Ezel / Tax Rulings / TX
TX 8902L0924F01 Sales and/or Use Tax (State,Local,MTA) 1989-02-07

Was a fee paid to terminate a computer-equipment lease early subject to Texas sales tax?

Short answer: Yes. The fee was part of the lease agreement and was not among the deductions allowed from taxable lease receipts, so it was included in the taxable amount.

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This page answers the general question as of 1989. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1989
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A company leased a computer but obtained a newer computer from another lessor before the original lease expired. The original agreement required an early-termination fee when the old equipment was returned before the lease ended.

The Comptroller treated the fee as taxable. Texas tax applied to the total amount paid to lease the equipment, and although the Tax Code allowed some deductions from taxable lease receipts, the letter said an early-termination fee was not one of them.

Common questions

Was the early-termination fee taxable? Yes.

Did it matter that the fee was paid to stop leasing the equipment? No. The Comptroller treated it as part of the lease agreement and included it in taxable lease receipts.

Did the letter identify an available deduction for the fee? No. It expressly said the fee was not among the allowed deductions.

Source

Original ruling text

Bob Bullock
Comptroller of Public Accounts
Austin, Texas 78774

February 7, 1989

Dear ***:

Thank you for your letter of January 25, 1989, concerning the
taxability of a lease termination fee.

I understand STORE A leased a computer in 1982. The lease will expire
this November (1989). However, because the old equipment does not
have sufficient capacity to meet the company's needs, STORE A has
leased a new computer from another lessor. Under the original
lease, STORE A is obligated to pay a lease termination fee.

The early termination fee is paid to avoid leasing the equipment.
This fee is part of the lease agreement. And, if the lessee
decides to return the equipment prior to the conclusion of the
lease, the lessee is obligated to pay the early termination
penalty.

Under the Tax Code, tax is due on the total amount paid to lease
the equipment. The Tax Code does allow certain deductions to
reduce taxable lease receipts. Unfortunately, the early termina-
tion fee is not among the deductions, and is included in the
amount subject to tax.

If you have any other questions, please let me know.

Sincerely,
Dan Pearson
Deputy Comptroller

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