Taxpayer requested a ruling to determine its tax collection obligations because of the following provision in the agreement:

“Notwithstanding any provision contained in the Master Lease Agreement or the LeasSchedule to the contrary, upon expiration of the lease term set forth in the Lease Schedule and upon payment by Lessee of all rentals and other amounts due, Lessee agrees to purchase all of the Lessor’s right, title and interest in and to all, but not less than all of the equipment described and covered by the Lease Schedule for the purchase price of $1.00.”

In its response, the Department referred to Tax Law section 1101(b)(5) which defines “sale” as “any transfer of title or possession or both, … rental, lease or license to use or consume conditional or otherwise, in any manner or by any means whatsoever for a consideration…”  Based on that definition, the Department stated that a conditional sale, an installment sale, and a lease are all considered sales.

Next, to establish the taxability, the Department must determine whether the Taxpayer is involved in transactional leases or conditional sales.  The Taxpayer stated that its agreement with its customers require that they take possession of the property at the beginning of the agreement; they are required to make payments for the property over 36 months; and, then they must purchase the property for $1.00 and take title of the property once the 36-month period is over.

Based on the terms set forth in the agreement, the Department concluded that the Taxpayer’s agreement constitutes a conditional sale, not a lease. Additionally, the Taxpayer’s agreement covers computer hardware, computer software, and office furniture.  If the computer software that is transferred to the customer under the agreement is pre-written software, all of the items included in the agreement are considered taxable tangible personal property.  As a result, the Taxpayer must collect sales tax on the entire amount due under the terms of the agreement at the beginning of the agreement and remit the tax to the Department with its sales tax return.

For Further Information

New York Department of Taxation and Finance – Advisory Opinion TSB-A-13(20)S