How did Rhode Island sales tax apply when Company B leased cranes to Company A for re-leasing, Company A rented cranes with operators, and Company B used re-leased cranes in rigging services?

Plain-English summary

Company B's lease of cranes to Company A for later rental to third parties was a nontaxable sale for resale. Company A, as the re-lessor, had to collect and remit sales tax on its crane lease payments.

Company A's rentals remained taxable when it supplied an operator. Under the general lease agreement, the lessee received direction and control of the crane and operator. An operator's right to refuse an illegal or dangerous instruction did not change that result, and any operator charge formed part of the taxable selling price.

When Company B re-leased cranes from Company A for Company B's own rigging and hauling operations, Company A had to charge tax on those lease payments. Company B's separate charges to customers for rigging and hauling services were not subject to Rhode Island sales and use tax under the ruling.

What this means for you

Equipment lessors

A lease can qualify as a sale for resale when the lessee acquires the equipment solely to lease it onward. The downstream lessor must then collect tax on the taxable customer rental.

Operator-supplied rental businesses

Supplying an operator did not convert these crane rentals into nontaxable services because direction and control passed to the lessee. The operator charge was taxable with the rental.

Rigging and hauling companies

Company B paid tax when leasing cranes for use in its own service business, but did not collect tax on its customer charges for the rigging and hauling services themselves.

Common questions

Was Company B's initial lease to Company A taxable? No. It was treated as a sale for resale because Company A would re-lease the cranes.

Was Company A's re-lease to Company B taxable? Yes, because Company B used the cranes in its own rigging and hauling operations.

Were crane rentals with operators taxable? Yes. The lessee had direction and control, and the operator charge was part of the selling price.

Did the operator's safety-refusal right change the control analysis? No. The ruling still found that direction and control passed to the lessee in all relevant instances.

Were customer charges for rigging and hauling taxable? No, under the facts and law applied in this order.

Citations and references

• R.I. Gen. Laws § 44-18-7(d)(1) — the definition of sale includes a lease.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1999-03

Original ruling text

Ruling Request No. 99-03

Declaratory Rulings

Ruling Request No. 99-03

Re: Ruling Regarding the Applicability of the Sales/Use Tax Law to Certain Lease Transactions

Request for Ruling

You request a ruling with regard to a proposed transaction involving Company "A" and Company "B".

Facts

The facts set forth in your request for ruling dated September 15, 1999 and the documents attached thereto are incorporated herein by reference. The salient facts are as follows.

Company B owns various types of heavy-duty cranes and other rolling stock. Company B is engaged in two distinct businesses; (a) the leasing of its cranes, with or without an operator, to third parties who utilize the cranes in construction activities, and (b) hauling, rigging and transportation services. Company A also leases cranes with or without an operator to third parties. When Company A leases a crane with an operator, direction and control passes to the lessee (section 6(c) general lease agreement).

The only "control" retained by Company A is when Company A supplies an operator with the crane and the lessee directs the operator to perform a function in violation of law or which would create a dangerous situation (par. 6B). In such a case the operator may refuse to follow the lessee's directions. Company A is now a wholly-owned subsidiary of Company B.

Company A and Company B presently own cranes in their own name. It is intended that Company B will lease its cranes to Company A so that Company A will have corporate control of all cranes. For crane leases to third parties, Company A will be the lessor and will charge the lessee sales tax and remit the same to the state. For cranes used by Company B in its rigging operations, Company B will re-lease the cranes from Company A and use them in its rigging operations. Company A will charge Company B a sales tax on the re-lease and remit the same to the state. Company B will not charge any sales tax to its rigging customers. In effect, all crane leases, with our without operators, will be by Company A, while all rigging services utilizing cranes will be through Company B. It is estimated that approximately ten percent of all cranes leased by Company A will be to Company B. All future crane acquisitions will be by Company A.

Rulings Requested

1. The lease of cranes from Company B to Company A will be treated as a sale for resale, and not subject to Rhode Island sales and use taxes.
2. The re-lease of cranes from Company A to Company B to be used in rigging and hauling operations in Rhode Island will be subject to sales tax on the lease payments.
3. Company B will not charge any of its rigging and hauling customers sales tax on those services.
4. Company A will charge a sales tax on lease payments received from lessees of its cranes, including the charge for operators, if any, that are supplied to the lessees as part of the lease of cranes.

Discussion

Pursuant to Rhode Island law, the definition of "sale" means and includes a lease (R.I.G.L. 44-18-7(d)(1)). Sales for resale are not subject to Rhode Island sales tax. When Company A leases cranes from Company B for subsequent lease to third parties, the transaction would be a "sale for resale" wherein Company A would be required to charge and remit a sales tax on its lease of the cranes.

The leasing of the cranes with an operator would also be subject to tax since under the facts presented, direction and control passes to the lessee in all instances. When an operator is supplied and there is a charge for the operator, that charge is part of the selling price and is subject to tax.

When Company B leases cranes from Company A to be used in its rigging and hauling operations in Rhode Island, those lease charges will be subject to tax. Company B would not, however, be required to collect a tax on its charges for hauling and rigging since those services are not subject to tax in this state.

Ruling

1. The lease of cranes from Company B to Company A will be treated as a sale for resale, and not subject to Rhode Island sales and use taxes.
2. The re-lease of cranes from Company A to Company B to be used in rigging and hauling operations in Rhode Island will be subject to sales tax on the lease payments.
3. Company B's charge to its customers for rigging and hauling services will not be subject to sales and use tax.
4. Company A will charge a sales tax on lease payments received from lessees of its cranes, including the charge for operators, if any, that are supplied to the lessees as part of the lease of cranes.

This ruling may be relied upon by Company A and Company B and shall be valid until expressly revoked for until the applicable statutory provisions of the law are amended in a manner that requires a different result or the underlying situations described above change.

**R. Gary Clark

Tax Administrator**

September 24, 1999