12 Nov Texas Sales Tax Exemption on Rental Equipment
In the Texas equipment rental with operator exemption is only exempt from Sales & Use Tax under very specific circumstances. The state of Texas draws the line for this distinction based upon which type of property the equipment is working. Equipment rental with operator transactions are only exempt if the property that the work is being performed on is exempt tangible personal property. The Rule relating to lease or rental of equipment with an operator, Texas Rule §3.294(c) reads as follows:
RULE §3.294 – Rental and Lease of Tangible Personal Property
(c) Tangible personal property leased with and without an operator.
(1) Receipts from the lease of tangible personal property without an operator are taxable.
(2) The furnishing of tangible personal property with an operator for which a single charge is made to the customer shall be presumed to be the performance of a service and no tax may be charged to the customer, unless the service is taxable under other provisions of the Tax Code, Chapter 151. Sales or use taxes will be due on the original purchase price of the tangible personal property.
(A) The presumption set forth in subsection (c)(2) of this section may not be rebutted solely by one party to the transaction. The presumption may be rebutted by the following criteria which establish a lease of tangible personal property:
(i) the customer exercised direct control or supervision over the operator of the tangible personal property; and
(ii) the intent of the agreement was to lease a piece of tangible personal property and separately furnish an operator.
(B) If it is established that a lessor who made a single charge to customers did in fact make a lease of tangible personal property, the tax will be due on the fair market rental value of the tangible personal property. If this cannot be determined, the tax will be due on the total charge reduced by the charge attributable to the operator determined from lessor’s records. If the charge for the operator cannot be determined from the lessor’s records or if it seems unreasonable, the comptroller will make a determination of a reasonable operator charge.
(3) A transaction in which tangible personal property is furnished with an operator, and the customer is charged separately for tangible personal property and operator, shall be presumed to be the lease of tangible personal property and the separate furnishing of an operator; the receipts from the separate charge for the tangible personal property are taxable. The separate charge for the operator will not be taxable unless a taxable service is being provided.
(A) If a nontaxable service is being provided and it is established that the separate charge for the lease of tangible personal property is lower than the tangible personal property’s fair market rental value, sales tax will be assessed on the fair market rental value unless the lessor presents convincing evidence to the comptroller as to why the rental charge should be lower than fair market rental value.
(B) If it is established that a lessor who separated charges for tangible personal property and operator nevertheless used the tangible personal property to perform a service, sales tax will be assessed on the fair market rental value if the property was purchased under a valid resale certificate. See subsection (j) of this section.
The type of property is a factor in determining taxability because of the phrase, “unless the service is taxable under other provisions of the Tax Code, Chapter 151.” Texas Tax Code, Chapter 151 states that the following are taxable services:
- 151.0101. “TAXABLE SERVICES”
- “Taxable services” means:
(5) the repair, remodeling, maintenance, and restoration of tangible personal property, except:
(B) a ship, boat, or other vessel, other than:
(i) a taxable boat or motor as defined by Section 160.001;
(ii) a sports fishing boat; or
(iii) any other vessel used for pleasure;
(C) the repair, maintenance, and restoration of a motor vehicle; and
(D) the repair, maintenance, creation and restoration of a computer program, including its development and modification, not sold by the person performing the repair, maintenance, creation, or restoration service;
(11) real property services;
(13) real property repair and remodeling;
As a result, the exemption available for equipment rental with operator is quite restrictive. Examples of exempt tangible personal property include commercial ships, boats and vessels; or railcars and locomotives. For example, if you were renting a crane with an operator provided to re-rail a locomotive and railcars after a derailment, the rental of that equipment with an operator would be exempt. However, if that same crane was performing work on real property such as the tracks and roadbed on which the train travels, the transaction would be taxable.
As with all Sales & Use Tax research, the specifics of each case need to be considered when determining taxabilty. Agile Consulting Group’s sales tax consultants can be found on our page summarizing Texas sales and use tax exemptions. If you have questions, comments or would like to discuss the specific circumstances you are encountering in regard to this issue or any other Sales & Use Tax issue, please contact us at (888) 350-4TAX or (888) 350-4829 or via email at email@example.com.