Texas Tax Roundup—October 2022: Rentals vs. Services, Drink Recipes, and More

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

Hiya! Welcome back to the Texas Tax Roundup. It’s fall. The Texas weather is finally getting back to something like bearable. It won’t last, so enjoy it while you can, folks.

In this edition of the Texas Tax Roundup, the highlights are a hearing that wrestles with the perennial question of whether something is a rental or a service for Texas sales and use tax, some mixed beverage tax stuff (always fun), and a rare boat sales tax hearing.


Sales and Use Tax

Rentals vs. Services

Comptroller’s Decision No. 117,602 (2022)—The ALJ found that a taxpayer that was renting oilfield equipment and providing fishing and pumping services at oil and gas wells owed tax on its purchases.

Here’s the situation:

Under these circumstances, the ALJ found that taxpayer’s fishing and pumping services were indeed services—not rentals.[2] As such, the taxpayer couldn’t purchase the items that it used to perform these services tax-free as a sale for resale.[3]

(This hearing is interesting because the Comptroller often argues for the opposite result—that “services” are actually rentals—in order to impose tax on a taxpayer’s sales rather than their purchases. This hearing could be a useful precedent for these taxpayers going forward.)

Information Services

STAR Accession No. 202209005L (Sept. 6, 2022)—In this private letter ruling, the Comptroller found that a taxpayer that provided a web-based meteorological forecasting service was not providing a taxable information service.[4]

Manufacturing Exemption

STAR Accession No. 202208017L (Aug. 8, 2022)—In this memo to Audit Division, Tax Policy reiterated the Comptroller’s position that sellers of taxable services are not manufacturers ultimately selling tangible personal property when they provide tangible personal property that’s used by its customers to acquire the taxable service. The Comptroller argued that this position had been affirmed by the Travis County District Court in Dish Network, LLC v. Hegar, Cause No. D-1-GN-17-005821 (Jan. 6, 2020). This case involved a satellite cable company that claimed the manufacturing exemption on its purchases of wrapping and packaging items that it used when it refurbished satellite dish receivers, remotes, and other equipment that it provided to customers.

Export Exemption

Comptroller’s Decision No. 118,569 (2022)—The ALJ determined that a taxpayer didn’t prove that certain sales qualified for exemption from sales and use tax because they were exported outside of Texas or outside of the territorial limits of the United States.[5] The taxpayer was unable to provide bills of lading or other export documentation to support its claim.[6] The ALJ refused to grant the exemption based on invoices alone.


Motor Vehicle Sales, Rental, and Use Tax

Seller-Financed Sales

Comptroller’s Decision No. 116,430 (2022)—The ALJ found that a dealer making seller-financed sales didn’t provided sufficient proof that it had applied for title and registration within 60 days of the date of sale. Therefore, the dealer was liable for all unpaid tax on the total consideration received from the sale. The fact that the dealer had repossessed some of these vehicles didn’t affect the amount of tax due on the sale of the vehicles.[7]


Mixed Beverage Taxes

Depletion Analysis

Comptroller’s Decision Nos. 118,264, 118,265 (2022)—The ALJ found that a page of recipes provided by a taxpayer that owned two bars wasn’t enough to establish that certain drinks that the bars served contained 5.0 ounces alcohol when:

  1. the prices for those drinks weren’t significantly greater than those for other drinks that the bars served,
  2. those prices didn’t match what would be expected for drinks containing 5.0 ounces of alcohol, and
  3. the taxpayer didn’t provide any other evidence to support its claim.

In addition, the ALJ upheld the additional 50% penalty imposed against the taxpayer when there were incomplete business records and the audits showed an error rate for each of the bars of over 50%.

Additional Penalty

Comptroller’s Decision Nos. 117,366, 117,371, 117,372 (2022)—The ALJ determined the 50% additional penalty was supported by clear and convincing evidence when the taxpayer provided incomplete records, the overall error rate for the mixed beverage tax audit was over 46% and for the sales tax audit was over 33%, and more than half of the mixed beverage sales tax, mixed beverage gross receipts tax, and sales and use tax reports were filed late.


Natural Gas Severance Tax

Successor Liability

Comptroller’s Decision Nos. 116,645, 116,646 (2022)—The ALJ found that a taxpayer that acquired a natural gas lease from a company for no consideration was liable for the natural gas severance tax that the company owed in connection with that lease.[8] The transfer of the natural gas lease constituted the transfer of the stock or inventory of a business.[9] Because the natural gas lease was acquired for no consideration, the transfer was considered “a fraudulent transfer or a sham transaction”, which caused successor liability to come into play.[10]


Boat Sales and Use Tax

Comptroller’s Decision No. 118,270 (2022)—The ALJ upheld the Comptroller’s denial of a taxpayer’s refund claim for boat sales tax both on the merits and due to the claim being filed outside of the applicable statute of limitations.

The taxpayer purchased the boat for $363,629.00. Problems with boat eventually resulted in the taxpayer suing the seller and manufacturer, which in turn eventually resulted in the boat being returned to the seller and a cash settlement of $315,000.00 being paid out to the taxpayer. Because the taxpayer didn’t show that he received a full refund of the sales price, the ALJ found he didn’t prove that he was entitled to a refund of the boat sales tax.[11] The ALJ determined that provisions of chapter 151 of the Texas Tax Code (Limited Sales, Excise, and Use Tax)—which in certain circumstances allow a seller a credit or reimbursement of sales tax when there’s a partial refund for returned merchandise[12]—were inapplicable to the boat sales tax.

The ALJ also ruled that the refund claim, which was filed on September 1, 2020, was outside of the four-year statute of limitations when the claim related to tax that was payable in May 2016.[13]




[1] While not directly addressed in the hearing, this fact is perhaps relevant because the taxpayer was relying on the sale-for-resale exemption with regard to its purchases. As we’ll see, the ALJ determined that much of what the taxpayer was selling was services and that the purchases that it used to perform these services didn’t qualify for the sale-for-resale exemption. Thus, even if the taxpayer were able to establish that it was making pure rentals of its equipment, its purchases of equipment would only fully qualify for the sale-for-resale exemption if the equipment were used solely for these rentals. See 34 Tex. Admin. Code §§ 3.285(e) (Resale Certificate; Sales for Resale) (providing that if a taxpayer purchases taxable items for resale and uses those items for any purpose other than retention, demonstration, or display while holding it for sale, lease, or rental, or for transfer as an integral part of a taxable service, then the taxpayer becomes liable for sales tax based on the value of the taxable item for the period of time used), 3.294(c)(3)(B) (Rental and Lease of Tangible Personal Property) (providing that if a taxpayer purchases tangible personal property tax-fee as a sale for resale and then uses the property to perform a service, then sales tax will be assessed on the fair market rental value if the property was purchased under a valid resale certificate).


[2] For purposes of the sales and use tax, a “lease or rental” is “[a] transaction, by whatever name called, in which possession but not title to tangible personal property is transferred for a consideration.” 34 Tex. Admin. Code § 3.294(a)(2) (Rental and Lease of Tangible Personal Property)

For there to be a lease of tangible personal property, the putative lessee must exercise operational control over the leased property in order to take possession of that property, which means “using, controlling, or operating the tangible personal property.” SeeComptroller’s Decision No. 40,812 (2003).

A transaction in which tangible personal property is furnished with an operator and the customer is charged separately for tangible personal property and the operator is presumed to be the lease of tangible personal property and the separate furnishing of an operator. 34 Tex. Admin. Code § 3.294(c)(3). The receipts from the separate charge for the tangible personal property are taxable, and the charge for the operator is not taxable unless a taxable service is being provided.  Id. An “operator” as “[a] person who actively guides, drives, pilots, or steers tangible personal property.” Id.

However, the presumption in Rule 3.294(c)(3) may be overcome and both the charges for tangible personal property and operator considered a charge for a service when the facts show that the customer never gained possession of the equipment. See Comptroller’s Decision No. 44,228 (2007).


[3] See Tex. Tax Code §§ 151.006(c) (“Sale for Resale”) (“A sale for resale does not include the sale of tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of performing a service not listed as a taxable service . . . .”), 151.058 (Property Used to Provide Taxable Services and Sales Price of Taxable Services) (“A person performing services taxable under this chapter is the consumer of machinery and equipment used in performing the services.”).


[4] See 34 Tex. Admin. Code 3.342(a)(5)(B) (Information Services) (stating that nontaxable information service includes “[a]ny sale of information primarily derived from laboratory, medical, or exploratory testing or experimentation or any similar method of direct scientific observation of physical phenomena is not subject to tax. Examples include, but are not limited to, geophysical survey information, polygraph test, and medical test results.”).


[5] See Tex. Tax Code § 151.307 (Exemptions Required by Prevailing Law).


[6] See id.


[7] See Tex. Tax Code § 152.047(f) (Collection of Tax on Seller-Financed Sales).


[8] Texas imposes on each producer of natural gas a tax at a rate of 7.5% of the market value of gas produced and saved in this state by the producer. Tex. Tax Code §§ 201.051 (Tax Imposed), 201.052 (Rate of Tax).


[9] The ALJ cited Comptroller guidance opining that “[s]ince the intent of the [natural gas severance tax] statute is to protect the state’s interest, it would make a lot of sense to take the position that any severance tax liability follows the properties.” STAR Accession No. 9009L1080A01 (Sept. 11, 1990).


[10] “A person who acquires a business or the assets of a business from a taxpayer through a fraudulent transfer or a sham transaction is liable for any tax, penalty, and interest owed by the taxpayer.”  Tex. Tax Code § 111.024(a) (Liability in Fraudulent Transfers). A transfer is considered to be a fraudulent transfer or a sham transaction if the taxpayer made the transfer without “receiving a reasonably equivalent value in exchange for the business or business assets subject to the transfer or transaction.” Id. § 111.024(b).


[11] Texas imposes a tax of 6.25% on the total consideration paid on every retail sale of a taxable boat or taxable boat motor. Tex. Tax Code § 160.021 (Retail Sales Tax). In calculating the boat sales tax, total consideration does not include, among other things, a full cash or credit refund to a customer of the sales price of the item returned to the seller. Tex. Tax Code § 160.002(b)(2) (Total Consideration). Apparently, a partial refund doesn’t cut it here.


[12] See Tex. Tax Code § 151.4261 (Credit or Reimbursement in Return Transactions).


[13] A refund claim must be filed within the applicable statute of limitations period. Tex. Tax Code § 111.104(c)(3) (Refunds). Generally, the limitations period for requesting a refund is tied to the period for which the Comptroller may assess a deficiency, which is four years from the date that the tax becomes due and payable. See Tex. Tax Code §§ 111.107(a) (When Refund or Credit is Permitted), 111.201.