Was a gas-compression agreement a taxable equipment rental or a nontaxable compression service when the provider operated and controlled the compressor?

Plain-English summary

The Comptroller treated the gas-compression agreement as a nontaxable service rather than a taxable rental of tangible personal property.

The compressor was a substantial part of the agreement, but that was not decisive. The provider was responsible for installation, daily operation, repairs, and starting and stopping the unit, while the customer supplied no operating employees and had no identified control over the equipment. The essence of the transaction was therefore a compression service for a fee.

Common questions

Was the compressor merely incidental to the service? No. The letter called it a substantial part of the agreement.

Why was the agreement still not a rental? The provider operated and controlled the equipment, and the customer had no identified control over it.

Was the compression-service fee taxable? No, under the facts presented.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8903L0942C14

Original ruling text

March 9, 1989

Dear ***:

I have examined in detail the information you submitted concerning a gas
compression agreement.

You stated your position as being that a gas compression agreement should be
considered as a non-taxable service, rather than as a rental of tangible
personal property. You also state that the provider is responsible for
installation, daily operations, repairs, and starting and stopping of the unit.
You continue by stating that the customer does not provide employees for the
operation of the equipment.

Item (3) states, "The equipment provided is incidental to the service."
I disagree with this statement. The equipment is a substantial part of the
service agreement. However, this is not the real issue to be discussed.

The documents you submitted set out the duties of the customer under this
compression agreement. Exhibit C, Section 2, guarantees that the equipment
will be available 95 percent of the time provided the daily operation of the
equipment is performed by the provider of the service. I can find nothing in
the documents that would give the customer control over the equipment used in
providing the compression service.

Therefore, the essence of this transaction was to provide a compression
service for a fee. This fee is not subject to the sales tax.

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

If you have any questions or need more information, please call our
toll-free number 1-800-531-5441. The regular number is 512/464-4434.
You may write me at the Legal Division. (FAX (512) 474-1643)

Sincerely,

John Bolin
Taxability Section
Legal Services Division