SUMMARY. Sales and Use Tax

Transcription

1 SUMMARY Sales and Use Tax QUESTION: Whether the assignment/transfer of a beneficial interest in a lease of a motor vehicle from a trust interest to a series of LLCs is a sale subject to tax for Florida sales and use tax purposes? ANSWER - Based on Facts Below: The transfer of beneficial interests does not constitute a sale at retail subject to Florida sales and use tax since none of the transfers or subsequent transfers of the beneficial interests will require retitling or reregistration of the leased vehicles. Since legal title to the leased vehicles will continue to be vested in and held by the original owner. Corporate Income Tax QUESTION: Will Florida follow the federal "check the box" treatment of a Delaware Series LLC set forth in a private letter ruling issued to the taxpayer? ANSWER - Based on Facts Below: Yes. Generally speaking, Florida will follow IRS "check the box" treatment for an LLC, unless that treatment conflicts with Florida law. Intangible Tax QUESTION: Whether single member non-florida nexus LLC subsidiary of a Corporation may receive the assignment of the UTI in the Delaware LLC and not be subject to tax as a member of the Corporation's affiliated intangible tax group? ANSWER - Based on Facts Below: Since the non-florida nexus LLC is wholly owned by the Taxpayer, it may receive the Undivided Trust Interest in the out-of-state LLC and file as a part of the affiliated group without being subject to the intangible tax. **********************************************************

2 Nov 27, 2002 Re: Technical Assistance Advisement 02M-009 XXX ("Corporation" or "Taxpayer") Beneficial Interests in Leases of Motor Vehicles Sections (15)(a), (1)(e), , , (10), F.S. Dear : This is in response to your letter of June 26, 2002, in which you requested the issuance of a Technical Assistance Advisement (TAA) pursuant to s , F.S., and Ch , F.A.C., regarding the referenced matter. The Department has carefully examined your request and supporting documents and finds them to be in order. Statement of Facts A. Taxpayer Information Corporation, a Florida corporation, has formed a limited liability company, ("LLC") of which a leasing company ("LC") initially will be the sole member. LC is an existing limited partnership. The LLC will exist for the purpose of acquiring beneficial interests in certain motor vehicles that have been leased to retail customers ("Leased Vehicles") and the related leases ("Leases") until such Leases are terminated. Each such beneficial interest in a Lease and the related Leased Vehicle is referred to as a "Unit." The LLC will be used to facilitate certain existing and future financing arrangements involving portfolios of Leased Vehicles and Leases. B. Statement of Facts Corporation is a wholly owned subsidiary of Parent and is a member of the Parent affiliated group that files a consolidated federal income tax return with the Internal Revenue Service and

3 appropriate tax returns with Florida and other states, including a Florida affiliated intangible tax return. Parent, through its subsidiaries, provides a full range of automotive-related distribution and financial services to auto dealerships in various states including XXX states (the "Five- State Area"). Corporation provides, among other financial services, lease financing to retail customers of automotive dealers both within and without the Five-State Area. C. Overview of Corporation's Current Leasing Operations Corporation, in the course of its business, currently through a business trust formed under the laws of (the "Trust"), regularly purchases motor vehicles that motor vehicle dealers ("Dealers") have leased to retail customers. All of the beneficial interests in the Trust are owned, directly or indirectly, by Corporation, and the Trust does not file separate federal income tax returns; rather all of its income and expenses are reported on Corporation's income tax returns. Dealers offer to lease vehicles for predetermined lease periods to their customers according to terms approved by Corporation, generally ranging from 24 to 60 months. Dealers then assign the Leases at Corporation's direction, to the Trust. Corporation, acting as servicer for the Trust, disposes of Leased Vehicles as the related Leases terminate and directs title to the applicable purchasers. Title to each of the Leased Vehicles is currently held by Trustee Corp. as trustee of the Trust. 1. Separate Pools of Assets a. The "SUBIs" The Units held by the Trust are divided into separate pools. The beneficial interests in the pools of Units allocated to certain securitizations and leveraged lease transactions are referred to as "special units of beneficial interest" of the Trust ("SUBIs"). The Trust has issued, with respect to each SUBI, a certificate (each, an "SUBI Certificate") representing the entire beneficial interest in such SUBI. Each of the SUBI Certificates has been issued to a securitization trust or to

4 another special purpose entity in conjunction with a securitization, secured financing or similar transaction. b. The UTI Units that are not allocated to the SUBIs are allocated to the "undivided trust interest" of the Trust (the "UTI"). A certificate representing the entire beneficial interest in the UTI (the "UTI Certificate") has been issued to LC. c. Separation of Asset Pools in the Trust The separate pools of assets in the Trust are established by means of mutual express contractual waiver and subordination among the respective beneficial owners thereof. Holders of beneficial interests in the Trust must waive claims to all Units and other assets of the Trust that are not allocated to their beneficial interest. Units may be reallocated from time to time from the UTI to an SUBI or from an SUBI to the UTI. Each such reallocation is accomplished by notation on the books and records of Trustee Corp., as trustee of the Trust, and does not require retitling of the related Leased Vehicles nor transfer of Units outside of the Trust. D. The Proposed LLC Corporation has formed a new series limited liability company (the "LLC" and, together with the trust, the "Titling Companies" and each a "Titling Company") with functions analogous to those of the existing Trust. Trustee Corp., will hold title to newly originated Leased Vehicles that are acquired for the benefit of the LLC as trustee for a common law trust formed with respect to each series of the LLC. In addition, Trustee Corp. on behalf of such common law trust will be the named lessor under the related Leases. Corporation will act as servicer on behalf of the LLC of the Units held by such company. 1. New UTI The LLC will be divided into separate series of limited liability company interests as described below. A separate pool

5 of Units will be allocated to each series. LC will own the entire limited liability company interest in the series analogous to the UTI (the "New UTI") as holder of the certificate (the "UTI Certificate") representing such interest. 2. New SUBIs Each other series of limited liability company interest of the LLC will be represented by a certificate issued by the LLC that will be analogous to an SUBI (the "New SUBI"). Units may be reallocated from time to time from the New UTI to a New SUBI, from a New SUBI to the New UTI or from one SUBI to another SUBI. Each such reallocation will be accomplished by notation on the books and records of U.S. XXX, as administrator of the LLC (the "LLC Administrator"), and will not require retitling of the related Leased Vehicles. Following each such reallocation, title to the Leased Vehicles will be and remain in Trustee Corp., and Trustee Corp. will remain the lessor under the related Leases. 3. Separation of Asset Pools in the LLC The LLC will be a series limited liability company under the Limited Liability Company Act (the "Act"). Under Section XX of the Act, if a limited liability company establishes multiple series under its limited liability company agreement and meets certain other criteria, then "the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof." The New UTI and each New SUBI will be formed as a separate "series" of a single limited liability company within the meaning of the Act. Under the Act, the respective series are not separate legal entities, but rather are separate pools of assets within a single legal entity. The LLC Administrator will maintain books and records pursuant to the LLC Agreement with respect to the Units allocated from time to time to the UTI and each SUBI. 4. Federal Income Tax Treatment

6 For purposes of this ruling request, the New UTI and each New SUBI will be treated as a separately characterizable entity for federal income tax purposes and, because the limited liability company interest in any series will be held by a single holder, such series will be disregarded for tax purposes vis-a-vis such holder. E. "Phase Out" of the Origination Trust and Replacement with the LLC and Proposed Transactions It is contemplated that the Trust will be gradually "phased out" and replaced by the LLC: (1) by movement of certain Units from the Trust to the LLC and (2) by causing the Units relating to newly-originated Leases and related Leased Vehicles to be acquired by or for the benefit of the LLC rather than by the Trust. In order to facilitate this process, Corporation will cause certain financing Arrangements secured by Units held by the Trust to be secured also by Units held with respect to the LLC. Trustee Corp. will at all times be the record titleholder of the Leased Vehicles and the named Lessor under the Leases. 1. The Initial Reallocation In order to facilitate the phase-out of the Titling Company while accommodating the existing financing arrangements, Corporation will cause certain Units to be moved from the Trust, specifically those held in the UTI, to the LLC (the "Initial Reallocation"). The Initial Reallocation will be accomplished without retitling the vehicles. To effectuate the Initial Reallocation of the Units held in the UTI to the LLC, first, all of the Units in the UTI will be reallocated to a newly-created SUBI of the Trust (the "Reallocation SUBI") which will be beneficially owned by the New UTI of the LLC and, second, the Trust, acting with respect to the Reallocation SUBI, will transfer all of its right and interest in the Units allocated to the Reallocation SUBI to the LLC for allocation to the New UTI. It is represented for purposes of this ruling request that for

7 federal income tax purposes these reallocations will not cause recognition of income. 2. Periodic Further Reallocations of Units from UTI to UTI After each of the secured financings are terminated, the Units allocated to the applicable SUBIs will be reallocated to the UTI. In addition, Units may be reallocated from time to time to the UTI if they are determined to be ineligible for inclusion in the secured financings. As a part of the plan to "phase out" the Trust, any such Units will then be reallocated to the Reallocation SUBI and moved into the LLC for allocation to the New UTI in the same manner as described for the Initial Reallocation. After all of the Units held by the Trust have been moved to the LLC in this manner, the Trust will be liquidated or merged into the LLC. Title will remain with Trustee Corp. at all times. 3. Registration of Various Entities as Dealers Trustee Corp. is registered as a dealer for Florida sales and use tax purposes. 4. Acquisitions and Dispositions Made Through Qualified Intermediary Certain acquisitions and dispositions of Units made from time to time by the LLC, and certain dispositions of Units made from time to time by the Trust, will be made through a specialpurpose subsidiary of a financial institution that will serve as a qualified intermediary for certain like-kind exchange transactions under Section 1031 of the Internal Revenue Code (the "Qualified Intermediary"). Under those transactions, Corporation will assign to the Qualified Intermediary Corporation's rights under agreements (1) with dealers to acquire newly-originated Leases and related Leased Vehicles and (2) with various purchasers to sell Leased Vehicles at the termination of the related Leases. It is represented for purposes of this ruling request that for federal income tax purposes, the Qualified Intermediary will be deemed to have (1) acquired from dealers and sold to Corporation or the LLC such

8 newly-originated Leases and related Leased Vehicles and (2) acquired from Corporation or the applicable Titling Company and sold to the applicable third-purchaser such Leased Vehicle subject to terminated Leases. Requested Rulings for Sales and Use Tax "1. The one-time assignment/transfer of Units from the UTI to a series in the LLC is not a sale subject to tax for Florida sales or use tax purposes." "2. The periodic movement of beneficial interests in vehicles and leases (a) between an SUBI and the UTI, (b) among series in the LLC or (c) between the Trust and any series within the LLC is not a "sale" for sales and use tax purposes." "3. A transfer or deemed transfer of Units or in the proceeds thereof between Corporation and the Qualified Intermediary will not be treated as a sale for sales tax purposes." 4. The periodic assignment/transfer of Units (a) between an SUBI and an UTI, (b) among series within the LLC or (c) between the Trust and any series within the LLC will not be subject to sales or use tax. Applicable Law Section (15)(a), F.S., provides the requisite elements of a "sale" for the purposes of imposing Florida sales tax and establishes a two prong test, both prongs of which must be satisfied in order for a transaction to constitute a "sale." These prongs, are, namely: (i) the transfer of title or possession, or both, of tangible personal property; and (ii) the flow of consideration in exchange for the transfer of title or possession, or both, of the tangible personal property. In general, the taxpayer making the sale is required to bill the tax to the purchaser and remit the applicable sales tax to the State. Discussion & Analysis

9 Under the above requested ruling transactions proposed by the taxpayer, the title to the Leased Vehicles is not transferred. Trustee Corp. at all times will hold title to the Leased Vehicles, and it remains the lessor under the Leases. In terms of the first prong test, a transfer of title on the Leased Vehicles has not occurred. The second prong of the test is the flow of "consideration." The transfer of beneficial interests in the Leased Vehicles in all specified circumstances appears to be in the form of distributions of the proceeds of the sale of the Vehicles. Each of the parties will receive a "consideration" from its beneficial interest in the Leased Vehicles. However, the transfer of the beneficial interest (the Unit) in all of the specified circumstances does not appear in the chain of title, or in the possession of the Leased Vehicles. Under such circumstances, the transfer of the beneficial interest fails the first prong of the test establishing a "sale," as defined in s (15)(a), F.S. Sales and use tax will not be imposed upon the proceeds received by each of the parties from the transfer of the beneficial interests (Units). The transfer of beneficial interests (Units) does not constitute a sale at retail subject to Florida sales and use tax. None of the transfers or subsequent transfers of the beneficial interests will require retitling or reregistration of the Leased Vehicles, because legal title to the Leased Vehicles will continue to be vested in and held by Trustee Corp. Requested Rulings for Corporate Income Tax "1. Each series within the LLC is a separately characterizable entity, each of which is a disregarded entity vis-a-vis the holder of the limited liability company interest in such series for federal income tax purposes, will also be a similarly disregarded entity for Florida corporate income tax purposes." "2. The one-time assignment of Units from the UTI to a series of the LLC will not trigger a Florida corporate income tax liability." "3. The periodic movement of Units (a) between an SUBI and the

10 UTI, (b) among series within the LLC or (c) between the Trust and any series within the LLC does not trigger a Florida corporate income tax liability." "4. Assuming that for federal income tax purposes, the exchange of units through a qualified intermediary qualify under IRC Section 1031 as a nonrecognition transaction, that no gain will be recognized on the exchange transaction for Florida corporate income tax purposes." By letter dated October 7, 2002, the Taxpayer withdrew its fourth ruling request - whether the Department will follow IRC Section 1031 nonrecognition treatment. Applicable Law Section (1)(e), F.S., provides in part: "Corporation" includes all domestic corporations, foreign corporations qualified to do business in this state or actually doing business in this state; joint-stock companies; limited liability companies, under chapter 608; common-law declarations of trust, under chapter 609; corporations not for profit, under chapter 617; agricultural cooperative marketing associations, under chapter 618; professional service corporations, under chapter 621; foreign unincorporated associations, under chapter 622; private school corporations, under chapter 623; foreign corporations not for profit which are carrying on their activities in this state; and all other organizations, associations, legal entities, and artificial persons which are created by or pursuant to the statutes of this state, the United States, or any other state, territory, possession, or jurisdiction. The term "corporation" does not included proprietorships, even if using a fictitious name, partnerships of any type, as such; limited liability companies that are taxable as partnerships for federal income tax purposes; state or public fairs or expositions, under chapter 616; estates of decedents or incompetents; testamentary trusts; or private trusts.

11 Section , F.S., provides: (1) A limited liability company classified as a partnership for federal income tax purposes, or a single member limited liability company which is disregarded as an entity separate from its owner for federal income tax purposes, and organized pursuant to this chapter or qualified to do business in this state as a foreign limited liability company is not an "artificial entity" within the purview of s and is not subject to the tax imposed under chapter 220. If a single member limited liability company is disregarded as an entity separate from its owner for federal income tax purposes, its activities are, for purposes of taxation under chapter 220, treated in the same manner as a sole proprietorship, branch, or division of the owner. (2) For purpose of taxation under chapter 220, a limited liability company formed in this state or authorized to transact business in this state as a foreign limited liability company shall be classified as a partnership, or a limited liability company which has only one member shall be disregarded as an entity separate from its owner for federal income tax purposes, in which case the limited liability company shall be classified identically to its classification for federal income tax purposes. For purposes of taxation under chapter 220, a member or assignee of a member of a limited liability company formed in this state or qualified to do business in this state as a foreign limited liability company shall be treated as a resident or nonresident partnership unless classified otherwise for federal income tax purposes, in which case the member or assignee of a member shall have the same status of such member or assignee of a member has for federal income tax purposes.... Discussion & Analysis The first question presented by the Taxpayer involves the

12 treatment of a LLC under the Florida Income Tax Code. The Taxpayer has asked whether the Department will follow the federal income tax treatment of a Limited Liability Company. A LLC is a special type of limited liability company that utilizes the provisions of Section XX of the XX Code. Specifically, a single limited liability company is created; however, within that limited liability company, numerous separate membership or ownership interests exist that have separate rights, powers or duties with respect to specified property or obligations. The XX statute provides that none of the debts, liabilities, or obligations of the limited liability company can be enforced against the assets of these separate ownership or membership interests (a "series") and that separate management may be vested in each of the series owners. Section (1)(e), F.S., defines the term "corporation" for purposes of the Florida Income Tax Code, and further provides that the term "corporation" does not include a limited liability company that is taxed as a partnership for federal income tax purposes. Section , F.S., generally provides that, for purposes of Chapter 220, F.S., a foreign limited liability company qualified to do business in this state is disregarded as an entity separate from its owner unless classified otherwise for federal income tax purposes. The Internal Revenue Service has not authoritatively addressed the federal income tax treatment of a LLC. The Taxpayer has advised that it has applied to the IRS for a private letter ruling regarding the federal income tax treatment of a LLC, but has not yet received a response. Taxpayer has advised that it is unaware of any other ruling, whether state or federal, regarding the tax treatment of a LLC. Generally speaking, the Florida Income Tax Code treats limited liability companies the same as they are treated for federal income tax purposes. The Taxpayer has represented at conference that the proposed transaction and the use of a LLC will not affect the amount of income reported to Florida, the entity reporting the income, or the apportionment factors. Accordingly, based upon that representation, the Department will follow the federal income

13 tax treatment of the Taxpayer's limited liability company, unless that treatment conflicts with the Florida Statutes. Taxpayer should provide a copy of the IRS private letter ruling to the Department once it is received. The second question presented is whether the one-time assignment of Units from the UTI to a series of the LLC will trigger a Florida corporate income tax liability. Taxpayer uses a business trust to acquire automobile leases from unrelated parties, and then divides the income flow from these automobile leases into separate pools called undivided trust interests ("UTIs"). A certificate representing the right to the income flow from these UTIs has been issued to LC. LC is a limited partnership, which is 99.9% owned by Corporation. The general partner of LC is ALF, LLC ("LLC"), which is also owned by Corporation. The Florida Income Tax Code utilizes adjusted federal income as its starting point. Income earned by LC is reported on its Florida partnership return, and is passed through to its owner, Corporation (who then pays Florida corporate income tax on that income). Similar, but not identical, treatment is afforded to a single member limited liability company that has made a federal election to be disregarded as an entity separate from its corporate owner. Income earned by the single member limited liability company is reported on the Florida corporate income tax return of its corporate owner, Corporation. A business trust is included within the definition of "corporation" under the Florida Income Tax Code and, as such, has a separate filing requirement under Florida law. Taxpayer has advised that Florida corporate income tax returns have been filed by the business trust. In this case, there is a transfer of the right to receive income from an business trust (a corporate entity) to what is treated as a division of Corporation. Unless the two entities are members of the same consolidated group, income would be realized and recognized on the transfer, since they are separate and distinct legal entities. Accordingly, the business trust would be required to file a Florida corporate income tax return reporting this income. Income would have to be recognized under Florida law on

14 the transfer of an interest owned by the business trust to the LLC. The third question presented is whether the periodic movement of Units (a) between an SUBI and the UTI, (b) among series within the LLC, or (c) between the Trust and any series within the LLC would trigger a Florida corporate income tax liability. New car leases are substituted in the place of non-performing and expiring leases as part of the overall management of the securitization process. As to parts (a) and (b) of the question, the Florida Income Tax Code would follow federal concepts of income recognition. If the business trust or the LLC would recognize income for federal income tax purposes by reason of the transfer of an interest from one series to another or from one pool to another, then Florida would similarly recognize that income. Part (c) of the question is more difficult, because grantor trusts are not treated as disregarded entities under Florida law, but rather, as corporations. Absent a consolidated return, the sale or transfer of a car lease between the business trust and the LLC would be as between two distinct and separate legal entities. In such instance, the Florida Income Tax Code would apply federal concepts of income recognition, and the income would have to be recognized and reported to Florida. Request Rulings for Intangible Tax "A non-florida nexus single member LLC subsidiary of Corporation (or other member of Corporation affiliated intangible tax group) may receive the assignment of the UTI in the LLC and file as a member of the Corporation affiliated intangible tax group, yet not be subject to Florida's intangible tax." Applicable Law Regarding intangible tax on an assignment of the UTI in the out- of-state LLC, to a non-florida subsidiary or to another member of the affiliated group, s (10), F.S., provides in part:...the mere making of a consolidated return shall not in

15 itself provide a business situs in this state for intangible personal property held by a corporation. The fact that members of an affiliated group own stock in corporations or membership interest in limited liability companies which do not qualify under the stock ownership or membership interest in a limited liability company requirements as members of an affiliated group shall not preclude the filing of a consolidated return on behalf of the qualified members. Where a consolidated return is made, intercompany accounts, including the capital stock or membership interest in a limited liability company of an includable corporation or limited liability company, other than the parent, owned by another includable corporation or limited liability company, shall not be subject to annual taxation. However, capital stock, or membership interest in a limited liability company, and other intercompany accounts of a nonqualified member of the affiliated group shall be subject to annual tax... Discussion & Analysis Since the non-florida nexus single member LLC is wholly owned by the Taxpayer, it may, or any other qualified member of the affiliated intangible tax group may, receive the Undivided Trust Interest in the out-of-state LLC and file as part of the affiliated group without being subject to the intangible tax. This response constitutes a Technical Assistant Advisement under Section , F.S., which is binding on the Department only under the facts and circumstances described in the requests for this advice, as specified in Section , F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules, upon which this advice is based, may subject similar future transactions to a different treatment than expressed in this response. You are further advised that this response, your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the

16 conditions of s , F.S. The Department acknowledges receipt of your edited copy of your request for Technical Assistant Advisement, deleting names, addresses and any other details which might lead to identification of the taxpayer. Sincerely, Vicki Allen Tax Law Specialist Technical Assistance & Dispute Resolution (850) Gary Moreland Tax Law Specialist Technical Assistance & Dispute Resolution (850) Celestine Grantham Senior Tax Specialist Technical Assistance & Dispute Resolution (850) Control #50843