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Repayments of Loans Made by Lessors Are Now Taxable Under Ohio Sales/Use Tax
In a recent administrative decision by the Ohio Department of Taxation, the commissioner held that the repayment of a loan of money should be added to the lease price of tangible personal property subject to the Ohio Sales/Use Tax. The case before the commissioner involved a loan that was made to a lessee to pay off its contract obligations to another lessor, so that the lessee could enter into a lease of new equipment with the new lessor. Both the loan and the lease were separately delineated in the Lease Agreement between the partners. The commissioner concluded that the repayment of the loan was an “expense associated with the leased equipment.” As a result, the commissioner held that under Ohio R.C. 5739.01(H)(1), the separately stated refinance charge to pay the interest and principle on the loan could be included as part of the leased price paid for leased equipment making both amounts taxable under the Ohio Sales/Use Tax.
In his ruling, the commissioner discarded the fact that the loan was a separate undertaking unrelated to the cost or value of the new equipment being leased. The commissioner also discarded the fact that the repayment of the loan was “separately stated” as a finance charge in the Agreement and on the invoices. Moreover, the commissioner overlooked the fact that Ohio Sales/Use Tax was already paid once when the loaned money was used to pay off the earlier lease. Nor did it bother the commissioner that by including the repayment of the loan in the tax base as part of the lease price of the newly leased equipment, it effectively doubled the actual value of the equipment and the rental price paid.
More significantly, the commissioner's decision is directly contrary to numerous past Ohio Supreme Court, Court of Appeals and Board of Tax Appeals decisions. See e.g. Columbus Equipment Co. v. Limbach, 38 Ohio St. 3d 62 (1988); Leasing Dynamics, Inc. v. Limbach, 64 Ohio St. 3d 296 (1992); Xyovest, Inc. v. Limbach, 62 Ohio St. 3d 469 (1992); Central Trust Co. v. Limbach, Ohio BTA, No. 90-Z-1644 (1993). Recognizing this infirmity with his determination, the commissioner asserted that all of those decisions have been overruled by a 1991 amendment to the Ohio sales tax law. In doing so, the commissioner simply overlooked that this change in the law merely delineated a definition of lease price that essentially mirrored the definition of sales price, upon which some of those Ohio decisions were based. The commissioner also failed to address the fact that no Ohio case since 1991 has adopted the commissioner's position, or the fact that Ohio decisions after 1991 have also expressly recognized that agreements containing mixed transactions should only be taxed on their taxable portions.
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