Summary
In Columbus Equipment, we held that the charges labeled as interest in the context of the exercise of an option to purchase leased equipment were related to the financing of the purchase, and were therefore not part of the taxable price.
Summary of this case from Barry Equipment Co. v. LimbachOpinion
No. 87-716
Submitted May 10, 1988 —
Decided July 20, 1988.
Taxation — Sales tax — Lease of personal property with subsequent sale — Interest charge not taxable, when.
APPEAL from the Board of Tax Appeals, No. 84-A-723.
Taxpayer, Columbus Equipment Company, sells, leases, and services heavy construction, industrial, and mining equipment. When equipment is leased the lessee pays a stated amount of rent monthly.
The lessee has no obligation to purchase the equipment but may do so. If the lessee exercises this option, all the paid-in rent is deducted from the "total delivered price" that is stated in the lease agreement. Taxpayer also grants a discount to the lessee, usually a greater amount the earlier the equipment is purchased. Taxpayer collects sales tax on the "total delivered price" less the special discount and paid-in rent.
At the time of purchase, taxpayer also computes an interest charge. Each lease payment consists of a payment of principal and an interest charge which is based on an agreed interest rate. The interest charges are totaled to the date of sale, and this total is added to the purchase price after the sales tax has been charged. Thus, no sales tax is collected for these interest charges.
Exhibit 8 is an invoice for one of these purchases. It demonstrates the calculations as follows:
"[Total delivered] Price $84,430.00 "Less special discount 4,900.00 $79,530.00 "Less rent invoiced 25,000.00 $54,530.00 "Sales Tax 2,181.00 "Total $56,711.00 "Add interest charge to 3/15/80 16,149.00 $72,860.00 "Less additional discount 3,000.00 "Balance $69,860.00 "Less Trade-in of Austin Western model 310SR crane serial no. 5662 35,000.00 "NET AMOUNT DUE $34,860.00"
Taxpayer's witness testified that interest was charged so that taxpayer could make money on the financing of the equipment. The interest rate it charged was not tied directly to its interest expense under the floor plan arrangement it had with its lender. The witness stated that even if the equipment were not subject to a floor plan, taxpayer would still collect this interest from the lessee.
Appellant, Tax Commissioner, assessed sales tax on these interest charges for the audit period October 1, 1977 through December 31, 1980. On appeal, the Board of Tax Appeals ("BTA") determined that these charges related to the financing of the purchase and were not part of the "price" of the equipment. The BTA reversed this assessment.
The cause is now before this court upon an appeal as of right.
Brouse McDowell, Linda B. Kersker and David F. Raynor, for appellee.
Anthony J. Celebrezze, Jr., attorney general, and James C. Sauer, for appellant.
The commissioner argues that the interest amounts collected from the lessees are part of the "price" of the retail sale and taxable, regardless of the name taxpayer gives them. Taxpayer responds that these amounts were the cost of borrowing money with which the lessee was able to purchase the property and were not part of the "price."
R.C. 5739.02 levies a tax on retail sales and this tax is measured by the "price" of the sale. R.C. 5739.01(H) defines "price" as:
"* * * [T]he aggregate value in money of anything paid or delivered, or promised to be paid or delivered, in the complete performance of a retail sale, without any deduction on account of the cost of the property sold, cost of materials used, labor or service cost, interest or discount paid or allowed after the sale is consummated, or any other expense. * * *"
The BTA adopted the interpretation of this definition set forth in Columbia Gas of Ohio, Inc. v. Lindley (Feb. 10, 1981), Franklin App. Nos. 79AP-879 through 79AP-882, unreported. In that case, the court recognized the distinction between the "price" of a sale and the interest paid for the use of money to purchase the item sold. The court ruled that an interest charge is not taxable. Prior decisions of this court further hold that not all sums paid in a transaction are part of the "price." E.g., Grabler Mfg. Co. v. Kosydar (1973), 35 Ohio St.2d 23, 64 O.O. 2d 14, 298 N.E.2d 590.
This court described "interest" in Fulton v. B.R. Baker-Toledo Co. (1934), 128 Ohio St. 226, 228, 190 N.E. 459, 460-461, as "* * * [a] compensation paid for the use of money. It may be compensation allowed by law or fixed by the parties." See, also, Black's Law Dictionary (5 Ed. 1979) 729.
Interest is the agreed compensation that a borrower pays to a lender. It is the cost of borrowing money so that a person will have the money to purchase the item. Interest is not a part of the item's price because it is not related to the cost of the property sold or materials used. R.C. 5739.01(H).
In the instant case, taxpayer and its customers agreed that the lease payment would include interest. At the time of purchase, the total paid-in rent, which included the interest and principal payments, was deducted from the "total delivered price." Taxpayer then computed the total interest that it had charged and added it back to the purchase price. When taxpayer did this, it was not adding compensation to the purchase price, but was retaining the interest that the parties had agreed was due on and paid with the lease payments. Taxpayer received the interest only once, when the lease payment was made.
Since the BTA's decision is reasonable and lawful, it is hereby affirmed.
Decision affirmed.
MOYER, C.J., SWEENEY, HOLMES, WRIGHT and H. BROWN, JJ., concur.
LOCHER and DOUGLAS, JJ., dissent.
I cannot agree that the alleged "interest" charges collected from the customers of appellee that exercise their option to purchase should not be taxable. Therefore, I respectfully dissent.
There is a clear distinction among a normal purchase with financing, a general leasing arrangement and a leasing arrangement with the option to purchase. I would agree that where financing is provided in a normal purchase installment plan, the financing charges or interest would not be a part of the price for state tax purposes. That is simply a charge for the use of money. However, in a general leasing transaction, a lessee pays no interest because there is generally no amount financed or loan made.
Under this unique procedure employed by appellee, it collects "interest" charges on past rental payments made by lessees that exercise their option to purchase despite the fact that during the rental period no amount is financed and no loan is made. How can there be any interest charged on these rental payments? As appellee's witness admitted, if a lessee never decides to purchase the equipment, it never pays any interest.
Prior to the decision to exercise the option to purchase, a lessee that does exercise the option stands in the same shoes as a lessee that never decides to purchase the equipment. Lessees are charged only in the event the option to purchase is exercised. This added "charge" at the time of the sale should be included as part of the "price" and be subject to taxation.
Appellee cites Columbia Gas of Ohio, Inc. v. Lindley (Feb. 10, 1981), Franklin App. Nos. 79AP-879 through 79AP-882, unreported, which the BTA relied upon in support of its decision in the instant action. In that case, the court relied on the fact that the "interest" charge was part of a service charge which was required to be paid during the term of the lease for the use of money. The charges in the cause sub judice are in no way related to the use of money. It is merely a charge which is required to be paid when a lessee exercises its option to purchase the leased equipment. Simply identifying a charge as interest is not enough. An interest charge should, in fact, be an interest charge. The majority overlooks the fact that labels can be misleading.
I find these charges to be taxable under R.C. 5739.01(H) as part of the price of the equipment sold. The decision of the BTA should be reversed as unreasonable and unlawful.
DOUGLAS, J., concurs in the foregoing dissenting opinion.