United States

Alabama: Sales Tax Assessment Voided because Transactions Were Subject to Lease Tax

Mar 28, 2016
From KPMG TaxWatch

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The Alabama Tax Tribunal recently voided a sales tax assessment because the transactions at issue were properly subject to the rental tax, rather than the sales tax. The taxpayer operated a music store that sold musical instruments and accessories. Some of the taxpayer’s customers entered into “lease-to-own” agreements whereby the customers agreed to make monthly payments over a period of time. The agreement specified that the instrument remained the property of the taxpayer until the final lease payment was made. The agreement also provided that a comprehensive maintenance contract was included with the monthly payments. Upon audit, the Department concluded that the portion of the monthly payments attributable to the maintenance contract were subject to sales tax, and issued an assessment accordingly.

On appeal, the Tax Tribunal concluded that the proceeds from the lease-to-own agreements were subject to the rental tax, not sales tax. The Tribunal noted that the taxpayer retained title to the instruments during the term of the agreement, and customers could return the instruments at any time before all monthly payments were made. In fact, the auditor had even acknowledged that the taxpayer should have been collecting the rental tax. The Tribunal, relying on earlier Administrative Law Division rulings, concluded that because the final assessment was entered for the wrong tax type, it must be voided. For more information regarding Hallman Enterprises, LLC v. Alabama Dep’t of Revenue, please contact Scott Jackson at 404-614-8688.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.