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Can you charge sales tax on a personal property tax bill?

We have leasing agreements and I just received invoices to cover the personal property taxes that are associated with those agreements. The financier also included sales tax. I think this is wrong, but am not sure who/where to look to ask.

Answers

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

I really can't find an authoritative source, but you shouldn't be charged sales tax. If you step back and think about a taxing authority, this is not a product or service that the vendor is providing, but is a pass through cost. Check your agreements or put on your agreements that personal property taxes should be a "pass through" cost only. I think of it like T&E costs from a consultant that would not be taxed. This isn't a perfect example as labor costs typically aren't taxed. The one thing you can do to control it would be to give all of your financing companies tax exemption certificates and assess tax yourself. This does create some more work for you, but may reduce an unnecessary cost.

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

I spent my career in the equipment leasing business. If the lessor charged sales tax on personal property tax payments, that is incorrect. Property tax billings, as Patrick notes, are a simple pass through.

It is sometimes possible to pay property taxes directly as Patrick suggests. However, I do not believe the method for doing so is an exemption certificate because Critical Signal is probably not exempt. Instead, you and the lessor agree which party will be responsible. This agreement is typically made at lease inception. Not every lessor allows this because it can create operational risk and potential penalties for the lessor. As the owner of the equipment, the lessor is ultimately liable if your firm does not make timely or any payment. It may be possible to assume PPTX payment responsibility and keep a wary lessor comfortable if you set up an escrow account or provide copies of paid receipts within a certain period after the due date.

You don't indicate whether the property tax bills from the lessor are monthly or less often. If less often, then the assumption that the sales tax charge relates to the property tax amount appears warranted. If you receive these property tax bills monthly, are you sure the sales tax is not associated with the lease payment itself? That would make more sense. Payment timing for sales and use taxes varies by state. Sales tax is normally due the taxing authority when the lessor purchases the equipment to be leased. The lessor adds the sales tax paid to the equipment cost and collects rent (including a "finance charge") from your company over time (i.e., with each monthly payment) on that total. The portion related to sales tax may or may not be separately stated.

Ken Francis
Title: Tax Accountant
Company: United Leasing, Inc.
(Tax Accountant, United Leasing, Inc.) |

A number of states, I do not have a list in front of me, subject passed through property tax billings on leased property to sales tax by regulation. Please post a specific state for more authoritative feedback. Most states provide clear authority on this.

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