Was a crane rental still taxable when the owner supplied the operator but the construction customer exclusively directed and controlled the work?

Plain-English summary

The operated-crane arrangement was a taxable lease, and tax applied to the total charge including the operator.

The lessor supplied both the crane and its employee, but the customer's agreement placed the equipment and everyone operating it under the customer's exclusive jurisdiction, supervision, and control. That transferred the direction and control necessary for a lease under the cited rule.

The lessor did not convert the crane to its own use merely by supplying its employee. It therefore did not owe a separate use tax based on fair market value or acquisition cost. The special monthly-use method the taxpayer proposed was an aircraft-dealer rule and did not apply to heavy-equipment lessors.

The TAA expressly stated that it was not binding for transactions covered by the taxpayer's audit for November 1, 1985 through March 31, 1990.

What this means for you

Who directs the operator can determine whether an equipment-with-operator contract is a taxable lease or a service. Here the lessee's exclusive control made the entire charge taxable rent.

Common questions

Q: Did supplying the operator turn the transaction into a service?
A: No. The lessee controlled the crane and operator.

Q: Was only the bare-equipment portion taxable?
A: No. Tax applied to the total charge, including the operator.

Q: Did the lessor owe use tax for converting the crane to its own use?
A: No. The crane remained in a rental transaction.

Q: Did the ruling cover the prior audited years?
A: No. It expressly excluded the transactions audited for November 1, 1985 through March 31, 1990.

Citations and references

• Fla. Stat. §§ 212.02(16)(a) and 212.05(1)(d) — lease definition and tax on rental price
• Fla. Admin. Code r. 12A-1.071(1), (2), and (10) — equipment leases, own-use conversion, and operator-supplied equipment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95A-022

Original ruling text

Jun 09, 1995

Re: TAA 95A-022
Sales and Use Tax; Crane Leases
ss. 212.02(16)(a); 212.05(1)(d), F.S.
Rule 12A-1.071, F.A.C.

Dear :

This is in response to your request of January 19, 1995,
for a Technical Assistance Advisement (TAA) on behalf of your
client, XXXX [hereinafter Taxpayer]. The Department of Revenue
was unable to issue a TAA since all the requirements set forth
in Rule 12-11, F.A.C., for issuance of a TAA were not met. On
March 7, 1995, in response to our Letter of Technical Advice
issued February 8, 1995, this office received the additional
information that is necessary for issuance of this response,
styled as a Technical Assistance Advisement.

It has been discovered that Taxpayer was audited for sales,
use, and other taxes for the period of November 1, 1985, through
March 31, 1990. The audit resulted in a sales and use tax
assessment. Taxpayer challenged certain portions of the
assessment and filed an action in the Thirteenth Judicial
Circuit Court in XXXX. At issue was whether Taxpayer leased
tangible personal property subject to sales and use tax or
whether Taxpayer entered into agreements that represented a
service not subject to sales and use tax (except during the
period of July 1, 1987 through December 31, 1987, when many
services were subject to sales and use tax). On February 25th,
1994, Taxpayer filed a Notice of Voluntary Dismissal of the case
and a Settlement Agreement with the Circuit Court in which
Taxpayer agreed to pay the Department in satisfaction of all
tax, penalty and interest liability arising from the audit. A
payment schedule was arranged for Taxpayer to pay the liability
over a 12 month period. Based on these facts, this Technical
Assistance Advisement will not be binding on any transaction for
which Taxpayer was audited for the period of November 1, 1985,

through March 31, 1990.

FACTS PRESENTED

"The Taxpayer owns and operates an equipment leasing
company. The Taxpayer is in the business of leasing,
servicing and transporting heavy equipment such as cranes,
hoists, and lifts which are used by Lessees in performing
real property construction or repair contracts. The cranes
can be rented to Lessees with or without (`bare rentals')
operators provided by the Taxpayer.

"When the Taxpayer purchases cranes for use in `bare'
rental contracts, these cranes are purchased tax exempt
pursuant to Rule 12A-1.071(2)(a)l.[, F.A.C.]

"Occasionally, a crane purchased exclusively for use in
bare' rental contracts may be used in a rental contract in which the Taxpayer also provides an operator. In most cases, the crane will be converted back to thebare
rental' fleet soon thereafter.

"Rule 12A-1.071(2)(b)[1. and 2., F.A.C.,] provides that if
a conversion of an asset is made from an exclusively leased
asset (bare rental) to `[one]s own use', tax should be paid
on the cost price of the asset or 'fair market value' of
the asset at the time of the conversion.

"The Taxpayer does not interpret [Rule 12A-1.071(2)(b)[1.
and 2., F.A.C.,] as applicable to their situation because
the Taxpayer is not converting the assets to their own use' when they use them in a rental contract in which they also provide an operator. Even though the operator is an employee of the Taxpayer, the operator works at the direction and control of the Lessee in performing the Lessee's construction contract. The construction contracts are not those of the Taxpayer, but are those of the Lessee. Thus, the Taxpayer has not converted the asset to itsown
use' but has merely given the Lessee the additional option
of an operator with the standard `bare rental' contract.
The amounts billed for this option can be easily separated

from the total charge to the Lessee.

"The Taxpayer interprets their situation to be more closely
related to the situation in which a dealer has purchased an
aircraft exclusively for resale but may use it for charter,
rental, flight training, or demonstration (where a charge
is made). Therefore, the Taxpayer would pay use tax
computed on one percent of the value of the asset each
calendar month that the asset is used in an operated rental
contract the same as described in [R]ule 12A1.007(10)(h)[1. and 2., F.A.C.] Value would be the same as
described in Rule 12A-1.007(10)(h) [4., F.A.C.,] or the
acquisition cost of the asset plus reconditioning costs if
any, or generally, the value of the asset as reflected upon
the books of the Taxpayer in accordance with generally
accepted accounting principles.

"The Taxpayer respectfully requests confirmation regarding
the validity of the above interpretation and confirmation
of applying Rule 12A-1.007(10)(h)[1., 2., and 4., F.A.C.,]
to their operated rental assets...."

STATUTORY/REGULATORY AUTHORITY

Section 212.02(16)(a), F.S., provides:

"(16) `Sale' means and includes:
"(a) Any transfer of title or possession, or both,
exchange, barter, license, lease, or rental, conditional or
otherwise, in any manner or by any means whatsoever, of
tangible personal property for a consideration."

Section 212.05(1)(d), F.S., provides:

"(1) For the exercise of such privilege, a tax is levied on
each taxable transaction or incident, which tax is due and
payable as follows: ...
"(d) At the rate of 6 percent of the lease or rental price
paid by a lessee or rentee, or contracted or agreed to be
paid by a lessee or rentee, to the owner of the tangible
personal property."

Rule 12A-1.071, F.A.C., provides in part:

"Rentals, Leases, or License to Use Tangible Personal
Property.
"(1)(a) For the purpose of this rule, the term lease' includes any rental or license to use tangible personal property, unless a different meaning is clearly indicated by the context in which it is used. The term refers to all transactions that are not bailments in which there is a transfer of possession of tangible personal property, without regard to limitations upon the use, for a consideration, without a transfer of title to the property. It is not essential for a transfer of possession of tangible personal property to include the right to move the tangible personal property. It includes a transaction under which a person secures for a consideration the temporary use of tangible personal property which, although not on his premises, is operated by or under the direction or control of the person or his employees. All leases of tangible personal property other than conditional-sale type leases as described in paragraph (1)(d) of this Rule, are operating leases. Whether a transaction is asale' or a
`rental, lease, or license to use' shall be determined in
accordance with the provisions of the agreement.
"(b) Transfer of possession with respect to an operating
lease means that one of the following attributes of
tangible personal property ownership has been transferred:
"1. Custody or possession of the property, actual or
constructive;
"2. The right to custody or possession of the property;
or,
"3. The right to use and control or direct the use of the
property....
"(c) For an operating lease, tax applies to the gross
proceeds derived from the lease of tangible personal
property for the entire term of the lease....
"(2)(a)l. Tangible personal property purchased exclusively
for leasing purposes may be purchased tax exempt, providing
the lessor is registered with the Department as a dealer at
the time of purchase and issues the vendor a valid resale

certificate in lieu of tax. Any purchases made prior to the
time of registration as a dealer are subject to tax....
"(b)2. The subsequent conversion to one's own use, of
tangible personal property which has been purchased tax
exempt for exclusive lease, will be subject to use tax at
the time of conversion. The basis of the use tax will be
`fair market value' at the time of conversion. If the fair
market value of the tangible personal property cannot be
determined, then the use tax due at the time of conversion
should be based on the acquisition cost of the tangible
personal property. Under no circumstances will the
aggregate amount of sales tax, from leasing, and the use
tax at the time of conversion, be less than the total sales
tax that would have been due on the original acquisition
cost paid by the lessor....
"(10)(a) A transaction involving the use of equipment with
an operator supplied by the owner of the equipment is a
lease if control or direction over the use of the equipment
passes to the customer.
"(b) When the operator of the equipment is on the payroll
of the lessee, the contract constitutes a rental of
tangible personal property and is subject to the tax.
"(c) A transaction is not a lease if it is for the
performance of a specific job in a manner to be determined
by the owner or his operator.
"(d) When the owner of equipment furnishes the operator and
all operating supplies, and contracts for their use to
perform certain work under his direction and according to
his customer's specifications, and the customer does not
take possession or have any direction or control over the
physical operation, the contract constitutes a service
transaction and not the rental of tangible personal
property, and no tax is due on the transaction...."

ADVISEMENT

The provisions of Rule 12A-1.071, F.A.C., are controlling
in the application of sales and use tax to the lease
transactions of Taxpayer. The provisions under Rule 12A1.007(10)(h)1., 2., and 4., F.A.C., are applicable exclusively
to aircraft dealers, not lessors of heavy equipment, such as

cranes, hoists, and lifts.

In the transactions you have described, Taxpayer enters
into an agreement to lease a crane to a lessee and provide an
employee of Taxpayer to operate the crane. Taxpayer's employee
operates the crane under the exclusive direction and control of
the lessee. PARAGRAPH 6. of the conditions of Taxpayer's
standard agreement for the lease of a crane or other equipment
specifically provides:

"INDEMNIFICATION: Lessee agrees that the equipment and all
persons operating such equipment, including Lessor's
employees, are under Lessee's exclusive jurisdiction,
supervision and control and agrees to indemnify and save
Lessor, its employees and agents harmless from all claims
for death or injury to persons, including Lessor's
employees, and from all loss, damage or injury to property,
including the equipment, arising in any manner out of
Lessee's operation."

Rule 12A-1.071(10)(a), F.A.C., provides that a lease
transaction occurs when a lessor provides equipment with an
operator and the lessee maintains control or direction over the
operation of the equipment. It is the Department's position
that, under the transactions described and based on the
indemnification language in PARAGRAPH 6. of the AGREEMENT
conditions, a taxable lease transaction has occurred. Sales tax
must be collected on the total charge for the lease of the
equipment, including the charge for the operator. Taxpayer has
not converted the equipment to "[its] own use" and is not
required to accrue use tax on the fair market value or cost of
the equipment in the manner described above.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject

similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer will be deleted by the Department
before disclosure in keeping with your request dated January 19,
1995, for deletion of private or confidential information.

Sincerely,

Sharon Gallops
Technical Assistant

/sg
Cont. #20081