Statement - January 2000

Effective January 1, 2000
Heavy Equipment Dealers Report
Leased or Rented Inventory

Heavy equipment dealers will report leased and rented heavy equipment, subject to purchase options, with their inventory to county appraisal districts (CADs). Beginning January 1, 2000, Senate Bill (SB) 1435 changed Property Tax Code Section 23.1241 and the reporting forms filed by these dealers.

New forms

The December issue of STATEMENT explained the changes to the two forms filed by heavy equipment dealers -- Dealer's Heavy Equipment Inventory Declaration (Comptroller Form No. 50-265) and the Dealer's Heavy Equipment Inventory Tax Statement (Comptroller Form No. 50-266).
The Comptroller amended Comptroller Rule 9.4035 that adopts these two forms as well as other special inventory forms filed by certain dealers. The Property Tax Division mailed these new forms to CADs and county tax offices for distribution to dealers for tax year 2000. To get a copy of either form, e-mail ptd.cpa@cpa.state.tx.us. or call the Property Tax Division's technical assistance at 1-800-252-9121. In Austin, call 305-9999. The forms also are available at the Local Property Taxes site of the Comptroller's Web page at www.window.state.tx.us.

New requirements

SB 1435 changed the definition of heavy equipment to include a heavy equipment item that is leased or rented and has an option to purchase by the lessee or renter in the lease or rental agreement.
The definition of "sales price" for lease or rented equipment is the total amount of the lease or rental payments plus any final consideration, excluding interest. A sale of leased or rented equipment is considered to have occurred when possession of the heavy equipment item transfers from the dealer to the purchaser.
SB 521 also changed the law for reporting items of heavy equipment. Beginning January 1, 2000, a chief appraiser is not required to report to the Comptroller a dealer who failed to file an annual declaration or if, on the declaration, reported the sale of fewer than five items in the preceding year.

New questions

With any new law and reporting change, questions arise on implementing those changes. Here are some of the most frequently asked questions:

Question: Does it matter if the heavy equipment has a lease or rental agreement? Answer: No, the new law does not distinguish between a lease agreement or rental agreement. The law does require that a purchase option be a part of the agreement. In either case, the agreement must have a purchase option either in the agreement or attached to it.

Question: When is the sales price determined for the leased or rented heavy equipment? Answer: The sales price is determined at the inception of the lease or rental agreement.

Question: Are items such as freight and repairs, charged after the sale, considered in the sales price of the leased or rented equipment? Answer: No, any special charge backs, such as repairs and freight, paid by the lessee or renter are not considered in the sales price of the heavy equipment. Interest is also not considered. The sales price of an item of heavy equipment is the total amount of the lease or rental payments, plus any final consideration.
Items such as freight included with the sale, however, are part of the sales price.

Question: Are these leased and rented items of equipment treated as "dealer-financed sales?" Answer: Yes, these items are treated like other types of special inventory with financing arrangements. The dealer reports these items as "dealer-financed." Thus, if the lessee or renter does not exercise the purchase option and returns the equipment, and the dealer again rents or leases the same item in the same calendar year, this second transaction would be treated as a "subsequent sale." Treating the second transaction as a "subsequent sale" provides that the heavy equipment is appraised and taxed only once per calendar year.

Question: Do heavy equipment dealers include leased or rented heavy equipment with purchase options from calendar year 1999 on their Dealer's Heavy Equipment Inventory Declaration to be filed by February 1, 2000? Answer: Yes, dealers should include any leased or rented heavy equipment with purchase options when the dealers complete their declaration forms for tax year 2000. These items were not included on the monthly tax statements filed by dealers during 1999. So, dealers need to review their records for those items. Dealers also should review whether any of these items were "subsequent sales."
CADs use the declaration to appraise a dealer's inventory for the current tax year. For tax year 2000, the market value of a dealer's inventory for property tax purposes is the total sales price of all sales for the 12-month period preceding the tax year, divided by 12. That period is January to December 1999, except for dealers who were not in business for the full 12 months. The total sales exclude sales to dealers, fleet transactions, and subsequent sales.

Question: What happens with heavy equipment that is rented or leased but has no purchase option in or with the agreement? Answer: Items of heavy equipment that are simply rented or leased with no purchase option will be appraised as regular business inventory under Property Tax Code Section 23.12. The dealer should render this equipment on the dealer's business personal property rendition.
A dealer's items of heavy equipment may fall within one of several areas:

Heavy equipment rented or leased with a purchase option agreement -- reported, appraised, and taxed as special inventory under Section 23.1241;
Heavy equipment rented or leased only -- appraised as regular business inventory as of January 1 of the tax year, under Section 23.12; or
Heavy equipment in dealer's possession -- equipment held by a dealer at the business site or temporarily housed elsewhere. If these items of equipment are held for sale at retail or for lease or rental under an option to purchase, then the items will be reported, appraised, and taxed as special inventory under Section 23.1241. If these items are not held for sale at retail, then the items are part of the dealer's regular inventory and appraised under Section 23.12.

Question: Does it matter if the heavy equipment has a lease or rental agreement?	Answer: No, the new law does not distinguish between a lease agreement or rental agreement. The law does require that a purchase option be a part of the agreement. In either case, the agreement must have a purchase option either in the agreement or attached to it.
Question: When is the sales price determined for the leased or rented heavy equipment?	Answer: The sales price is determined at the inception of the lease or rental agreement.
Question: Are items such as freight and repairs, charged after the sale, considered in the sales price of the leased or rented equipment?	Answer: No, any special charge backs, such as repairs and freight, paid by the lessee or renter are not considered in the sales price of the heavy equipment. Interest is also not considered. The sales price of an item of heavy equipment is the total amount of the lease or rental payments, plus any final consideration. Items such as freight included with the sale, however, are part of the sales price.
Question: Are these leased and rented items of equipment treated as "dealer-financed sales?"	Answer: Yes, these items are treated like other types of special inventory with financing arrangements. The dealer reports these items as "dealer-financed." Thus, if the lessee or renter does not exercise the purchase option and returns the equipment, and the dealer again rents or leases the same item in the same calendar year, this second transaction would be treated as a "subsequent sale." Treating the second transaction as a "subsequent sale" provides that the heavy equipment is appraised and taxed only once per calendar year.
Question: Do heavy equipment dealers include leased or rented heavy equipment with purchase options from calendar year 1999 on their Dealer's Heavy Equipment Inventory Declaration to be filed by February 1, 2000?	Answer: Yes, dealers should include any leased or rented heavy equipment with purchase options when the dealers complete their declaration forms for tax year 2000. These items were not included on the monthly tax statements filed by dealers during 1999. So, dealers need to review their records for those items. Dealers also should review whether any of these items were "subsequent sales." CADs use the declaration to appraise a dealer's inventory for the current tax year. For tax year 2000, the market value of a dealer's inventory for property tax purposes is the total sales price of all sales for the 12-month period preceding the tax year, divided by 12. That period is January to December 1999, except for dealers who were not in business for the full 12 months. The total sales exclude sales to dealers, fleet transactions, and subsequent sales.
Question: What happens with heavy equipment that is rented or leased but has no purchase option in or with the agreement?	Answer: Items of heavy equipment that are simply rented or leased with no purchase option will be appraised as regular business inventory under Property Tax Code Section 23.12. The dealer should render this equipment on the dealer's business personal property rendition. A dealer's items of heavy equipment may fall within one of several areas: Heavy equipment rented or leased with a purchase option agreement -- reported, appraised, and taxed as special inventory under Section 23.1241; Heavy equipment rented or leased only -- appraised as regular business inventory as of January 1 of the tax year, under Section 23.12; or Heavy equipment in dealer's possession -- equipment held by a dealer at the business site or temporarily housed elsewhere. If these items of equipment are held for sale at retail or for lease or rental under an option to purchase, then the items will be reported, appraised, and taxed as special inventory under Section 23.1241. If these items are not held for sale at retail, then the items are part of the dealer's regular inventory and appraised under Section 23.12.