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