Can a company lease marine cargo containers tax free, and are the cleaning of those containers and the equipment used to clean them also tax exempt?

Subject

Marine Cargo Containers — Components Of Vessel

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9308146L

Plain-English Summary

A company that operates as an international transporter of cargo for chemical, agricultural, and food service industries asked the Comptroller two questions. First, is the lease of certain cargo containers subject to Texas sales tax? Second, is the machinery and equipment used to clean these containers — plus the structure housing that machinery and equipment — subject to Texas sales tax?

The company is licensed as a Non Vessel Operating Common Carrier by the Federal Maritime Commission, meaning it is a common carrier that does not own its own vessels. It leases cargo containers from a third party, and those containers are attached to railcars, vessels, aircraft, and trucks (not owned by the company) to move customer cargo through international commerce. The containers are rarely carried by aircraft (about once every five years) because that mode isn't cost effective; they are primarily designed to transport liquid materials over deep seas but are "intermodal" containers usable across any mode of transport without modification. Because a given container may carry chemicals one trip and food products the next, it must be cleaned to strict specifications before carrying food — and the company was building a Texas facility to do that cleaning.

The Comptroller responded that the containers described meet the definition of a "marine cargo container" under subsection (b)(2)(A) of Rule 3.297, which the letter quotes: a container "fully or partially enclosed to constitute a compartment of a permanent character intended for containing goods," strong enough for repeated use, designed to facilitate carriage of goods by one or more modes of transport without intermediate reloading, and designed for ready handling when transferred between modes. The term includes the container's accessories and equipment carried with it, but excludes chassis, vehicles, and vehicle accessories or spare parts. Because the containers meet this definition, they are component parts of a vessel, and the company may lease them tax free.

On the cleaning service, the letter cites Tax Code Section 151.3111(a), which exempts a service performed on tangible personal property that would itself be exempt (because of its nature, use, or a combination of both) if sold, leased, or rented at the time of the service. Since the marine cargo containers are tax-exempt property, the service to clean them is also tax free.

However, the letter draws a sharp line for the cleaning machinery, equipment, and building. It notes that air cargo containers are treated as component parts of the aircraft they're used in, and are exempt if the aircraft is a licensed and certified carrier under Rule 3.297(a)(1) — and that Tax Code Section 151.328(d) exempts machinery, tools, and equipment used exclusively in repairing, remodeling, or maintaining aircraft, aircraft engines, or aircraft component parts by or for a certificated or licensed carrier. But the containers at issue here are not air cargo containers, and the Tax Code contains no similar provision for vessels. So the company is not entitled to purchase the machinery and equipment used to provide the cleaning service, or the structure built to house that machinery and equipment, tax free.

The letter closes with the standard caveat that the opinion is rendered based on the facts submitted, and that other facts, though similar, may yield different results.

What This Means For You

Leasing marine cargo containers can be tax free. If your containers meet Rule 3.297(b)(2)(A)'s definition of a "marine cargo container" — enclosed, durable, designed for repeated intermodal use without intermediate reloading, and easy to transfer between transport modes — the lease of those containers is exempt as a component part of a vessel, even if the containers are also occasionally used on trucks, railcars, or aircraft.

A cleaning service on exempt property is itself exempt — but the tools to do the cleaning are not automatically exempt. This letter shows a company can buy the container-cleaning service tax free under Section 151.3111(a) because it's performed on exempt property, while still owing tax on the machinery, equipment, and building used to perform that cleaning, because there is no vessel-equivalent to the aircraft equipment exemption in Section 151.328(d).

Aircraft and vessel exemptions are not parallel. The letter explicitly notes that air cargo containers get a broader exemption (extending to repair/maintenance machinery and equipment under Section 151.328(d)) that vessel-related cargo containers do not get. If your operation spans multiple transport modes, don't assume an exemption that applies to the aircraft side of your business also applies to the vessel side.

This is fact-specific. The letter is explicit that its conclusion rests on the facts the company submitted, and that other, similar facts could produce a different result — so a company with a materially different container design, use pattern, or business structure should not assume this letter's outcome applies to it.

Q&A

Q: Is the lease of the marine cargo containers described in this letter subject to Texas sales tax?
A: No. The letter states the containers meet the definition of a marine cargo container in subsection (b)(2)(A) of Rule 3.297, and the company may lease marine cargo containers tax free.

Q: Is the service of cleaning the marine cargo containers taxable?
A: No. Citing Tax Code Section 151.3111(a), the letter states the company can buy the service to clean marine cargo containers tax free, because that section exempts services performed on tangible personal property that would itself be exempt.

Q: Is the machinery and equipment used to clean the containers, or the building that houses it, tax exempt?
A: No. The letter states the company is not entitled to purchase the machinery and equipment used in providing the cleaning service, or the structure built to house the machinery and equipment, tax free — because the containers are not air cargo containers and the Tax Code contains no provision for vessels similar to the aircraft equipment exemption in Section 151.328(d).

Q: Why are air cargo containers treated differently?
A: The letter explains that air cargo containers are considered component parts of the aircraft in which they're used, and are exempt if the aircraft is a licensed and certified carrier under Rule 3.297(a)(1); Tax Code Section 151.328(d) also exempts machinery, tools, and equipment used exclusively to repair, remodel, or maintain aircraft, aircraft engines, or aircraft component parts by or for a certificated or licensed carrier — a provision the letter says has no vessel equivalent.

Q: Does it matter that the containers are occasionally carried by aircraft?
A: The letter notes the containers are rarely carried by aircraft (about once every five years) because that mode isn't cost effective, and treats them as intermodal containers usable across rail, vessel, aircraft, and truck without modification — but the ruling's exemption analysis is based on their qualifying as marine cargo containers/vessel components, not on their occasional aircraft use.

Q: Does this letter apply to every company that leases similar containers?
A: No. The letter states the opinion is rendered based on the facts submitted, and that other facts, though similar, may yield different results.

Original ruling text

August 30, 1993

Dear **:

Thank you for your recent letters which are restated in part with response
below.

We are writing to request a ruling on whether the lease of certain cargo
containers by our client (here in after "The Company") are subject to Texas
sales tax. We would also like a determination of whether the machinery and
equipment used to clean these containers as well as the structure which houses
this machinery and equipment is subject to Texas sales tax.

The Company specializes as an international transporter of cargo for chemical,
agricultural and food service industries. The Company is licensed as a Non
Vessel Operating Common Carrier by the Federal Maritime Commission. This
designation means that the company is licensed as a common carrier but does not
own their own vessels. The Company leases cargo containers from a third party.
These containers are attached to railcars, vessels, aircraft, and trucks which
are not owned by the Company and are used to transport customer' s cargo
through international commerce. The containers are rarely (possibly 1 container
in a 5 year period) carried by aircraft. This mode of transportation is not
cost effective. The cargo containers in question are primarily designed to
transport liquid materials over deep seas. However, they are considered
intermodal containers whereby they can be used via any of the above modes of
transportation without any modifications.

A particular cargo container may be used to transport chemicals and then
subsequently may be used to transport food products. Before the food product
may be transported, the containers must be cleaned to very strict
specifications. The Company is in the process of constructing a facility in
Texas which will be used to clean these containers to acceptable
specifications.

Response: The intermodal containers you mention appear to meet the description
of marine cargo containers found in subsection (b)(2)(A) of Rule 3.297 which is
restated below. The Company may lease marine cargo containers tax free.

(b) Vessels.

(2) Sales or use tax is not due on materials, equipment, and machinery which
become component parts of vessels qualified under paragraph (1) of this
subsection whether purchased by the builder or by a subsequent owner or
operator. A component part is:

(A) A marine cargo container which is fully or partially enclosed to constitute
a compartment of a permanent character intended for containing goods. It is
strong enough to be suitable for repeated use, specially designed to facilitate
the carriage of goods, by one or more modes of transport, without intermediate
reloading. It is designed for ready handling, particularly when being
transferred from one mode of transport to another. The term "marine cargo
container" includes the accessories and equipment of the container provided
that such accessories and equipment are carried with the container. The term
"marine cargo container" does not include chassis, vehicles, accessories or
spare parts of vehicles.

Tax Code Section 151.3111 (a) exempts:

(a) A service that is performed on tangible personal property that, if sold,
leased, or rented, at the time of the performance of the service, would be
exempted under this chapter because of the nature of the property, its use, or
a combination of its nature and use, is exempted from this chapter.

That means the Company can buy the service to clean marine cargo containers tax
free.

Air cargo containers are considered to be component parts of the aircraft in
which they are used and are exempt if the aircraft are licensed and certified
carriers as defined in Rule 3.297(a)(1).

Tax Code Section 151.328(d) states:

(d) Machinery, tools, and equipment used or consumed exclusively in the repair,
remodeling, or maintenance of aircraft, aircraft engines, or aircraft component
parts by or on behalf of a certificated or licensed carrier of persons or
property are exempted from the taxes imposed by this chapter.

However, the containers you describe are clearly not air cargo containers, and,
since the Tax Code does not contain a similar provision for vessels, The
Company is not entitled to purchase the machinery and equipment used in
providing the cleaning service or the structure built to house the machinery
and equipment tax free.

This opinion is rendered based on the facts you submitted. Other facts, though
similar, may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441 (ext.34680). My direct line
number is (512) 463-4680. The number for FAX transmissions is (512) 475-0900.
You may write to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division