Is the rental fee for a cryogenic gas vessel that is rented to a customer and refilled at the customer's site taxable, or is the vessel a tax-exempt 'returnable container'?

Subject

Cryogenic Gas Vessel Rentals — Reconsideration Reverses Course, Vessels Treated As Exempt Returnable Containers

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9308L1269A01

Plain-English Summary

This file actually contains two letters. The second (dated April 19, 1993, from Kevin Koller of the Tax Administration Division) responded to a taxpayer whose cryogenic gas vessels are rented to customers and refilled at the customer's site, sometimes staying there for three to five years before being returned to the vendor. That April letter concluded the vessels were NOT "returnable containers" under Tax Code Section 151.322, because the "returns" only happened at three-to-five-year intervals when rental contracts ended — not for refilling — so the rental fees would be taxable going forward (though prospectively only, out of respect for the taxpayer's prior reliance on an earlier favorable hearing decision).

The first letter (dated August 17, 1993, from Tom Poole, Assistant Manager of Tax Administration) is a reconsideration of that April position, written after the taxpayer requested the agency revisit it. Poole recounts the taxpayer's history: in 1975 the agency told the taxpayer that tax was due on its purchase of the vessels but that rental fees to customers were exempt; that position was reinforced in the taxpayer's administrative hearing, Comptroller's Decision No. 10,119, on the grounds the vessels are "returnable containers," consistent with the East Texas Oxygen Co. v. State court case; and an audit through 1984 made no change to that position. In 1989 a Comptroller supervisor, Deborah Patillo, wrote the taxpayer that this prior position was incorrect, citing Taxability Response No. 495 (issued 10-12-79) — but the taxpayer did not feel bound by that letter because it believed the facts differed and its hearing decision postdated the taxability response.

After discussing the matter with Mike Doyle, Wade Anderson, and Harold Lee, Poole's August 17 letter concludes the taxpayer should continue the policy it had followed for 14 to possibly 18 years: pay tax on its purchase of the vessels, but do NOT charge tax on the rental fees billed to customers.

What This Means For You

The final word in this file is "not taxable." The August 17, 1993 letter is a reconsideration that supersedes the taxability conclusion in the April 19, 1993 letter also reproduced here. Read together, they show the agency going back and forth on the same taxpayer's facts before settling on: rental fees for these cryogenic vessels are not taxable, and the vessels are treated as returnable containers.

This turns on longstanding taxpayer-specific reliance, not a general rule change. The August letter's reasoning leans heavily on the taxpayer's own history — a 1975 agency letter, a favorable 1979 administrative hearing (Comptroller's Decision No. 10,119), and an audit through 1984 that didn't disturb the position — rather than announcing new general guidance. Businesses in a similar rental/refill arrangement without this specific history of agency correspondence and a favorable hearing decision may not be able to rely on the same outcome.

Detrimental reliance and STAR's own disclaimer matter here. Per this site's standard disclaimer, STAR letters can support a detrimental-reliance claim only for the taxpayer to whom they were directly issued — this letter's holding was expressly built around this particular taxpayer's own multi-decade reliance history, reinforcing why the outcome may not transfer to other businesses' facts.

If you rent cryogenic or similar refillable vessels to customers, get your own determination. The two competing letters in this single file (April says taxable; August says not taxable) illustrate how fact-specific and unsettled this "returnable container" question can be. Don't assume either outcome applies to your business without your own written guidance from the Comptroller.

Q&A

Q: Is the rental fee charged to customers for these cryogenic vessels taxable?
A: According to the August 17, 1993 reconsideration letter, no — the taxpayer should not charge tax on the fees charged to customers, though it should pay tax on its own purchase of the vessels.

Q: Didn't an earlier letter in this same file say the rental fees WERE taxable?
A: Yes. The April 19, 1993 letter from Kevin Koller concluded the cryogenic cylinders were not "returnable containers" (because they were only returned every three to five years, at the end of rental contracts, not for refilling) and so the rentals would be taxable, applied prospectively. The August 17, 1993 letter reconsiders and reverses that conclusion.

Q: What statute governs whether these vessels count as "returnable containers"?
A: Tax Code Section 151.322. The April letter states the section defines a "returnable container" as one "customarily returned for reuse by the buyer of the contents."

Q: What is Comptroller's Decision No. 10,119?
A: It is the taxpayer's own administrative hearing decision (issued November 16, 1979, for the audit period January 1, 1975 through December 31, 1976) in which an administrative law judge ruled that the taxpayer's vessels were returnable containers, a position the August letter says is "consistent with the East Texas Oxygen Co. v. State court case."

Q: Why did the agency change its mind between April and August 1993?
A: The August letter explains that after the taxpayer requested reconsideration, the author discussed the matter with Mike Doyle, Wade Anderson, and Harold Lee, and the group agreed the taxpayer should continue following the policy it had "followed for at least 14 years and possibly as much as 18 years," which the letter says appears consistent with Tax Code Section 151.322 and the taxpayer's hearing decision.

Q: What were Taxability Response No. 495 and Deborah Patillo's 1989 letter?
A: The April letter references Taxability Responses TR0495 and TR0709, issued before the 1979 hearing decision, stating these vessel rentals were taxable and not exempt as containers. In 1989, Deborah Patillo, an audit supervisor, wrote the taxpayer stating the 1979 hearing decision relied on an invalid "finding of fact" about the vessels being returnable and should not be relied on. The taxpayer did not consider itself bound by that letter, and the August 1993 letter ultimately sides with the taxpayer's position.

Original ruling text

August 17, 1993

Dear ***:

Chuck Johnstone asked me to review your request for reconsideration of
the position stated in Kevin Koller's letter of April 19, 1993
concerning the taxability of vessels purchased and fees charged by
your client, **. Your letter notes that **
has, for many years, followed a policy agreed to by this agency
and request that the policy continue in effect.

The facts indicate that ** was informed in 1975, via a
letter from ** , that tax was due on its purchase of the
vessels and that fees to customers were exempt. This position was
subsequently reinforced in **'s administrative hearing,
Comptroller's Decision No. 10,119, on the grounds that **'s
vessels are "returnable containers", a position consistent with the East
Texas Oxygen Co. V. State court case. Additionally, no change in the
position resulted from an audit of *** performed through
1984.

In 1989, ** received a letter from Deborah Patillo, a
supervisor in the ** Audit office, stating that the prior
position was incorrect due to Taxability Response No. 495, issued 10-12-79.
*** did not feel compelled to follow Ms. Patillo's letter
because it felt the facts were different and its hearing decision came
after the taxability response.

In summary, ** has followed for at least 14 years and possibly
as much as 18 years, a policy initiated by the Comptroller and which
appears to be consistent with Tax Code Section 151.322 and the result
of **.

I discussed this matter with Mike Doyle, Wade Anderson, and Harold Lee.
The result of our discussion was an agreement that ** should
continue to follow the policy that has stood for so many years.
** should pay tax on its purchase of the vessels and should
not charge tax on the fees charged to customers.

If I can be of further help in this matter, please do not hesitate to
call me at 463-3939.

Very truly yours,

Tom Poole
Assistant Manager
Tax Administration

April 19, 1993

Dear ***:

Your letter of February 16, 1993, to Bill Roach, Manager of the
** Audit Office, has been forwarded to my attention. The
letter concerns the taxability of cryogenic vessels that are rented to
customers and refilled at the customer's site. The vessels may remain
at the customer's site for a period of three to five years before
being returned to the vendor of the gases (**).

Your letter states that ** has relied on
Comptroller's Hearing No. 10,119 where the administrative law judge
ruled that these vessels were returnable containers. The hearing was
issued November 16, 1979, for the audit period January 1, 1975,
through December 31, 1976. Two taxability responses (TR0495 and
TR0709) were issued prior to the hearings decision that state that
these vessel rentals are taxable and not exempt as containers. Deborah
Pattillo, an audit supervisor issued a letter to ** on
June 13, 1989, which stated that the hearing is based on an invalid
"finding of fact" that the cylinders were returnable and should not
be relied on.

The Tax Administration Division has continued to maintain the validity
of the taxability responses and has used them as a basis for similar
correspondence. Section 151.322 of the Texas Tax Code defines
"returnable container" as a kind customarily returned for reuse by the
buyer of the contents (emphasis added). The "returns" in question are
at three to five year intervals. They are returned at the end of
rental contracts, and not for refilling. Based upon these facts and
the language of the statute, the Tax Administration Division holds
that the cryogenic cylinders are not returnable containers.

The Audit Division has informed me that for purposes of audits of
***, this policy will be applied prospectively due
to the taxpayer's detrimental reliance on the hearings decision. The
prospective treatment will also be applied to rental contracts entered
into prior to this letter. They will be treated as "returnable
containers" and not taxable container rentals.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct
line is 512/475-0613. You may also write to Tax Administration
Division, Comptroller of Public Accounts.

Kevin Koller
Tax Administration Division