SALT Report 2805 – The Missouri Department of Revenue issued a letter ruling regarding the application of sales and use tax to medical equipment that is leased to medical professionals.
When the Taxpayer leases the equipment it offers its customers two types of contracts. Contract #1 requires that the customer pay a monthly rental payment and at the end of the lease, the customer may purchase the equipment for $1.00. Title to the equipment passes once all of the payments have been made. The lease begins once the Taxpayer receives confirmation that the medical equipment has been received and is installed at the customer’s location.
Contract #2 allows the customer to pay monthly rental payments on the equipment. At the end of the lease, the customer may purchase the equipment by paying the fair market value residual on the leased equipment. However, the customer is not required to pay the fair market value residual at the end of the lease and may return the equipment. This lease contract commences once the equipment is delivered and installed at the customer’s location.
The Taxpayer requested a ruling as to whether the leased equipment that is brought into Missouri is subject to sales or use tax. If so, what is the proper application of tax? On the total value of the equipment, or on each monthly payment received from its customers?
In its response, the Department stated that the leased equipment, that is brought into and used in Missouri, is subject to sales tax under Missouri Code of State Regulation 12 CSR 10-113.200.3(D). The regulation provides that, leases of tangible personal property follow the same taxing guidelines as sales of tangible personal property. Therefore, leases of tangible personal property by a Missouri lessor are subject to sales tax if the lessee takes possession in Missouri. Additionally, if a lease of tangible personal property is not subject to sales tax it will be subject to use tax if the lessee stores, uses or consumes the tangible personal property in Missouri.
As for the application of tax, the Department advised that the Taxpayer collect and remit the sales tax as follows:
Contract #1 – The Taxpayer should collect and remit sales tax on the amount the customer pays monthly. Once the lease ends, and the customer purchases the equipment, the Taxpayer should collect and remit sales tax on the $1 purchase price.
Contract #2 – The Taxpayer should collect sales tax on the total amounts received from the rental stream. If the customer chooses to purchase the equipment at the end of the lease and pay the fair market value residual the Taxpayer must also collect and remit sales tax on the fair market value residual.
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