Were leases of taxable equipment between brother-sister or otherwise affiliated corporations exempt because of common ownership or consolidated federal filing?

Plain-English summary

Leases of taxable items between brother-sister or related corporations were taxable on the total lease price. Common ultimate stock ownership did not qualify for Rule 3.331's joint-ownership transfer exemption.

If the lessor used an item before leasing it, tax was due on the original purchase and again on the lease. If it made no use before lease, it could recover tax paid to the supplier or buy for resale, but the related-company lease still remained taxable.

There was no tax-free grace period for temporary use. Property removed from resale inventory for the purchaser's own use was taxed on fair market rental value for that use period under Rule 3.285.

Eligibility to file a consolidated federal income-tax return did not change the result. The intercorporate exemption in section 151.346 applied to service transactions, not leases of taxable items.

Leases of realty or fixtures were nontaxable. Tangible personal property included in the real-property lease could also be nontaxable to the tenant when the lessor paid tax on purchase; a separate equipment lease by someone who did not own or manage the real property was taxable.

Common questions

Did common ownership exempt the equipment lease? No.

Did consolidated federal filing help? No.

Was there a grace period for the lessor's pre-lease use? No.

Were real-property and fixture leases taxable? No, under the letter.

Citations and references

• Tex. Tax Code § 151.346.
• Comptroller Rules 3.285, 3.294, and 3.331.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9008L1042B09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

BOB BULLOCK
Comptroller

August 13, 1990

Dear ***:

I am writing in response to your letter of July 18, 1989, in which
you requested information about intercorporate transfers of taxable
items. Proposed changes to the rule governing intercorporate sales
are under consideration, but right now the law remains unchanged.

Under current law, the leases of taxable items from one corporation
to a subsidiary of a "brother-sister" related corporation are taxa-
ble and sales tax must be collected and remitted on the lease price.

In response to your specific questions:

1.(a): When a corporation leases taxable items to a "brother-sister"
related corporation, sales tax is due on the total lease price. Such
transactions are specifically excluded from the joint ownership
transfer exemption of Rule 3.331 as "sales between related corpora-
tions or other entities where the only joint ownership is the ulti-
mate ownership of corporate stock."

Therefore, if the lessor made use of the taxable items before leasing
them, then sales tax was due and payable at the time of purchase. If
the lessor made no use of the taxable items, then it may furnish the
seller with a resale certificate and request a sales tax refund, file
amended sales tax returns, or take a credit on future sales tax returns
for tax paid in error to the supplier. Whether or not the lessor made
use of the items, the subsequent lease to the subsidiary is taxable.

(b) The rules provide no specific threshold or tax-free "grace period"
for use by the original purchaser before leasing the items. They do
provide, though, that items purchased tax-free with a resale certifi-
cate, when pulled out of valid tax-free inventory and put to use by
the original purchaser, are subject to sales tax based on the "fair
market rental value of the item for the period of time used." Rule
3.285. This rule applies if the purchaser issued a resale certificate
at the time of purchase, intending to resell or lease the items.

2. The answer remains the same even if the lessor corporation and the
   lessee corporation were eligible to file a consolidated federal income
   tax return. The intercorporate services exemption authorized by Tax
   Code Section 151.346 does not apply to the lease of taxable items. It
   applies only to "service transactions among affiliated entities."

3.(a) You are correct in stating that no sales tax is due on the lease
of realty or fixtures under Rule 3.294.

(b) You are correct in stating that no sales tax is due on the lease
of tangible personal property included as part of the agreement in a
lease of real property. In this situation, the lessor must pay sales
tax on the tangible personal property at the time of purchase. How-
ever, sales tax is due on the separate lease of tangible personal
property by a person or entity not owning or managing the real proper-
ty in which the tangible personal property is or will be situated. Rule
3.294. The above described rule determines whether tax is due without
regard to the relative values of the real and tangible personal property.

I have enclosed copies of the above referenced rules and statutes. These
opinions are based on the facts presented. Different facts might result in
different
answers. If you have further questions, please don't hesitate to write
or call me toll-free at 1-800-531-5441, ext. 3-3889.

Sincerely,
John Christian
Taxability Section
Legal Services Division