For a barge bare-rental business run through one entity and a related towing-services business run through a separate entity, which charges -- surveys, inspections, repairs, cleaning, brokered personnel, cargo contracts, and boat supplies -- are taxable, and does splitting billing between the two entities create tax problems?

Plain-English summary

A business owner operates two related entities: a limited liability company that rents barges under "bare rental" agreements (no crew, just the vessel), and a separate limited partnership that provides towing services (both self-operated boats and brokered towing). The owner asked seven detailed questions about how various charges should be taxed, and specifically whether splitting billing between the two entities creates risk of "blurring the lines" and making otherwise-nontaxable towing charges taxable.

1) Survey/inspection charges. An inspection or valuation by itself isn't taxable. But there are two separate charges to track: what the surveyor charges the barge company, and what the barge company passes through to its customer. On the surveyor's charge: if connected to an insurance claim, tax is due if the inspected items are in Texas and the customer does business in Texas; if not insurance-related, the barge company can give the surveyor an exemption certificate instead of paying tax. On the pass-through to the customer: charges incidental to the bare barge lease are taxable as part of the rental price under § 151.007(b) -- INCLUDING survey/inspection charges -- regardless of whether the lease specifically mentions inspections. Critically, the Comptroller was skeptical that simply rebilling a charge through the (nontaxable) towing partnership instead of the (taxable) barge LLC would change this, absent an actual change in which entity's contract the charge belongs to -- the letter suggests clearer invoicing to show which entity/service a charge actually relates to.

2) Safety and repair-diagnostic inspections. Not taxable on their own (hazardous-gas checks, repair-need assessments) -- UNLESS tied to an insurance claim (see #1) or billed to the customer as part of the taxable bare rental, in which case they're taxable just like any other rental-incidental charge. A repairman's diagnostic charge is taxable as part of the repair even if labeled "inspection."

3) Repairs rebilled to customers. Taxable in full (labor and materials) as part of the rental price, per § 151.007(b) -- but § 151.329(3) separately exempts materials and labor used to repair/renovate/convert a qualifying commercial vessel (8+ tons, exclusively/directly commercial use).

4) Barge clean-off and pumping services. Same treatment as repairs (#3).

5) Brokered personnel. Depends entirely on what the personnel actually do: piloting a customer-owned towboat is nontaxable; personnel performing repairs required under the bare rental (using either party's tools) are part of the taxable rental; personnel repairing customer-owned equipment or barges rented elsewhere are taxable unless the customer gives a valid resale/exemption certificate.

6) Contracts of affreightment (moving cargo point-to-point). Not taxable -- it's a nontaxable service. But the provider of that nontaxable service owes tax on the equipment it uses to perform it: if the barges were purchased tax-free for bare rental purposes, using them instead for nontaxable cargo-moving is a "divergent use" triggering tax on the barge's fair rental value under § 151.154. The workaround the letter confirms is safe: if the barge LLC charges the towing partnership its own TAXABLE inter-company rental, and the partnership performs the nontaxable cargo service, neither entity's status is jeopardized -- the barge company just collects tax on the rental to its sister company.

7) Consumable supplies and component parts for towing boats. § 151.329 exempts materials/equipment that become actual component parts of a qualifying 8+-ton commercial vessel: the letter confirms fuel filters, batteries, fire extinguishers, life jackets, and towing gear qualify, and appliances (washer/dryer/AC) qualify ONLY when bolted to the boat. Flashlights and hand tools are never component parts and stay taxable. Consumable operating/passenger-crew supplies (food, waste bags, lubricants, tape) are exempt only if the vessel operates EXCLUSIVELY in foreign or interstate coastal commerce -- otherwise taxable. Tools and equipment used to perform repairs are themselves taxable regardless.

What this means for you

Barge, vessel, and marine equipment rental businesses

Nearly any charge that's "incidental" to a bare rental -- inspections, repairs, cleaning -- gets swept into the taxable rental price, even if not spelled out in the lease. If you want a charge to stay nontaxable, it needs to genuinely belong to a separate, nontaxable service contract (like towing), not just be rerouted through a different billing entity.

Businesses operating related taxable and nontaxable entities

Simply billing a charge through your nontaxable-service sister company doesn't make it nontaxable if the charge actually arises under a taxable rental contract -- the Comptroller looks at the substance of which contract the charge belongs to, not just which entity issues the invoice. But a genuine inter-company taxable rental (one entity paying the other full tax on the equipment) followed by a real nontaxable service is a safe, letter-sanctioned structure.

Commercial vessel operators buying supplies and parts

Track the difference between true component parts (exempt if the vessel is 8+ tons and commercial), appliances (exempt only if bolted on), hand tools (never exempt), and consumable supplies (exempt only for vessels in exclusively foreign/interstate coastal commerce) -- this letter is a practical checklist across all four categories.

Common questions

Q: Is a barge inspection/survey charge always taxable?
A: The surveyor's own charge to the rental company can be taxable or exempt depending on whether it's insurance-related and where the parties are. The rental company's PASS-THROUGH charge to its customer is taxable if it's part of the bare rental price -- which it usually is.

Q: Can splitting billing between a taxable rental entity and a nontaxable service entity avoid tax?
A: Only if the charge genuinely belongs to the nontaxable entity's own contract for its own service -- simply rerouting a rental-incidental charge through a different entity doesn't work without an actual change in the underlying contractual relationship.

Q: Is moving cargo from point to point taxable?
A: No, it's a nontaxable service -- but the provider owes tax on the equipment used to perform it (or, if the equipment was bought tax-free for a different taxable purpose, owes divergent-use tax on its rental value).

Q: What vessel-related supplies are tax-exempt?
A: True component parts of a qualifying 8+-ton commercial vessel (fuel filters, batteries, safety gear, bolted-on appliances). Hand tools and flashlights are never exempt. Consumable supplies (food, lubricants, tape) are exempt only if the vessel operates exclusively in foreign/interstate coastal commerce.

Q: Does this letter bind the Comptroller for other marine rental businesses?
A: No -- this is an informal 2001 letter answering one taxpayer's specific two-entity structure and seven detailed questions, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else.

Citations and references

Statutes:

• Tex. Tax Code § 151.007(b) (sales price includes a service that is part of the sale)
• Tex. Tax Code § 151.154 (divergent use of tax-free purchased property)
• Tex. Tax Code § 151.329 (ship and vessel exemption; subsection (3) covers repair/renovation materials and labor)

Rules:

• 34 Tex. Admin. Code Rule 3.355 (insurance services, referenced for the survey/inspection insurance-claim analysis)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107422L

Original ruling text

July 31, 2001

Dear **:

Thank you for your letter concerning the application of sales taxes to your
barge rental business. I apologize for the delay in responding to your
request.

Your company (a limited liability company) operates a barge rental business in
the State of Texas and in surrounding states. The barges are generally leased
out under a "bare rental" agreement. These agreements vary in term (i.e. daily
or package) with the contract beginning at the time the barge is picked up by
the customer.

You also operate a separate company (limited partnership) that provides towing
services via boats that you own and/or you provide brokered towing services.
This company does not own any barges.

The barge activities are billed out through the limited liability company while
the towing services are billed out through the limited partnership.

Costs (other than barge rental and/or towing services) are incurred by both
entities. You bill these costs to your customers. You question how the
invoices to your customers should be treated for sales tax purposes and whether
or not billing some of the charges through the limited partnership "blur the
lines" and thus could cause all towing services to be taxable.

1) Are barge survey charges taxable? Are they taxable if they relate to an
insurance claim? Are they taxable if specifically addressed in the "bare
rental" agreement? If not directly addressed in the "bare rental" agreement,
can survey charges be billed tax free through your towing company (limited
partnership)?

You attached a copy of your current ** Charter Party Agreement and
an invoice for survey charges. The 4th paragraph concerns inspections. With
this wording, can you bill tax-free surveys under the limited partnership? Does
this type of transaction "blur the lines" between the limited partnership and
the limited liability company? Does the wording on the invoice cause any
problems (i.e. taxable transaction)?

Response. I presume that a barge survey is an inspection for condition or
damage. An inspection or valuation in itself is not taxable. There are two
actual charges here. The first is the survey/inspector's charge to your firm
and the second is your pass through to your customer.

Charge to your firm- When the survey is in connection with an insurance policy,
tax is due on a damage survey or insurance inspection if: the items being
examined are located in Texas, and the customer is engaged in business in
Texas. If the claim is not in connection with an insurance policy, you should
give the surveyor an exemption certificate in lieu of tax. See enclosed Rule
3.355.

Charge to your customer- Charges that are incidental to the bare lease of the
barge are taxable as part of the lease price of the barges pursuant to Sec.
151.007(b), which provides that the "total amount for which a taxable item is
sold, leased, or rented includes a service that is part of the sale." As a
result, an inspection or survey charge passed on to the customer by the lessor
is taxable as part of the rental of the barge.

I do not understand how a charge, due under a lease agreement of one firm
(limited liability company bare barge rental), could be billed by the provider
of nontaxable services (limited partnership towing provider) without a change
in the contractual requirements of both entities. If an inspection is required
and billed out as part of a nontaxable towing contract, the inspection charge
is not taxable.

You may wish to make your invoicing clearer that the charges are in connection
with a lease or nontaxable service and not a billing for stand-alone services
performed by your firm.

2) Are inspections of barges to determine if there are hazardous gases in them
taxable? Are inspections associated with repairs taxable? Does it matter (as
to taxability) whether or not the inspections are performed by your company or
third parties?

Response. No. Inspections associated with safety (hazardous gases) or to
determine is the barge is in need of repair are not taxable unless related to a
claim of insurance as discussed in Response 1. A charge by a repairman to
diagnose a problem is a taxable part of the repair even if called an
inspection. However, the charge to the customer, whether related to an
inspection performed by your employees or an outside firm that are a condition
of the bare barge rental are taxable when billed to your customer as part of
the rental.

3) Are repairs to barges taxable when they are performed by your firm or third
parties and rebilled to your customers? Is the labor associated with the
repair taxable?

Response. Charges that are incidental to the bare lease of the barge are
taxable as part of the lease price of the barges pursuant to Sec. 151.007(b),
which provides that the "total amount for which a taxable item is sold, leased,
or rented includes a service that is part of the sale." As a result, the
entire charge for the repair (labor and materials) passed on to the customer is
taxable as part of the rental of the barge.

Section 151.329 (3) of the Texas Tax Code exempts materials and labor used in
repairing, renovating, or converting a ship or vessel that is of eight or more
tons displacement and that is used exclusively and directly in a commercial
enterprise.

4) Are barge clean off and barge pumping services taxable? Does it matter
whether or not these services are performed by our company or third parties as
to taxability?

Response. See Response 3.

5) If a customer (A) owns a piece of equipment and your company (B) brokers
(i.e. subcontracts with company (C) the personnel to operate the equipment, are
the personnel charges billed to customer (A) subject to sales tax?

If our company brokers equipment and personnel and we bill the customer for
both charges separately, are the personnel charges taxable?

Response. The answer depends in part on what services your personnel are
performing. If a customer owns a towboat and you are providing the pilot, the
pilot services are not taxable. If your customer provides a sand blaster,
paint sprayer, and welder and you are providing personnel to perform repairs
called for under the bare barge rental, the personnel charges are part of the
taxable barge rental. If the customer provides a sand blaster, paint sprayer,
and welder and you are providing personnel to perform repairs to customer owned
equipment or barges rented from other entities, you will collect tax on the
repair unless the taxpayer provides you with a valid resale or exemption
certificate.

6) Are contracts of affreightment (i.e. contract to move cargo from point to
point) taxable? If we use our barges to move the product, are the barges
taxable to our customers if we did not pay sales tax on the barges when they
were purchased? If we bill the contract of affreightment out of the limited
partnership and the limited liability company in turn bills the limited
partnership for the use of the barges are we in any way jeopardizing the
nontaxable status of the towing company?

Response. A contract to move cargo from one point to another is not subject to
tax. As a provider of nontaxable services, you should pay tax on the equipment
that you use in performing the service. If you purchased the barges tax free
for bare rental, your firm owes tax on the fair market rental value of the
divergent use of the barge per Section 151.154 of the Texas Tax Code.

However, if the limited liability company bills the limited partnership for the
barge rental (taxable bare rental) and the limited partnership contracts to
perform nontaxable services, you do not jeopordize the exempt purchase by the
barge company or the nontaxable status of the towing company. The barge
company will collect tax on the rental to the towing firm.

7) Your limited partnership owns boats that provide towing services to our
customers. Various consumable supplies and component parts are purchased for
the boats. Please identify if the following items are tax exempt:

Fuel filters
Cleaning supplies
Washer/dryer/air conditioner
Nuts, bolts, washers
Batteries
Tools
Paint
Paint supplies (brushes, paintbrushes, paint pans)
Duct tape
Electrical tape
Flashlights
Fire extinguishers
Life jackets
Towing gear (rope, chain)
Oil & lube
Oil response kits
Waste disposal bags
Food items

Response. Section 151.329 of the Texas Tax Code provides an exemption for
certain ships and ship equipment. The following items are exempted from the
taxes imposed by this chapter:

(1) materials, equipment, and machinery that enter into and become component
parts of a ship or vessel that is of eight or more tons displacement and is:

(A) used exclusively and directly in a commercial enterprise, including
commercial fishing; or

(B) used commercially as a vessel for pleasure fishing by individuals as
paying passengers on the vessel;

(2) a ship or vessel of eight or more tons displacement, that is used
exclusively and directly in a commercial enterprise and is sold by the vessel's
builder;

(3) materials and labor used in repairing, renovating, or converting a ship or
vessel that is of eight or more tons displacement and that is used exclusively
and directly in a commercial enterprise;

(4) materials and supplies purchased by the owner or operator of a ship or
vessel operating exclusively in foreign or interstate coastal commerce if the
materials and supplies:

(A) are loaded on the ship or vessel and used in the maintenance and operation
of the ship or vessel; or

(B) enter into and become component parts of the ship or vessel; and

(5) materials and supplies purchased by a person providing stevedoring
services for a ship or vessel operating exclusively in foreign or interstate
coastal commerce if the materials and supplies are loaded aboard the ship or
vessel and are not removed before the departure of the ship or vessel.

Presuming that your vessels are used exclusively in commercial enterprise and
are eight or more tons displacement, the items that become component parts
(fuel filters, batteries, fire extinguishers, lifejackets, towing gear, etc.)
are exempt. Appliances (washer, dryer, a/c) are considered exempt component
parts only when bolted to the boat. Flashlights and hand tools are not part of
the vessel. Other items such as foods, waste disposal bags, lubricants, tape,
etc. (consumable supplies to operate the ship and supplies for passengers and
crew) that are not considered component parts of the vessel are exempt only if
the vessel is operated exclusively in foreign or interstate coastal commerce.
The handtools and equipment used in making the repairs are taxable.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division

cc: **