Texas Letter Ruling 9210L1204F12: Lock Or Locking Cylinder Exchange Service For Storage Facilities — Fee Charged

Subject

Lock Or Locking Cylinder Exchange Service For Storage Facilities — Fee Charged

Plain-English summary

A taxpayer wrote to the Texas Comptroller asking about a new business she and her husband were starting: a locking cylinder exchange service for storage facilities. Storage facilities buy their own locking cylinders, and periodically want to swap them out for security reasons. The taxpayer's business contracts with several storage facilities to rotate their locking cylinders across the state and/or country. She does not sell or lease the locking cylinders herself — instead, storage facilities trade in their existing locking cylinders for different ones, and she charges a flat fee for organizing and coordinating the exchange.

The Comptroller ruled that this arrangement is a taxable sale of tangible personal property. Even though the taxpayer described her role as coordinating an "exchange" or "trade-in" rather than selling anything, the Comptroller treated the customer's trade-in of their old locking cylinders for different locking cylinders, plus payment of the flat fee, as a purchase. The flat fee she charges is treated as the taxable sales price of the different locking cylinders the customer receives.

The Comptroller noted that this opinion is based on the facts as presented in the taxpayer's letter, and that the opinion could change if there are additional or different facts.

What this means for you

Business owners running exchange or trade-in services

If your business coordinates a trade-in or exchange of tangible personal property — even if you frame the transaction as a "service" or "coordination fee" rather than a sale — the Comptroller may still treat the transaction as a taxable sale of the property that changes hands. Here, the taxpayer did not sell or lease the locking cylinders outright, but because customers received different locking cylinders in the exchange and paid a fee for it, that fee was treated as the taxable sales price of the property received.

Accountants and tax professionals

This ruling is a useful illustration of how the Comptroller looks past the labeling of a transaction (a "coordination fee" for an "exchange service") to its substance: a customer traded in property and paid money to receive different property in return. That structure was enough to make the flat fee taxable as the sales price of tangible personal property, even without a traditional sale or lease of the cylinders by the taxpayer to the customer.

Storage facility operators

If you are the customer of a service like this — trading in your locking cylinders for different ones in exchange for a fee — be aware that the fee paid may be treated as a taxable purchase of the cylinders you receive.

Common questions

Q: Why is a "coordination fee" for an exchange service taxable, if the business never sells or leases the locking cylinders?
A: The Comptroller looked at the substance of the transaction: the customer trades in its old locking cylinders and receives different locking cylinders in return, along with paying a flat fee. The Comptroller treated that fee as the taxable sales price of the different locking cylinders provided in the trade.

Q: Does this ruling apply if the facts of my business are different?
A: No. The letter itself states the opinion is based on the facts presented, and that the opinion may change if there are additional or different facts. It also is an official STAR letter that, per Comptroller rules, can only be relied on by the taxpayer to whom it was issued.

Q: What government office issued this ruling, and when?
A: The Texas Comptroller of Public Accounts, Tax Administration Division, issued this letter on October 19, 1992, in response to the taxpayer's letter of September 17, 1992. It was signed by Lindey Osborne of the Tax Administration Division.

Citations and references

No specific statutes, administrative rules, or prior rulings are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9210L1204F12

Original ruling text

October 19, 1992

Dear ***:

Thank you for your letter of September 17, 1992, concerning the taxability of a
business venture you and your husband are starting.

As I understand it, you will be providing a locking cylinder exchange service
for storage facilities. The storage facilities purchase locking cylinders for
their use. Periodically, the storage facilities wish to exchange the locking
cylinders for security purposes. You contract with several storage facilities
to rotate the locking cylinder across the state and/or country. You do not
sell or lease the locking cylinders. Your compensation for organizing and
coordinating the exchange of locking cylinders is a flat fee.

The locking cylinder exchange service as described in your letter is a taxable
sale of tangible personal property. Your customers trade in locking cylinders
for different locking cylinders plus a fee. The fee you charge is the taxable
sales price of the different locking cylinders.

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

If you have any questions or need additional information, you may call toll
free 1-800-252-5555, ext. 50037 or the regular Austin number is 512-475-0037.
You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division