Does a company that leases mobile storage units (containers, trailers, office units) to construction contractors qualify for Texas's reduced retail/wholesale franchise tax rate?

Plain-English summary

A company that leases container units, storage trailers, record trailers, and office units to construction contractors and other commercial users asked whether it's "primarily engaged in retail or wholesale trade" and eligible for Texas's reduced 0.375% franchise tax rate. The Comptroller ruled no.

The taxpayer's own argument was that leasing these units fell under SIC Codes 5082/5084 (construction and oilfield equipment distribution), part of the Standard Industrial Classification Manual's Division F, which Texas's "wholesale trade" definition incorporates wholesale. The Comptroller disagreed: Division F covers selling merchandise (or acting as a broker/agent in buying merchandise) — not leasing or renting it. Citing its own prior Comptroller's Decision No. 106,718 (2017), the Comptroller reiterated that "leasing and renting are not activities described in Division F," so mobile-unit leasing doesn't count as wholesale trade at all, regardless of which SIC code within Division F the taxpayer might otherwise point to.

The Comptroller then checked whether the leasing fit either of Texas's two narrow "retail trade" carve-outs that specifically DO cover certain rentals/leases: (1) leasing "tools, party and event supplies, and furniture" under SIC Industry 7359, and (2) "heavy construction equipment rental or leasing" under SIC Industry 7353. Neither fit: mobile storage units aren't "tools" under the term's ordinary dictionary meaning (an instrument worked by hand, like a hammer), and they aren't similar to the operator-required heavy equipment (bulldozers, cranes, earth movers) that SIC Code 7353 covers. So the leasing revenue is neither wholesale trade nor one of the specific retail-trade rental carve-outs, and the reduced rate doesn't apply.

What this means for you

Equipment and container leasing companies

Don't assume that leasing goods used in "wholesale"-adjacent industries (construction, oilfield) makes your leasing revenue "wholesale trade" — Texas's wholesale trade definition is about selling merchandise, and leasing/renting is categorically excluded from it, no matter which SIC industry the leased item would fall under if sold. Check specifically whether what you lease fits one of the two narrow retail-trade rental carve-outs (tools/party-event-supplies/furniture under SIC 7359, or heavy construction equipment under SIC 7353) before assuming the reduced rate applies.

Businesses considering the reduced retail/wholesale franchise tax rate

This ruling is a reminder that Texas's retail/wholesale trade definitions are keyed to specific, narrow SIC Manual categories — a business's plain-English description of itself (e.g., "we're in construction equipment distribution") doesn't control if the actual activity (leasing, not selling) falls outside the statutory definition.

Accountants and tax professionals

The key doctrinal points: (1) Division F of the SIC Manual (which defines "wholesale trade" under Section 171.0001(18)) is limited to selling/brokering merchandise, not leasing, per Comptroller's Decision No. 106,718 (2017); and (2) the "retail trade" leasing carve-outs in Section 171.0001(12)(E)-(F) are narrow and specific (tools/party-event-supplies/furniture; heavy construction equipment), not a general leasing catch-all.

Common questions

Q: Does leasing equipment ever count as "wholesale trade" for the reduced franchise tax rate?
A: Not under Division F of the SIC Manual, which Texas's wholesale trade definition uses — that division covers selling and brokering merchandise, not leasing or renting, per Comptroller's Decision No. 106,718 (2017).

Q: Are there any leasing/rental activities that DO qualify for the reduced retail/wholesale rate?
A: Yes — Texas's retail trade definition specifically includes leasing/renting tools, party and event supplies, and furniture (SIC Industry 7359), and heavy construction equipment rental (SIC Industry 7353). Mobile storage units didn't fit either category in this ruling.

Q: What counts as a "tool" for purposes of the SIC 7359 retail-trade carve-out?
A: The ruling used the term's ordinary dictionary meaning — an instrument used or worked by hand, like a hammer — which didn't include large mobile storage/office units.

Citations and references

Statutes:

• Tex. Tax Code § 171.002(b) (Rates; Computation of Tax)
• Tex. Tax Code § 171.0001(12) (definition of "retail trade")
• Tex. Tax Code § 171.0001(18) (definition of "wholesale trade")
• Tex. Tax Code § 171.0001(12)(E) (retail trade — tool/party-event-supply/furniture rental, SIC Industry 7359)
• Tex. Tax Code § 171.0001(12)(F) (retail trade — heavy construction equipment rental, SIC Industry 7353)

Cited prior guidance:

• Comptroller's Decision No. 106,718 (2017) — "Leasing and renting are not activities described in Division F" of the SIC Manual

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201805005L

Original ruling text

May 9, 2018

RE: Private Letter Ruling No. 20170601213245

** Taxpayer No. ****

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated Feb. 9, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance about whether a taxable entity engaged in leasing mobile storage units can use the reduced franchise tax rate to calculate its tax liability.

Facts Presented

** (Taxpayer) leases container units, storage trailers, record trailers, office units, and other similar storage units (mobile units). Taxpayer is primarily engaged in leasing these mobile units to construction contractors and other commercial users in Texas.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our ruling and analysis.

Question: Is Taxpayer primarily engaged in either a “retail trade” or a “wholesale trade” and entitled to use the reduced franchise tax rate to calculate its tax due pursuant to Section 171.002(b) (Rates; Computation of Tax)?

Ruling: No. Leasing mobile units is not an activity included within the definition of retail trade or wholesale trade in Section 171.0001(12) or (18) (Definitions). Therefore, Taxpayer is not primarily engaged in retail or wholesale trade and is not entitled to calculate its franchise tax liability using the reduced rate under Section 171.002(b).

Analysis:

Section 171.002(b) provides that a taxable entity primarily engaged in retail or wholesale trade may apply a franchise tax rate of 0.375 percent to its taxable margin to determine its tax liability for the current report year.

“Wholesale trade” is defined in Section 171.0001(18) as, “[t]he activities described in Division F of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget” (SIC Manual).

The introduction to Division F of the SIC Manual states the “division includes establishments or places of business primarily engaged in selling merchandise… or acting as agents or brokers in buying merchandise...” (Emphasis added). The introduction then identifies the “chief functions” of establishments included in Division F, which are: “selling goods to trading establishments, or to industrial, commercial, institutional, farm, construction contractors, or professional business users; and bringing buyer and seller together. In addition to selling, functions frequently performed by wholesale establishments include maintaining inventories of goods; extending credit; physically assembling, sorting, and grading goods in large lots; breaking bulk and redistribution in smaller lots; delivery; refrigeration; and various types of promotion such as advertising and label designing.” Taxpayer’s activities do not fall within Division F of the SIC Manual because Taxpayer is engaged in leasing, not selling or promoting the sale of goods.

You state that leasing mobile units falls within SIC Codes 5082 or 5084, which are within Division F of the SIC Manual, because these codes apply to businesses engaged in the distribution of construction and oilfield equipment. Leasing mobile units is not a type of wholesale distribution as provided in SIC Codes 5082 or 5084, however, because in the context of Division F of the SIC Code, the term “wholesale distribution” does not refer to equipment leasing. “Leasing and renting are not activities described in Division F.” Comptroller’s Decision No. 106,718 (2017).

“Retail trade” is defined in Section 171.0001(12)(E) as “activities involving the rental or leasing of tools, party and event supplies, and furniture that are classified as Industry 7359” of the SIC Manual, and in Section 171.001(12)(F) as “heavy construction equipment rental or leasing activities classified as Industry 7353” of the SIC Manual. You state that Taxpayer leases tools classified under SIC Code 7359 or rents heavy construction equipment classified under SIC Code 7353.

Chapter 171, Franchise Tax, does not define the term “tool.” Because the Tax Code does not define the term, we look to its common usage. Gov’t Code Section 311.011(a) (Common or Technical Usage of Words). Webster’s New Collegiate Dictionary defines “tool” as “an instrument (as a hammer) used or worked by hand.” Webster’s New Collegiate Dictionary 1221 (1980). Based on the common use of the term, Taxpayer’s leased mobile units are not tools. Leasing mobile units does not fall within SIC Code 7359.

The examples of heavy construction equipment provided in the SIC Manual under Code 7353 include bulldozers, cranes, and earth moving equipment that require operators. Because the mobile units are not similar to the types of heavy construction equipment described in that provision and do not serve a similar function, leasing mobile units is not one of the activities identified in SIC Code 7353.

The Comptroller’s Decision cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20170601213245.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTES:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.