Many businesses in Texas involve the performance of services that require the use of machinery and equipment. While these businesses may purchase the necessary equipment outright, others opt to rent equipment from third-party rental companies, or to completely outsource the equipment-related services to another service-provider. These transactions seem simple on the surface, but may be more complex when determining how to treat them for Texas sales and use tax purposes.
General Sales Tax Treatment of Equipment Rental
In determining how equipment rental should be treated, the first place to look is whether the equipment is being rented by itself (on a “standalone” basis), or whether it’s being rented with an operator.
- Standalone Basis – Comptroller Rule 3.294(c)(1) states that “receipts from the lease of tangible personal property without an operator are taxable.” [1]
- With an Operator – Comptroller Rule 3.294(c)(2) states that “[t]he 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…” [2]
An “operator,” in turn, is defined as a “person who actively guides, drives, pilots, or steers tangible personal property” and does not include one who merely provides maintenance, repair, or supervision. [3]
Under Rule 3.294(c)(2), the rental of equipment with an operator, billed as a single charge, is treated as the performance of a service. The taxability of this service, in turn, will depend on the nature of the service itself. Additionally, if equipment is rented with an operator, but there are separate charges for the equipment and operator, each charge will be treated differently for tax purposes – one as a rental of equipment on a “standalone” basis under Rule 3.294(c)(1), and one as a charge for the provision of services by the operator.
Additional Rules and Complications
I’ve previously posted a discussion of the rules surrounding construction-related services – you can find that here. As I noted in that discussion, a person providing nonresidential repair and remodel services can generally purchase incorporated materials tax-free. However, the Comptroller’s Rules make clear that this does not apply to purchases of equipment. [4] The reason for this distinction lies in the reason for allowing tax-free purchases of materials – those purchases are treated as being passed onto the customer as part of a taxable transaction, so tax is being paid by the “ultimate consumer” of the materials. In contrast, the Comptroller views the equipment as being used by the service-provider, rather than passed onto the customer.
There are also other complications that can arise with respect to the rental of equipment. Some rentals of heavy machinery may be subject to an additional tax – the Texas Emissions Reduction Plan (“TERP”) tax. [5] Still other equipment may fall under the definition of a “motor vehicle,” and be subject to an entirely separate tax. [6] These considerations are fact-driven and require a review of the specific machinery and transactions at issue.
[1] 34 Tex. Admin. Code § 3.294(c)(1).
[2] 34 Tex. Admin. Code § 3.294(c)(2).
[3] 34 Tex. Admin. Code § 3.294(a)(3).
[4] 34 Tex. Admin. Code §§ 3.291(b)(4), 3.294(e)(2).
[5] See Tex. Tax Code 151.0515.
[6] Tex. Tax. Code §§ 152.001-152.123.
