What is the correct treatment for capital leases for sales and use tax?

Tennessee law does not make a distinction for a capital lease. A lease or rental is defined as any transfer of possession or control of tangible personal property, without providing an operator, for a fixed or indeterminate term for consideration.  Tennessee law says sales and use tax is due on the sales price/ purchase price on all leases or rentals of tangible personal property or computer software in Tennessee.

Tax is assessed on the periodic billing price (e.g., weekly or monthly), whether the payments are all collected in a lump sum at the execution of the lease or the payments are collected on a periodic basis.

A lease or rental does not include the transfer of property under an agreement that: 1) requires the transfer of title upon completion of the periodic payments, or 2) provides for the transfer of title upon completion of the periodic payments and the payment of an optional price that does not exceed the greater of $100 or 1% of the total periodic payments.  

Such transactions are taxed at the time of sale, and the monthly payments including interest and financing charges are not taxed.

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