When did a parent's equipment transfer to its wholly owned subsidiary become a taxable sale rather than a nontaxable capital contribution?

Plain-English summary

A parent's equipment contribution to a wholly owned subsidiary was not subject to sales or use tax when the subsidiary gave no consideration. Issuing additional subsidiary stock also produced no tax when the parent owned 100% before and after the transfer.

Assumption of the equipment debt was consideration, making the transfer a taxable sale unless another exemption applied. Whether the subsidiary was newly organized did not matter.

If the contribution remained nontaxable and the subsidiary later sold, leased, or rented the equipment, the subsidiary had to collect tax on that later transaction. The letter also described resale-certificate treatment when the subsidiary leased debt-encumbered equipment back to the parent.

Common questions

Was a no-consideration capital contribution taxable? No.

Did issuing more stock create tax while the parent remained the 100% owner? No under the stated facts.

Did assumed debt change the answer? Yes. Debt assumption was consideration and made the transfer a sale.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8811L0950G01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

November 29, 1988

Dear ***:

Thank you for your recent letter concerning the sales tax
consequences of several transactions involving X, a Texas
corporation, and A, a wholly-owned subsidiary.

Your questions and my responses, which are based on the facts
that you presented in your letter, are listed below.

Question 1. Would this transfer result in sales tax liability?

Response: A contribution to capital by a parent to a wholly-
owned subsidiary is not subject to sales or use tax as long as
there is no consideration given to the parent by the subsidiary.

Question 2. Would this transfer result in sales tax liability if
A issued more capital stock to X, even though X would continue to
own 100% of A after the transaction?

Response: A sale is defined as a transfer for a consideration of
title to or possession of a taxable item. "Consideration" may be a
cash payment, issuance of stock when stock ownership in the subsidi-
ary is less than 100%. forgiveness or assumption of debt, etc. Since
X owns 100% of A at the time that the equipment is transferred, and
will continue to own 100% of A after the transfer, there will be no
sales tax due if A issues more capital stock to X.

Question 3. Would this transfer result in sales tax liability if
the equipment was encumbered by debt which A assumed?

Response: This transfer would be considered a sale of the equip-
ment by X to A. Assumption of debt is consideration. Unless the
sale qualifies for exemption under some provision in the law, the
sale between parent and subsidiary if a taxable transaction.

Question 4. Would this transfer result in sales tax liability if A
was not a newly organized corporation?

Response: Contributions to capital are not taxable as long as
there is no consideration given by the transferee. Whether or not
the transferee is newly-organized is not relevant for determining
the taxability of a transaction.

Question 5. Would this transfer result in sales tax liability if
A's trade of business involved the leasing of the equipment not a
third party, which in turn leased the property to the ultimate user?

Response: If the transfer qualifies as a contribution to capital
with no consideration given for the equipment, there will be no tax
liability on the transfer. Company A must collect tax on a subsequent
sale, lease or rental of the equipment.

Question 6. Would this transfer result in sales tax liability if
immediately after the transfer of equipment (which is encumbered) to
A, X leases the transferred equipment from A?

Response: As stated previously, assumption of debt is consideration
and the transfer to A by X is not exempt as a contribution to capital.
Each transaction is presumed taxable. If X made no use of the equip-
ment prior to the sale to A, then X may issue a resale certificate to
its supplier. If X used the equipment prior to the sale, the X owes
tax on the original purchase of the equipment. A could issue a resale
certificate to X for the equipment in lieu of paying tax, and must then
collect tax from X on the lease payments.

This opinion is based upon the facts you presented. If there are addi-
tional or different facts, this opinion may change.

Please feel free to contact me if you have any additional questions. You
may write me, call toll-free 1-800-531-5441 from anywhere in the United
States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Correspondence