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Hawaii recently reversed its prior position on leases, which used the title passage as the sole criterion in taxing leases.

The Department of Taxation recently issued a Tax Information Release that distinguishes a lease from an installment sale or conditional sale. The Department stated a lease exists if: (1) the lease contains no express option to purchase; (2) the lease contains an express option that the purchase price remaining at the end of the lease is not a nominal amount; (3) the lease has no provision for present or future passage of title from the lessor to the lessee; and (4) the lease specifically states that the lessee has no title or equity in the property. With a true lease, the lessor is subject to the general excise tax on the lease payments that are received from the lessee. With a sale-leaseback, the sale of the property is subject to a reduced rate of 1% general excise tax. The lease income received is subject to the 4% general excise tax by the lessor. If the sale price in a sale-leaseback transaction is nominal and the original owner (lessee) can purchase the equipment back at a nominal price, the transaction is considered a loan and not subject to the general excise tax. The finance charge received by the lessor is still subject to the 4% general excise tax.

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