The refinancing of debt through a financial agreement that is labeled as a sale/leaseback did not constitute an actual lease subject to Arizona transaction privilege (sales) tax on leases, but it was a nontaxable loan.

An owner of equipment borrowed money to pay off its original debt for the equipment by agreeing to sell the equipment to the lender under a bill of sale and received a lease of the equipment from the lender until the borrowed money, plus interest, was repaid. The arrangement was termed as a sale/leaseback to keep the equipment off the owner’s financial balance sheet. Although the owner’s payments to the lender were termed lease payments, the payments were not subject to sales tax because title to and possession of the equipment never passed to the lender to create a genuine lease. The lender’s only interest in the equipment was a security interest. Lease payments were based on the amount of the loan and interest rather than on the value of the equipment. (Private Taxpayer Ruling LR00-002, Arizona Department of Revenue, February 10, 2000) (6/00)