What sales-tax treatment applied when drilling tools, their lease, and lessor rights moved through a trust before customer rentals?

Plain-English summary

ABC leased drilling-tools equipment to HIG, then planned to assign that lease and sell the equipment to a trust before receiving lease payments. The trust would become lessor, while HIG intended to lease or rent the equipment to customers in its regular business.

The Comptroller said no sales or use tax was due merely upon execution of the HIG lease. It also said no tax was due on the sale and assignment of the lease to the trust because the trust was buying the tools to lease them in the regular course of business and the assignment and sale occurred together.

The equipment sale from ABC to the trust and the trust's lease to HIG were also treated as a sale for resale throughout the chain. HIG had to collect and remit sales tax on equipment leased in Texas.

If HIG made a divergent use of the tools, it became liable for sales tax under Section 151.154. The request also referenced Section 151.006 when describing rentals inconsistent with its requirements, but the letter did not reproduce either statute.

Common questions

Did the lack of initial lease payments control the result? No; the letter said that fact had no bearing. Was the combined equipment sale and lease assignment taxed? No under the stated resale structure. Who collected tax on Texas customer rentals? HIG. What created tax liability outside the resale chain? Divergent use by HIG.

Citations and references

• Texas Tax Code § 151.006, cited in the reproduced request.
• Texas Tax Code § 151.154, cited in the reproduced response for divergent use.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8503L0675A04

Original ruling text

March 22, 1985

Dear ***:

I am in receipt of a letter from *** asking for sales
tax rulings on your behalf. The request was based on the following
information:

The parties involved are ABC, EFG ("Trustee") as owner trustee under
a Trust Agreement between JKL, as beneficiary and the Trustee (the
"Trust") and HIG, Inc. (hereinafter referred to collectively as "the
parties"). ABC is engaged in the business of leasing and renting
various items of drilling tools equipment, and has been issued a Texas
sales and use tax permit. The Trust is being established to own and
lease certain items of drilling tools equipment, and will apply for a
Texas sales and use tax permit shortly. HIG is engaged in the business
of leasing and renting various items of drilling tools equipment, and
has been issued a Texas sales and use tax permit.

The transactions to be entered into by the parties can be described as
follows:

(1) ABC will lease to HIG various items of drilling tools equipment
pursuant to an equipment lease. The equipment to be leased (the
"Equipment") will be located in several states, but the bulk of the
Equipment is located in the State of Texas.

(2) After execution of the HIG lease, ABC will, pursuant to an equipment
purchase and assignment agreement assign the HIG lease and sell the
Equipment to the Trust. The HIG lease will be assigned prior to the
receipt by ABC of any lease payments from HIG.

(3) The HIG lease will subsequently be restated to name the Trustee,
as owner trustee on behalf of JKL as Lessor.

(4) HIG intends to lease or rent the Equipment in the United States
of America or a possession or territory of the United States of America
to its customers in the regular course of business, but does not know at
the time of these transactions whether all - the Equipment will be so
leased or rented since some of the Equipment might conceivably be used
offshore, in South America, or in some other foreign location.

The rulings requested are as follows:

Since ABC will not receive any payments from HIG with respect to the
lease, a ruling is requested that no Texas sales or use tax will be due
with respect to execution of the HIG lease.

Since the HIG lease assigned by ABC constitutes intangible personal
property, a ruling is requested that no Texas sales and use tax is due
with respect to the assignment of the HIG lease to the Trust.

Since the Equipment will be leased to HIG, which will in turn lease or
rent the Equipment to its customers in the regular course of business,
a ruling is requested that Texas sales and use tax is not due with
respect to the sale of Equipment by ABC to the Trust and the lease of
the Equipment by the Trust to HIG.

An additional ruling is requested that Texas sales and use tax should be
collected as applicable and remitted to the State of Texas by HIG with
respect to Texas leases and rentals of the Equipment to HIG's customers
in the regular course of its business, and that sales tax should be re-
mitted by HIG on the receipt from any leases and rentals which are in-
consistent with the requirements of section 151.006 of the Code.

Responses: Sales or use tax will not be due with respect to the execution
of the HIG lease because HIG is leasing the tolls for release. The fact
that ABC will not receive any payment from HIG has no bearing on our response.

Sales or use tax will not be due with respect to the sale and assignment
of the HIG lease to the Trust because the trust is buying the tools to
lease in the regular course of business. Since the assignment and sale
occur together, tax will not be due on the transfer of the assignment.

Sales or use tax will not be due with respect to the sale of the
equipment by ABC to the Trust and the lease of the equipment by the
Trust to HIG since this is a sale for resale all along the line.

Sales tax should be collected and remitted to the state by HIG for any
equipment leased in Texas. Any divergent use of the tools by HIG will
cause HIG to become liable for sales tax as set out in SEC. 151.154 of
the Tax Code.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

If you have any questions or need more information, please call us at
1-800-252-5555 toll free from anywhere in Texas.You may write us at the
Tax Administration Division.

Sincerely,

Tax Administration Division