How did Texas tax a petroleum storage facility's capital contribution, leaseback, third-party sale, ground lease, and related subleases?

Plain-English summary

The Texas Comptroller gave five answers for a petroleum storage facility consisting of land, buildings, tanks, pipelines, pumps, meter stations, docks, fixtures, improvements, and a nominal amount of personal property:

1. Contributing the entire facility to a wholly owned subsidiary's capital was not taxable because the transfer lacked consideration.
2. The subsidiary's short-term leaseback of the entire facility to the parent was a nontaxable lease of realty.
3. The later sale of the improvements and personal property to an unrelated third party was taxable. The response first stated that the improvements were not tangible personal property, but it did not explain why the transaction remained taxable or allocate tax to particular property.
4. The unrelated third party's lease of the improvements and personal property back to the subsidiary was a nontaxable realty lease.
5. The parent's lease payments to the subsidiary were not taxable.

The documents characterized the facility differently in various agreements, including a provision calling it movable personal property despite attachment to realty. The Comptroller still classified the lease transactions as realty leases.

What this means for you

The ruling did not let contract labels alone determine property classification. It also leaves a critical unexplained point in the sale answer, so the record cannot support a more specific claim about which asset or amount created the stated tax.

Common questions

Was the capital contribution taxable? No.

Were the facility leasebacks taxable? No; the letter treated them as realty leases.

Was the third-party sale taxable? The letter said yes.

Did it explain why after calling the improvements non-personal property? No.

Citations and references

• The letter cited no numbered statute or Comptroller rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8611L0787G02

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller November 26, 1986

Dear **:

Thank you for your letter of November 11, 1976 concerning the
applicability
of Texas sales and use tax to several transactions involving a petroleum
storage tank facility.

Company A owns a petroleum storage tank facility that is located in Texas
and
consists of (1) land, (2) improvements to land, which consist of
buildings,
petroleum storage tanks, pipelines, pumps, meter stations, docks,
fixtures
and other improvements, (collectively, the "improvements") and (3) a
nominal
amount of property that clearly constitutes tangible personal property
(the
"Personal Property"). The facility contains numerous petroleum storage
tanks, which range in capacity from 5,000 to 300,000 barrels, with only
one
tank with less than 500 barrel capacity.

1. Company A will contribute the entire facility to the capital of
   Company B,
   its wholly-owned subsidiary.

Please confirm our understanding that such contribution to capital is not
subject to Texas sales and use tax because of the lack of consideration
for the transfer.

Response: You are correct. This transaction is not subject to tax.

2. Company B simultaneously will lease the entire facility back to
   Company A
   under a short-term lease that will expire automatically upon the
   occurrence of the transaction described below. The lease document is
   expected to describe the property as follows: (1) lands, described as
   "Land"; (2) buildings, tanks, pipelines, pumps, meter stations, docks,
   fixtures and other improvements described as the "improvements"; (1) and
   (2) collectively described as the "Leased Premises;" and (3) tangible
   personal property described as the "Leased Personal Property." The
   monthly lease amount will not be allocated in the lease between the
   Leased
   Premises, which consist of the Land and the Improvements, and the Leased
   Personal Property.

Please confirm our understanding that Company A's lease payments to
Company B will not be subject to Texas sales and use tax because the
lease
is a lease of realty.

Response: The lease is a lease of realty and is not subject to tax.

3. Company B subsequently plans to sell the Improvements and the
   Personal
   Property to an unrelated third party. At the same time, Company B will
   lease the facility land to the same unrelated third party for a period of
   28 years (the "Ground Lease"), which is equal to the currently estimated
   useful life of the facility.

Simultaneously with the sale of the facility and lease of the facility
land, the unrelated third party will lease the Improvements and the
Personal Property to Company B for a period of 20 years. The lease
agreement, as presently drafted, will contain the following provision:
"Facility Personal Property. It is the intent of the parties hereto that
the Facility shall be and remain movable personal property
notwithstanding
the manner in which the Facility may be attached or affixed to realty."
Company B simultaneously will release the Improvements and the Personal
Property to Company A for the same period.

At the end of the 20-year lease term or any renewal term, Company B has
the option to (1) renew the lease at the facility's the fair market
rental
value for a term not to exceed the expiration date of the Ground Lease or
(2) purchase the Improvements and the Personal Property at (a) their then
fair market value or (b) a fixed price, which is based on the present
estimate of the fair market value of the Improvements and the Personal
Property at the end of the initial lease term. If Company B does not
exercise the renewal or purchase options discussed above, Company B, at
the option of the unrelated third party, is obligated to either (1)
surrender the facility in working condition or (2) dismantle the facility
and deliver the salvageable portions to a common carrier.

At the expiration of the Ground Lease's 28-year term, which is at the end
of the present estimated useful life at the facility, the unrelated third
party is obligated to return the land to Company B clear of the facility,
unless Company B has exercised its purchase option.

Please confirm our understanding that the sale of the improvements and
the
Personal Property by Company B to the unrelated third party is not
subject
to Texas Sales and Use tax because (1) the Improvements are not tangible
personal property for Texas sales and use tax purposes and the sale of
the
Personal Property qualifies as a sale for resale; or (2) if the
improvements are deemed to be tangible personal property, the sale
qualifies as a sale for resale.

Response: The improvements are not tangible personal property in this
situation. The transaction is subject to tax.

4. Please confirm our understanding that the lease of the Improvements
   and
   the Personal Property by the unrelated third party to Company B is not
   subject to Texas sales and use tax because (1) the lease is a lease of
   realty; or (2) if the Improvements are deemed to be tangible personal
   property; the lease qualifies as a sale for resale.

Response: The lease is a lease of realty and is not subject to Texas
sales tax.

5. Finally, please provide a ruling regarding the applicability of Texas
   sales and use tax to Company A's lease payments to Company B.

Response: Company A's lease payments to Company B are not subject to
tax.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
Julie Pesl
Tax Policy Section
Tax Administration Division