Who had to collect Texas tax under a software rent-to-own agreement that let the customer stop paying and return the software?

Plain-English summary

COMPANY X, the software developer, contracted directly with customers under a rent-to-own program. COMPANY A did not buy or resell the software.

The Comptroller classified the agreements as operating leases, not financing leases or conditional sales contracts. Customers were not obligated to purchase the software: they could make the scheduled payment or return the software, without a penalty for ending the agreement without buying it.

Because COMPANY X was the lessor and seller, it had to collect sales or use tax on the lease payments. Under the stated operating-lease treatment, the tax was reportable in the period when the rental receipts were income under the lessor's accounting method.

What this means for you

A rent-to-own label did not make the arrangement a financed sale. The customer's ability to return the software without a purchase obligation or termination penalty supported operating-lease treatment, placing collection responsibility on the developer that contracted with the customer.

Common questions

Was COMPANY A the seller? No. The letter said it neither purchased nor resold the software.

Why was this an operating lease? The customer could stop making payments and return the software without being required to buy it or pay a termination penalty.

Who collected the tax? COMPANY X, the software developer and lessor.

When was the tax reported? As rental receipts became income under the lessor's accounting method.

Citations and references

• 34 Tex. Admin. Code Rule 3.286 — seller's and purchaser's responsibilities

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1119F07

Original ruling text

July 1, 1991

Dear **:

Thank you for your letter concerning sales of computer software
licenses by the software developer under "rent-to-own" agreements.

You stated that when COMPANY A makes a sale under the "rent-to-own"
program, COMPANY A does not purchase or resell the product. Instead,
the software developer, COMPANY X, enters directly into the lease/
purchase agreement with the customer.

The "rent-to-own" agreements are operating leases rather than
financing leases or conditional sales contracts. The lessee is
under no obligation to purchase the software. According to the
terms of the agreement, the lessee is obligated to make each payment
as scheduled or return the software. There is no penalty
imposed on the lessee for terminating the agreement without
purchasing the software.

Based on the facts presented, COMPANY X is the lessor/seller of the
software. COMPANY X is responsible for collecting the sales or use
tax on the lease payments. Under an operating lease, tax must be
reported in the period in which the rental receipts are considered
income under the lessor's accounting method.

An application for a sales and use tax permit will be sent to
COMPANY X along with Rule 3.286-Seller's and Purchaser's
Responsibilities and other information about Texas sales and use
tax.

This opinion is based on the facts that you presented. If there
are additional 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 1-800-252-5555 from
anywhere in the United States or phone 512/463-4600.

Sincerely,

Julie Pesl
Tax Administration Division