34 Tex. Admin. Code § 3.294 - Rental and Lease of Tangible Personal Property
(a) Definitions. The following words and
terms, when used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1)
Financing lease--
(A) A written lease
contract containing either of the following provisions or conditions at the
inception of the contract:
(i) title to the
property must be transferred to the lessee at the end of the lease;
or
(ii) an option to purchase the
property at a nominal price is available to the lessee at the end of the lease
(a price is nominal which is, at the time the contract is executed, estimated
to be less than 10% of the fair market value of the property at the time the
option is to be exercised).
(B) A written lease contract containing
either of the following provisions or conditions at the inception of the
contract will be presumed to be a financing lease:
(i) the lease term is equal to 75% or more of
the estimated economic life of the property and the contract makes no
provisions for the return of the property to the lessor. For used property,
this section does not apply if the beginning of the lease term falls within the
last 25% of the total estimated economic life of the lease property;
or
(ii) the residual value of the
leased property is less than 10% of the property's fair market value at the
inception of the lease and the contract makes no provisions for the return of
the property to the lessor.
(C) The presumption outlined in subparagraph
(B) of this paragraph that the contract is a financing lease may be rebutted by
showing that the contract is not merely a security device, that the property
will be usable for its intended purpose at the end of the lease term, and that
the lessor in good faith intends to reclaim possession of the property at the
end of the lease term or to sell the property at the fair market value or to
lease it for its fair market rental value.
(2) Lease or rental--A transaction, by
whatever name called, in which possession but not title to tangible personal
property is transferred for a consideration. In this section, the words lease
and rental are used interchangeably.
(3) Operator--A person who actively guides,
drives, pilots, or steers tangible personal property. A person who provides
maintenance, repair, or supervision only is not an operator for the purposes of
this section.
(4) Operating
lease--A lease contract which gives the lessee use of the leased property for a
certain period. For the purposes of the sales and use taxes, a written contract
in the legal form of a lease will be treated as an operating lease unless it
meets the definition of a financing lease. All oral leases will be treated as
operating leases.
(b)
Leases. Tax must be collected from the lessee on all charges contained in the
lease unless the charge is separately stated and is nontaxable as provided by
this section. See subsection (f) of this section for imposition of tax and time
for reporting.
(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.
(d) Other charges related to lease
agreements. Operating and financing lease agreements and related billings may
contain a variety of charges in addition to the basic rental/lease charges,
including charges that occur subsequent to the rental. All charges related to a
lease agreement are taxable unless excluded from tax by this section. Some of
these charges and their tax consequences are as follows.
(1) Separately stated charges for labor or
services rendered in installing, applying, remodeling, servicing, maintaining,
or repairing the item being leased are subject to tax.
(2) Damage waiver fees are subject to tax. A
charge after the rental for repair to the damaged rental item is subject to tax
as a taxable service. See §
3.292 of this title (relating to
Repair, Remodeling, Maintenance, and Restoration of Tangible Personal
Property). Charges for items destroyed or lost by a lessee are not taxable.
However, if a lessee is required to purchase an item damaged by the lessee, the
charge for the damaged item is taxable.
(3) All transportation charges billed by the
lessor to the lessee related to the leased property are taxable. Charges for
transportation billed directly to the lessee by third-party carriers are not
taxable. See §
3.303 of this title (relating to
Transportation and Delivery Charges).
(4) Charges in the lease agreement for labor,
such as charges for supervision, set-up, hook-up, assembly or disassembly,
erection, and dismantling, are included in the lease price and are
taxable.
(5) A charge imposed for
the early termination of the lease is included in the lease price and is
taxable.
(6) Under an operating
lease, any interest charges will be taxable whether or not separately stated
unless the interest charge is clearly imposed for late payment or other
defaults under the lease.
(7) Under
a financing lease, charges for interest by the lessor to the lessee will be
taxable unless the rate of interest or the actual interest charged is
separately stated in a contract, invoice, billing, sales slip, or ticket to the
customer.
(e) Tangible
personal property rented for use on residential and nonresidential jobs.
(1) Persons renting equipment for use in the
performance of contracts to construct new nonresidential real property or to
construct, repair, or remodel residential real property owe tax to the
equipment rental company. Tax may not be collected from their customers on a
separately stated charge for this reimbursable expense item even if the
equipment charges to the customer are separately stated from operator charges.
See §
3.291 of this title (relating to
Contractors).
(2) Persons renting
equipment for use in the performance of contracts to repair or remodel
nonresidential real property owe tax to the equipment rental company. Tax must
also be collected from their customers on the total charge for the job
including the amount paid for the equipment rental.
(3) When both remodeling and new construction
are being performed under the same contract, the tax to be collected from
customers on the rental charges should be determined as provided by §
3.357(b)(7) of
this title (relating to Labor Relating to Nonresidential Real Property Repair,
Remodeling, Restoration, Maintenance, New Construction, and Residential
Property).
(f)
Imposition of taxes; time for filing; credits.
(1) Leases subject to sales tax.
(A) An operating lease executed while the
property is within the state is subject to sales tax. Tax will be due on the
total lease amount for the entire term of the lease regardless of where the
property is used if the lessee takes delivery in the state. Any renewal of the
contract, extensions, or options exercised while the tangible personal property
is outside the state will not be subject to Texas tax unless the property
reenters the state.
(B) A financing
lease executed while the property is within the state is subject to sales tax
if the lessee takes delivery in the state. Tax will be due on the total amount
of the contract regardless of where the property received in Texas is used
during the lease.
(2)
Leases subject to use tax. Property brought or shipped into the state for use
under the terms of a financing lease or an operating lease will be presumed to
be subject to use tax. See §
3.346 of this title (relating to
Use Tax). The use tax will be due on the lease price for the entire term of an
operating lease regardless of where the initial contract was executed. Credit
will be allowed against any sales or use tax legally imposed and paid to
another state. See §
3.338 of this title (relating to
Multistate Tax Credits and Allowance of Credit for Tax Paid to
Suppliers).
(3) Method and time for
filing reports.
(A) Under an operating lease,
a lessor must report the rental charges in the period in which they are
considered income under the lessor's method of reporting. Under the accrual
method of reporting, the rental charges are considered income when the lease
amount becomes due under the rental agreement. If the lessor does not collect
the tax, the lessee must report the tax in the period in which each lease
amount becomes due under the rental agreement.
(B) Under a financing lease, the lessor must
collect all tax due under the lease at the time the lessee takes possession of
the property or when first payment is due from the lessee, whichever is
earlier. Tax must be reported on or before the 20th day of the month following
the reporting period in which the tax is collected. If the lessor does not
collect the tax, the lessee must report the tax due when the lessee takes
possession of the property or when first payment is due, whichever is
earlier.
(C) An out-of-state lessor
deriving rental receipts from tangible personal property located in Texas is
engaged in business in Texas and is required to collect Texas use tax. Under an
operating lease, the use tax must be reported by the lessee if the lessor fails
to collect it. The tax must be reported by the lessee based upon the lessee's
accounting method used for regular books and records. Under a financing lease,
the use tax must be reported by the lessee when the lessee takes possession of
the property or when the first payment is due, whichever is earlier.
(g) Sales of leased
property under operating leases; credit allowed.
(1) When a lessee buys the property that the
lessee was renting under the terms of an operating lease and the lessor allows
credit against the sales price for all or part of the lease payments previously
made by the lessee on the same property, tax is not due on the amount allowed
as credit if the lessor has collected and remitted tax on the prior rental
payments. The lessor must collect the tax on the balance of the sales price
based on its method of accounting for sales and use tax purposes.
(2) When the lessor sells property to a third
party who was not the lessee of that property and allows the third party credit
against the sales price for all or part of the lease payments previously made
by the former lessee, tax may not be refunded on the amount allowed as credit.
The lessor must also collect and report the tax on the sales price of the
property to the third party based on its method of accounting for sales and use
tax purposes.
(h)
Assignment of lease payments under operating leases. A lessor may factor or
assign to a third party the lessor's right to receive all lease payments due
under the agreement with the lessee. At the time the lease agreement is
factored or assigned, tax is due on all lease amounts not yet reported. The
lessor is responsible for reporting the tax to the comptroller's department in
the report period the lease agreement is assigned or factored. No deduction in
the amount of tax due and payable by the lessor is allowed if a transfer at a
discount is made to a third party. No tax liability is incurred by the
purchaser of the lease agreement. This section does not apply to the pledge of
lease contracts by a lessor to a third party as loan collateral under the terms
of a bona fide loan agreement.
(i)
Assignment of lease payments and property under operating leases. A lessor may
assign to a third party the lessor's right to receive all lease payments due
under an agreement with the lessee and, in the same transaction, transfer title
to the property covered by the lease. At the time the operating lease contract
is assigned and title to the property is transferred to the third party, the
third party purchaser must begin collecting and remitting tax on the full
amount of the taxable rental charges remaining in the lease. The third party
purchaser may issue a resale certificate to the lessor as provided by
subsection (j) of this section. Tax must be reported by the third party
purchaser as provided by subsection (f)(3)(A) of this section.
(j) Sales for resale; resale certificates.
(1) The purchaser of property which is to be
held for lease within the United States of America, its territories and
possessions, or within the United Mexican States may issue a resale certificate
in lieu of the sales or use tax at the time of purchase. Mexican retailers who
purchase for resale must show their Federal Taxpayers Registry (RFC)
identification number for Mexico on the resale certificate and give a copy of
their Mexican Registration Form to the Texas seller. However, if the lessor
subsequently uses the property in any manner other than the leasing of it, or
display or demonstration of it, the lessor becomes liable at the time of the
use for sales tax based on the fair market rental value for the period of time
used. The fair market rental value is the amount that a lessee would pay on the
open market to rent the item for use. If the fair market rental value of the
property cannot be ascertained, tax is due on the original purchase price of
the property.
(2) At any time, the
lessor using the property purchased under a resale certificate may stop paying
tax on the fair market rental value and instead pay sales tax on the original
purchase price. When the lessor elects to pay sales tax on the purchase price,
credit will not be allowed for taxes previously paid on the fair market rental
value. See §
3.285 of this title (relating to
Resale Certificate; Sales for Resale).
(3) A resale certificate may be issued by a
retailer for a repair or replacement part, accessory, or equipment that will be
attached to a motor vehicle to be rented or leased under the provisions of the
Tax Code, Chapter 152. In this paragraph, the terms "rental" and "lease" are
defined by the Tax Code, Chapter 152, rather than by subsection (a)(2) of this
section.
(k) Lease of
real property with tangible personal property.
(1) If a contract for the lease or rental of
real property includes the lease or rental of tangible personal property (such
as furniture) as part of the agreement, no sales tax is due on the amount
charged the tenant for the lease or rental of the tangible personal property. A
resale certificate may not be issued and sales or use tax must be paid at the
time the tangible personal property is purchased.
(2) Sales or use tax is due on the separate
lease or rental of tangible personal property by a person or entity not owning
or managing the real property in which the tangible personal property is or
will be situated. A resale certificate may be issued in lieu of paying the tax
at the time of purchase of the tangible personal property for subsequent lease
or rental.
(l) Other
taxes. For information pertaining to tax on motor vehicle rental receipts,
refer to sections promulgated under the Motor Vehicle Sales and Use Tax
Act.
(m) Local tax. For proper
collection and allocation of city and transit sales taxes, see §3.374 of
this title (relating to Collection and Allocation of the City Sales Tax) and
§3.424 of this title (relating to Collection and Allocation of Transit
Sales Tax).
Notes
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