[00:00:06] Speaker A: Welcome, everyone, to taxing poetic. My name is Tim Howe. I'm the CEO of Synexis tax solutions, along with.
[00:00:12] Speaker B: I'm Jenny Carter. I'm the co host of Taxing Poetic, also with Synexis tax Solutions.
[00:00:17] Speaker A: Awesome. And we're here with JB.
[00:00:18] Speaker C: How's it going?
[00:00:19] Speaker A: As always? Yep. Good, dude, how are you?
[00:00:21] Speaker C: I have to be here.
[00:00:22] Speaker A: You have to be here.
[00:00:23] Speaker C: Can you imagine if I wasn't?
[00:00:24] Speaker A: Oh, dude, it would be a train wreck.
[00:00:26] Speaker B: We would never stop talking.
[00:00:27] Speaker A: In all honesty, I think we'd probably still be here from the first episode, which is actually episode four.
[00:00:31] Speaker B: Yes, it is the first one.
[00:00:35] Speaker A: And as always, Jenny's gonna start us off with a haiku, so hit us with it.
[00:00:39] Speaker B: All right. Shout out to my favorite producer. You ready? Like, JB once asked, why is leasing a sports car a bad investment?
So who's that?
[00:00:50] Speaker C: What you're trying to tell me?
[00:00:50] Speaker A: Yes.
[00:00:51] Speaker C: Yeah, it's Tracy Morgan from 30 Rock. He's like, the next thing you'll do is tell me that leasing a sports car is a bad investment.
[00:00:58] Speaker B: What a world.
[00:00:59] Speaker A: Oh, God.
[00:01:00] Speaker B: Well, speaking of leasing, that's why we're here. Today we are going to talk about taxation of leases. And what really got this conversation kicked off was the recent Illinois law that was passed regarding taxation of leases. Tim, why don't you tell us a little bit about this Illinois law? Okay.
[00:01:17] Speaker A: So, Illinois, basically, in June, the Illinois governor signed a House bill, 49 51, which basically makes significant changes to the state laws for income tax, franchise tax, sales, and use a number of different things. One of the biggest pieces of that legislation was a sales tax on leases. Okay. And currently, leases or rentals in the state of Illinois, lease stream payments for operating leases are not subject to sales tax. That's how it is right now. But starting January 1, 2025, operating leases of TPP will be subject to sales tax. It doesn't apply to motor vehicles, watercraft, aircraft, or semi trailers. And there's also a basic exemption for software. But what we're talking about here is a holistic change, because what happens is less sorce. Previously in Illinois, when you bought something to actually lease it, you would turn around and pay all the sales tax up front. And then when you actually leased it to someone, you wouldn't charge them sales tax on it.
[00:02:11] Speaker B: Yeah. Isn't this kind of leasing 101? Or hasn't it been canon with sales tax on leasing is that you don't tax both streams. It's like you're taxing either the purchase of the property to then lease or you're taxing the lease payments. Is that correct?
[00:02:27] Speaker A: That's exactly correct. Yeah.
[00:02:28] Speaker B: You don't cross the streams.
[00:02:29] Speaker A: Don't cross the streams. Ghostbusters.
[00:02:31] Speaker B: No.
[00:02:31] Speaker A: Boy, triple word score used. Cannon.
[00:02:33] Speaker B: I know.
Yeah.
[00:02:36] Speaker C: So is the change gonna be, do they pay less tax or do they get taxed twice?
[00:02:42] Speaker A: So right now, this is what a big question is, right? So what are we gonna do for all of these leases that are in effect in 2025, where the lessor has already paid the sales tax upfront? Do they get a refund of that sales tax? Do they get a credit and apply it?
[00:02:55] Speaker C: They don't know.
[00:02:56] Speaker A: Don't know. It doesn't spill it out in the law. I know, right? So we're all trying to figure that out.
[00:03:01] Speaker B: What about the lessee? If they signed a lease and they are not expecting to pay sales tax on the lease, now all of a sudden they have to pay sales tax.
[00:03:09] Speaker A: Right.
[00:03:09] Speaker B: Does it have to be in writing when they sign the lease agreement?
[00:03:13] Speaker A: Most lease agreements do typically have tax stipulations that are inside of them. I'm wondering if all these lease agreements are going to have to be re executed. I don't know. There's some very, very interesting questions. But then when we talk about those specific carve outs, right, for motor vehicles, watercraft, aircraft, this begs the question of what truly is a lease? Typically, in most states, you pay an ad valorem tax on your vehicle when you actually register it. Right. You pay a one time upfront tax. It's not really a sales tax. It's a tax on the registration or exchange of title of the vehicle. Okay, so if Jenny turns around and buys a brand new Porsche a couple of, you know, five years ago, you.
[00:03:48] Speaker B: Just gave me a raise.
[00:03:49] Speaker A: Okay, there we go. Paid all this ad valorem tax. When she sells it to someone else, that person goes and re registers it. Guess what? The state gets more tax.
[00:04:00] Speaker B: I know, I don't like it.
[00:04:02] Speaker A: Well, it's just part of the way that for itself, I know you don't like it for yourself, but it's part. It's part of the function that happens in state tax law and that, you know, they want to be able to get it on every single exchange of the vehicle. Now, granted, it's not going to be on the original cost new, it's technically on the blue book value or what the state determines, which is very interesting. We got to kind of figure out how these states determine what the values.
[00:04:24] Speaker B: Of these vehicles are on the sales price.
[00:04:25] Speaker A: Nope. Oh, it is not on the sales price, it's actually on the fair market value of the vehicle.
[00:04:30] Speaker B: Hmm.
[00:04:30] Speaker A: Yes. So it gets. It gets quite interesting. But that's for motor vehicles. Now, if we're talking about our lease of tangible personal property, that will be like the lease of what, Jenny? A bicycle, a copier, a generator. Yeah, right. Any of these things. And so if you are leasing one of these things for a, you know, a finite period of time, you're gonna pay tax on your monthly lease stream payments. But what normally happens is the lessor, when they buy that piece of equipment, they issue what? A resale exemption certificate.
[00:04:59] Speaker B: Okay.
[00:05:00] Speaker A: So they don't have to pay tax on it up front, and then they just tax the lease stream payments. Well, guess what? This is kind of trickled down to some other types of leases. So when we're talking about aircraft leases, okay? So a lot of people, when they buy an aircraft, they'll actually purchase it into an LLC. They'll issue a resale exemption certificate so they don't have to pay sales tax on the purchase of that aircraft. And then what they do is they tax the lease stream payments and they may be leasing it to themselves. Right. Because that aircraft is in one LLC and they maybe own another business LLC. And then the llcs just kind of exchange payment for the usage of that aircraft and they get to turn around and tax those lease stream payments. And it extended extends. Excuse me, that sales tax payment over the effective life of the aircraft. Right. It is completely legal. Number of people set these things up this way.
[00:05:50] Speaker B: Is that what we did for the synexis jet?
[00:05:52] Speaker A: That's exactly correct. The Cessna 172, that was purchased in 1969.
[00:05:58] Speaker C: And that's. So that's what they're doing right now with leases. Or that's what they're going to do.
[00:06:03] Speaker A: That's what most people do with leases right now. But what's happening, like in Illinois, get rid of the aircraft. Example, Illinois is very, very different. All these lessors are paying all this tax on these pieces of equipment up front. Okay, so you buy this cat D 100, this huge, you know, backhoe or like a bulldozer or something like that. Well, in Illinois, they're paying all this tax up front on it, but they may have that equipment for like 1520 years and the lease stream payments forever are exempt. Well, now Illinois saying, nope, we're not going to do that anymore. As long as you own that piece of equipment and you're leasing it to people, you owe tax on the lease stream.
[00:06:37] Speaker B: I feel like that's just so insane. And flies in the face of everything we have ever known about. Leases.
[00:06:42] Speaker A: Well, at least in Illinois, but for most other states, yeah, it is kind of crazy. Like, why would you ever pay tax upfront on something that you're going to resale? That. That just, you know, it doesn't make any sense.
[00:06:52] Speaker C: Well, that's the new. Yeah, that was going to be my next question. So is anybody else doing this?
[00:06:55] Speaker A: Um, well, most other states have the law that you basically issue a resale exemption certificate and you already taxed the lease stream. That's. That's what the normal law is. Most people say you have to pay tax.
[00:07:04] Speaker C: But don't they have that law in Illinois and they're getting rid of it?
[00:07:06] Speaker A: No, no, no. It's the exact opposite. You're paying tax upfront.
[00:07:09] Speaker C: Got it.
[00:07:10] Speaker A: Don't tax the lease stream. But now you are going to tax the lease stream starting January 1 of 2025. But what happens to all this trap tax that these guys have paid on all this equipment in the past? That's what we don't know.
[00:07:21] Speaker C: So if you're getting rid of one tax and adding another tax, doesn't that mean that you're just sort of. Isn't that just shifting same. Yeah.
[00:07:27] Speaker A: No, because what'll happen is, is if you hold a piece of equipment for 1015 years, you could theoretically collect tax on a lease stream value that's greater than the original value of the equipment.
[00:07:38] Speaker C: Dang. Yeah, so that's why they're doing it. This is a money play.
[00:07:40] Speaker A: That's exactly it, man. It's a money play. It's a total money play. It's just typical politicians, typical Illinois. They just don't think things through. And it's like, well, wait a minute. If I'm United Reynolds, or if I'm Sunbelt or I'm caterpillar or John Deere, and I've got all these leases of this equipment that's out there. Like, I paid tax on all that stuff when I bought it. Now you're telling me I gotta tax these lease streams. What happens to all the tax that I already paid? Can I get it back? Can I file a refund claim?
[00:08:07] Speaker C: Yeah. What do you think they're gonna do? So let's say you are.
[00:08:09] Speaker A: I doubt they're gonna let them file a refund claim, dude. I mean, I.
[00:08:12] Speaker C: But are you pulling your business out of Illinois? Like, what can you do to avoid the tax?
[00:08:16] Speaker A: Nothing. I mean, in all honesty, there's not really anything you do. And what Illinois is probably gonna argue is, hey, guess what? You're passing this on to your constituents. It's not a problem. But if I'm a leasing company, I'm going to go, well, dude, I should have never paid tax on this to begin with, because in all these other states, I don't pay tax on it right now. What am I doing?
[00:08:35] Speaker B: Why wouldn't they do it with new leases? Like, any lease after January 1, you.
[00:08:39] Speaker A: Would think that that would be the smart thing.
[00:08:41] Speaker C: That makes too much sense.
[00:08:42] Speaker A: Right? But see that specific language that's in here that states that operating leases, in effect, executed or renewed, that word in.
[00:08:52] Speaker C: Effect, it's crap because of the way that they're. They're not doing it till 2025. Like, right now, I could be like, hey, I'll give you a hundred year lease on these copiers so that we don't pay those taxes, because all we got to do is make sure the lease is in agreement before 2025. And basically they're taking that away. You can't do that.
[00:09:08] Speaker A: Right. But it still begs the question that it's very underhanded of the state to do this. It was very narrow minded of them. And I'm wondering, okay, for all these people in the statute of limitations that are within three years in Illinois statute, can they go back and file a refund claim on this tax? It's gonna be interesting to see how this all plays out.
[00:09:30] Speaker C: This is another birds aren't real conspiracy. But, like, you know, as companies like Blackrock and these.
[00:09:34] Speaker A: And it's not all birds aren't real, right?
[00:09:36] Speaker C: No, no, no. Like, most birds aren't real. I mean, you've never seen a baby pigeon.
[00:09:40] Speaker A: Okay.
[00:09:40] Speaker C: Right.
So anyways, yeah, so there's companies like Blackrock. They buy up all these single family homes and the things. And as leasing and renting is actually going to become more of what the middle class does because you can't afford to buy a home, I'm thinking that you're going to end up with these corporate leases that are very appealing to people the same way that health insurance is.
[00:10:03] Speaker A: Okay, well, I got to stop you right there. So the difference that you're asking about right now is a lease. Of what?
[00:10:09] Speaker C: Property.
[00:10:10] Speaker A: Real property.
Real property leases in every state except for Florida are typically exempted from sales tax.
[00:10:20] Speaker C: Right. But as they. As this revenue stream, like, let's say this works in Illinois really well, but.
[00:10:25] Speaker A: What you're saying is.
[00:10:26] Speaker C: So now I bought that house at $350,000, and I'm leasing it to somebody. I'm renting it to somebody.
[00:10:32] Speaker A: It is a non taxable transaction in every state except for Florida. And in Florida, it's the vacation rental thing, where it's typically. Is it less than six months? I don't want to speak on this. I think it's.
[00:10:42] Speaker B: We did a whole episode about this.
[00:10:43] Speaker A: Something we'll go back and listen to. But it does beg the question.
[00:10:47] Speaker B: It's the same. You're saying the same thing because it.
[00:10:50] Speaker C: Makes just as much sense to do that, which is none.
[00:10:53] Speaker B: I see what you're saying.
[00:10:54] Speaker C: Yes.
[00:10:55] Speaker B: You're correlating it to the Illinois leasing issue. You're saying, like, well, you didn't used to pay tax on this, but now you are.
[00:11:02] Speaker A: And see, and I'm looking at it through the tax lens of. I've always understood. I mean, and they are, they're two distinctly different transactions because it's real property versus tangible personal property. Right. But that does not mean that a state couldn't come through, like you said, with this advent of Blackrock. And there was a lot of Reitse becoming very, very popular again, right. With people going out and buying all these pieces of individual family homes and stuff like that and saying, hey, we're just going to come and lease this to you and you can lease it for the rest of your life. And you hear about these studies that are done about millennials and the new generation with these new kids. They don't want to own a home. They actually don't have the american dream like we had or our parents had. They were like, hey, we got to buy a house. We got to own a house. It's part of the. It's part of what we want to do. Right. For the rest of our life. These kids, like, I don't care. I want to rent a condo for the rest of my. Okay, why don't we start taxing that lease stream? It could be an easy way.
[00:11:54] Speaker C: Right.
[00:11:54] Speaker A: For the states to start generating revenue.
[00:11:57] Speaker C: So it might be interesting to watch how this goes in Illinois. But just to me, if there's a.
[00:12:03] Speaker A: State, really, if you're leasing something for four grand a month, right, so you got a three bedroom, two and a half bath townhouse, right? Let's say, like, you know, here in Georgia and your rent's four grand a month, well, now your rent is what? It's going to be $4,280 a month, depending on the county that you're in. Or it could be $4,350 a month. Right. You're going to add an extra $350 per month in sales tax that you're going to have to pay, man. That's going to change some people's opinions on that big time.
[00:12:30] Speaker C: That's where, that's where the conspiracy part of what I was saying comes in is that they will subsidize your rent for you to like, you just got to work for us and then we'll also give you this home for just a month or a thing.
[00:12:41] Speaker A: So like corporations are going to start looking to do this like health insurance.
[00:12:45] Speaker B: That's what miners used to do back in the day.
The miners, mining companies, you know, West Virginia, whatever in the Appalachias would own the housing and you would live there when you worked and you had to buy all your goods at the mining like store all marked up anyway. But it was like a total everything you're saying. It's like, just wait.
[00:13:05] Speaker A: This sounds eerily familiar. Hold on. Is this communism? Is that what I'm hearing?
[00:13:09] Speaker B: It sounds somewhat like communism, but this happened in America.
[00:13:12] Speaker A: I did. I know, and it's very, it's very interesting. Brought it up that way. Well, Monopoly, a complete monopolistic environment. Right.
[00:13:20] Speaker B: And to your point, JB, when you think about housing costs just being inaccessible, let's say in our favorite states for taxation, like California, New York. Right. Impossible, right. To buy any property just for anyone.
Why wouldn't they, especially California, they try to tax everything, right? Why wouldn't they try to start taxing.
[00:13:37] Speaker C: Elite stream, especially if it's not even, you're not even taxing people now. You're taxing like biggest, big evil company that bought all these things. You know what I mean? Like everyone. No one's going to feel sad for Blackrock.
[00:13:48] Speaker A: You're not taxing Blackrock. Think about, they're going to pass it on to the consumer. And that's the whole conceptual idea around our sales tax system is that ultimately the consumer pays for it. Okay? Because in one way or another, the consumer is ultimately going to pay for it because they're the ones that are consuming and using the goods. And it is a quote unquote sale slash use tax system. Right. But is that really appropriate? It doesn't sound too far fetched for some, you know, legislator to bring that idea up. I think you're going to see people revolt.
[00:14:20] Speaker B: Well, we pay property tax on what we on, you know, I pay property tax in the house I own.
[00:14:24] Speaker A: Exactly.
[00:14:25] Speaker B: So why wouldn't we?
[00:14:25] Speaker A: But now think if your own property, you pay property tax on it if you didn't own it and you were leasing from someone. Right. Well, they're going to bake in the property tax into your lease payments, and then they're going to bake in the sales tax on top of it. That's, I mean, that's huge.
[00:14:39] Speaker C: If you wanted to get more people to buy homes, that's one way to do it.
[00:14:42] Speaker A: I mean, I guess so. You definitely change the market that way.
[00:14:46] Speaker C: It's interesting.
[00:14:47] Speaker A: I think it's a very interesting question.
[00:14:48] Speaker C: That's what we wanted to talk about. And today is mostly opinions and things, like less facts and things and just like the taxation leases. Illinois obviously doing this one thing.
[00:14:56] Speaker A: I've always found the taxation of aircraft leases to be so interesting to me. I mean, there was people that I used to work with and at a firm that will remain nameless, that made their entire careers off of structuring aircraft, you know, transactions.
[00:15:07] Speaker C: Like you said, they would lease it back to themselves and some taxes would just sort of go right to you again.
[00:15:12] Speaker A: I mean, because if you're buying like a g six, you know, if you're going out and buying a huge gulf stream and you're paying, you know, millions and millions of dollars, do you really want to pay like 700 grand worth of sales tax out of the gate? Or if you know that you're only going to own the aircraft for like, three or four years and you're going to use it, why not just come up with a fair market value lease rate, reducing your ultimate amount of tax that you're going to pay, and then when you ultimately sell it to someone else, it's up to them to either, you know, set up a new llc or whatever. It just seems so interesting that they wouldn't just say, hey, guess what? You can't do this leasing structure anymore.
[00:15:43] Speaker B: I stress about this all the time.
[00:15:44] Speaker A: I know. I picked you up at night.
[00:15:46] Speaker B: Whenever I buy. When I'm going to buy a g six, how am I going to structure it? Hey, you know, to limit my tax liability.
[00:15:54] Speaker A: You have white collar professional problems.
[00:15:56] Speaker C: For the.
[00:15:56] Speaker A: I'm sorry that we've disturbed your sleep.
[00:15:58] Speaker C: For the three people that are listening to this episode that can buy an airplane. Yeah, they're like, this is very helpful.
[00:16:03] Speaker A: Right? Jenny's going to go to sleep and cry on her huge down pillow and her 8000 square.
[00:16:11] Speaker B: In my Blackrock house before I go mining in the coal mines.
[00:16:15] Speaker A: Buy your goods at the general store at 5000% market.
[00:16:18] Speaker B: Exactly.
[00:16:20] Speaker C: That's a pretty good wrap up. That was everything we talked about right there.
[00:16:23] Speaker A: You want to do it? Wanna wrap this up?
[00:16:24] Speaker C: Yeah, sure.
[00:16:25] Speaker B: All right. Well, if you have any opinions about aircraft leases, please send those to
[email protected].
[00:16:32] Speaker A: Dot and I know there's opinions about real property leases, definitely, but go ahead.
[00:16:37] Speaker B: Or if you have opinions about birds and if birds are real, please let us know. Thanks so much for listening to us today. We're looking forward to it next time where you can listen to us on any podcast platform that you favor. Thanks so much.
[00:16:48] Speaker A: Birds are real.
