Can a janitorial services company buy its cleaning equipment and supplies tax-free under a resale certificate?

Subject

Janitorial Equipment Leasing Vs. Supplies Left With The Customer — Resale Certificate Treatment

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310136L

Plain-English Summary

A company ("Company A") that provides commercial janitorial services asked the Comptroller three questions about whether it could purchase its equipment and supplies tax-free under a resale certificate. Under Company A's contracts, janitorial equipment costs were negotiated on a price-per-square-foot basis, while cleaners, restroom supplies, and paper products were sold separately to customers on a cost-plus basis, with sales tax charged on those separately stated items.

On the equipment question: Company A argued that because equipment charges were separately priced and sales tax was charged on them, it was effectively leasing the equipment to customers under Rule 34 TAC 3.294(c)(3) — which would let Company A buy the equipment tax-free for resale. The Comptroller disagreed, answering "no." The letter explains that although the equipment (brooms, buffers, buffer pads, mops, vacuum cleaners, brushes, etc.) is separately priced and kept at the customer's location, "there is no indication that either possession or control of the property is ever transferred to the customer." The ruling notes the answer would be different "if the customer has access to the equipment at all times, risk of loss, and none of the equipment can be removed from the customer's premises," citing Comptroller's Hearing Decision H-26,068 (1990). Because that transfer of possession/control doesn't happen here, the equipment does not qualify as a lease, and Company A's purchases of that equipment remain taxable (not resale-exempt).

On the supplies question: The Comptroller's answer is "yes and no." Under Rule 34 TAC 3.356(c)(1), a resale certificate can be used to buy tangible personal property tax-free only if care, custody, and control of the property is transferred to the customer as part of the real property service. The letter draws a distinction based on whether the item is consumed by Company A or left behind with the customer: cleaning supplies that are used up by Company A "cannot be purchased under a resale certificate even if separately set out to the customer." By contrast, "paper products and bathroom supplies that remain with the customer may be purchased under a resale certificate," and the letter specifically notes that wax "could be purchased under a resale certificate because it would be left on the customer's floors and furniture."

The third question — whether Company A could issue a resale certificate for the items in question — is answered by reference back to the answers to questions one and two: no resale certificate for the equipment or for consumed cleaning supplies, but yes for paper products, restroom supplies, and similar items left with the customer.

What This Means For You

If you run a janitorial or similar real-property-service business: Separately pricing your equipment in a contract, by itself, does not turn that arrangement into a tax-exempt "lease." What matters under Rule 3.294(c)(3), per this letter, is whether the customer actually gets possession or control of the equipment — access at all times, risk of loss, and the ability to keep the equipment from being removed from the premises. Absent that, your equipment purchases remain taxable.

When deciding whether an item qualifies for a resale certificate: Ask whether the item gets used up performing the service or is physically left behind with the customer. Under Rule 3.356(c)(1) as applied here, items consumed in the process (like cleaning solutions) don't qualify for resale treatment even if you bill for them separately — but items left on the customer's premises (paper products, restroom supplies, and consumables like floor wax that remain on the customer's furniture/floors) do transfer care, custody, and control and can be purchased tax-free for resale.

Watch the ALERT note at the top of the letter: The file's own alert flags that current guidance on care, custody, and control issues for taxable services is found in Rule 3.285 (Resale Certificates; Sales for Resale), as amended 11/01/2017 — meaning this 1993 letter's specific rule citations (3.294(c)(3), 3.356(c)(1)) may have been renumbered or superseded since issuance. Confirm current rule text before relying on the citations here.

Q&A

Q: Does separately pricing janitorial equipment on a price-per-square-foot basis make it a taxable lease under Rule 3.294(c)(3)?
A: No. The letter states that even though the equipment is separately priced and kept at the customer's location, "there is no indication that either possession or control of the property is ever transferred to the customer," so it does not constitute a lease.

Q: What would change the answer on the equipment question?
A: Per the letter, if "the customer has access to the equipment at all times, risk of loss, and none of the equipment can be removed from the customer's premises, the answer would be different," citing Comptroller's Hearing Decision H-26,068 (1990).

Q: Can a janitorial company buy its cleaning supplies tax-free under a resale certificate?
A: It depends on the item. The letter says cleaning supplies "used by Company A cannot be purchased under a resale certificate even if separately set out to the customer," because they are used up rather than left with the customer.

Q: What about paper products, restroom supplies, or floor wax?
A: These can be purchased under a resale certificate. The letter explains "paper products and bathroom supplies that remain with the customer may be purchased under a resale certificate," and specifically that "wax could be purchased under a resale certificate because it would be left on the customer's floors and furniture."

Q: What is the key test the letter uses to distinguish taxable from resale-eligible supply purchases?
A: "The key is whether the item is used up by Company A or is left with the customer," per the letter's discussion of Rule 34 TAC 3.356(c)(1) and care, custody, and control.

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

October 13, 1993

Dear **:

In your letter of October 6, 1993, you asked if a janitorial services contract
would allow the contracting company to purchase its supplies and equipment
under a resale certificate. Under the contract, the equipment is contracted for
on a price-per-square foot basis. The company provides for the sale of all
cleaners, restroom supplies, and paper products separately on a cost-plus
basis.

You specifically asked the following questions:

1. Does the structure of Company A's contracts constitute a lease of janitorial
   equipment as provided by Comptroller's Rule 34 TAC 3.294(c)(3)?

In answer is "no." As I understand the agreement, the janitorial equipment is
separately priced, though not specifically identified, and is kept at the
customer's location. However, there is no indication that either possession or
control of the property is ever transferred to the customer. If the customer
has access to the equipment at all times, risk of loss, and none of the
equipment can be removed from the customer's premises, the answer would be
different. See Comptroller's Hearing Decision H-26,068 (1990).

2. Is Company A, in fact, transferring care, custody, and control of the
   cleaning supplies, paper products, and restroom supplies to its customers as
   provided by Comptroller's Rule 34 TAC 3.356(c)(1)?

The answer is "yes" and "no." Cleaning supplies used by Company A cannot be
purchased under a resale certificate even if separately set out to the
customer. On the other hand, paper products and bathroom supplies that remain
with the customer may be purchased under a resale certificate. The key is
whether the item is used up by Company A or is left with the customer.
Therefore, while cleaning supplies would be used up and could not be purchased
under a resale certificate, wax could be purchased under a resale certificate
because it would be left on the customer's floors and furniture.

3. If both of the above issues are affirmative, can Company A issue a resale
   certificate in lieu of sales tax on purchases of the items in question? See the
   answers to questions (1) and (2). I hope this satisfactorily answers your
   questions.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

October 6, 1993

Mr. Wade Anderson
Tax Administration Division
Comptroller of Public Accounts
P.O. Box 13528
Austin, Texas 78711

RE: Request for Ruling

Dear Wade:

On behalf of our client, Company A, we hereby request a ruling with regard to
the Texas sales and use tax treatment of equipment and supplies purchased and
used by a commercial janitorial service. The important facts regarding these
transactions are outlined below.

FACTS

Company A is a corporation that provides janitorial services for commercial
properties in Texas and other southern states. When Company A executes a
contract for these services with a customer, the costs for all janitorial
services and equipment are negotiated and provided for on a
price-per-square-foot basis and as separate line items in the contract. In
addition, Company A provides for the sale of all cleaners, restroom supplies,
and paper products separately in the contract on a cost-plus basis (see
attached contract language). Sales tax is charged on these separately stated
items. All equipment and supplies, (brooms, buffers, buffer pads, mops, vacuum
cleaners, brushes, hand towels, toilet tissue polishes, cleaners, etc.) are
used exclusively in the customer's building and stored on-site in the
customer's building.

DISCUSSION

Comptroller's Rule 34 TAC 3.294(c)(3) provides that: A transaction in which
tangible personal property is furnished with an operator, and the customer is
charged separately for tangible personal property and operator, shall be
presumed to be the lease of tangible personal property and the separate
furnishing of an operator; the receipts from the separate charge for the
tangible personal property are taxable (emphasis added).

Since Company A's contracts contain separately negotiated provisions and
pricing for janitorial equipment, and Company A charges sales tax on the
separately stated equipment charges, it is our interpretation that Company A
is, in fact, leasing the janitorial equipment to customers in accordance with
Comptroller's Rule 34 TAC 3.294(c)(3). Consequently, Company A should be
allowed to treat purchases of this equipment as non-taxable purchases for
resale.

With regard to the taxability of cleaners, restroom supplies, polishes, and
paper products, Comptroller's Rule 34 TAC 3.356(c)(1) states the following:

A properly completed resale certificate may be used to purchase tangible
personal property tax free if the care, custody, and control of the property is
transferred to the customer as part of the real property service (emphasis
added). For example, a taxpayer purchases paper products to be left at the
customer's premises when providing janitorial services...Taxpayer may purchase
the paper products...tax free by issuing a resale certificate.

As shown on the attached excerpt from Company A's contract, it seems apparent
that Company A sells all cleaners, restroom supplies, and paper products on a
cost-plus basis to customers, and Company A charges sales tax to its customers
on the sale of these items. Therefore, the existence of a sale implies that
care, custody, and control of the items are transferred to the customer.
Consequently, Company A should be allowed to treat purchases of these items as
non-taxable purchases for resale.

REQUEST FOR RULING

With regard to the foregoing discussion, we respectfully request your ruling on
the following:

1. Does the structure of Company A's contracts constitute a lease of janitorial
   equipment as provided by Comptroller's Rule 34 TAC 3.294(c)(3)?

2. Is Company A, in fact, transferring care, custody, and control of the
   cleaning supplies, paper products, and restroom supplies to its customers as
   provided by Comptroller's Rule 34 TAC 3.356(c)(1)?

3. If both of the above issues are affirmed, can Company A issue a resale
   certificate in lieu of sales tax on purchases of the items in question?

Thank you for-your assistance with this matter. Please contact **
or me at ** if you have any questions.

Very truly yours,

Senior Director