Equipment Leases Are Not “Securities” for Purposes of Tax Law

In a detailed decision going into depth on many of the related issues, the Third Department determined that (1) leases of equipment which the customer has the option to buy at the end of the term and (2) installment sales of equipment in which title is conferred to the customer at the outset, both referred to as “financial agreements,” were not “securities” and therefore the related interest was not “investment income” within the meaning of Tax Law 208:

Business income is defined as “entire net income minus investment income” (Tax Law § 208 [8]); investment income, as relevant here, is defined as “income . . . [derived] from investment capital” less allowable deductions (Tax Law § 208 [6]), which is “investments in stocks, bonds and other securities, corporate and governmental, not held for sale to customers in the regular course of business” (see Tax Law § 208 [5] [emphasis added]).  The corporate franchise tax statutes do not offer a definition of the term security or the phrase “other securities.”  The [Tax] Department’s regulations provide that the phrase “stocks, bonds and other securities,” among other things, means “debt instruments issued by . . . government[s]” (20 NYCRR 3-3.2 [c] [2]).  Petitioner’s main argument is that the finance agreements in issue constitute such debt instruments and, thus, the income derived therefrom is investment income under Tax Law § 208 (5) and (6).  The [Tax Appeals] Tribunal rejected this interpretation, and we confirm.  Xerox Corp v NYS Tax Appeals Tribunal, 514464, 3rd Dept 10-24-13