If I buy equipment tax-free for rental/lease and later sell it as an 'occasional sale' when reorganizing my company, do I owe Texas sales tax?

Subject

Equipment/Items — Purchased Tax Free For Resale For Renting/Leasing Purposes And Later Sold As Occasional Sale

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9402294L

Plain-English Summary

This 1994 ruling responds to a detailed request from a corporate family (Company B, its subsidiary Company A, and a new subsidiary Company C) planning a multi-step reorganization involving road construction and manufacturing equipment. The Comptroller answered several distinct questions:

Selling rental/resale equipment as an "occasional sale" still triggers tax. Company A had purchased road construction and manufacturing equipment tax-free under a resale certificate in order to rent or lease it out. The Comptroller explained that Rule 3.316(g)(1), based on Tex. Tax Code § 151.055(a), requires that if such equipment is later sold as part of an occasional sale (under Rule 3.316(d) or (e)) before the full amount of sales tax that would otherwise have been due has been collected and paid through rental charges, the seller must include in its taxable receipts the amount by which the original purchase price exceeds the amount received from renting or leasing the item. In other words, Company A would owe tax on the purchase price minus whatever rental receipts (taxable or exempt) it had already collected on that item.

No aggregating across items. The ruling specifically rejects using an "aggregate method" — each piece of equipment must be tracked and calculated on its own. Rental receipts from one item cannot be netted against the purchase price of a different item, even if small tools were purchased tax-free along with larger equipment for the same rental purpose.

Rental/resale inventory is not the same as "operating assets." The statute defines a "sale or purchase" to include a rental or lease of a taxable item (Tex. Tax Code § 151.005(2)), so the law does not distinguish between inventory held for sale and inventory held for rental — both are treated as resale-certificate inventory, not as the business's operating assets. Because Tex. Tax Code § 151.304 and Rule 3.316(d) exempt (as an occasional sale) the sale of a business's entire operating assets or of an identifiable segment, and because resale/rental inventory bought under a resale certificate is not part of a business's operating assets, that inventory does not qualify for the same occasional-sale exemption as genuine operating assets. A resale certificate cannot be issued for operating assets.

The prior letter the taxpayer relied on didn't apply. The Comptroller distinguished an earlier document the taxpayer cited (microfiche document 9003T1020D03): that case involved a direct payment permit holder who bought items for its own use tax-free (not a sale or rental inventory), sold to another direct payment permit holder — a different fact pattern than a resale-certificate holder selling rental inventory under § 151.055(a).

Company B's sale of its manufacturing division could be tax-free. Company B's plan to sell its entire manufacturing division — trade receivables plus inventory of base, aggregate, and asphalt — to newly formed Company C was found not taxable: receivables are intangible property, and the inventory qualifies for the sale-for-resale exemption. However, Company A's separate sale of manufacturing equipment and transportation equipment to Company C remained subject to the § 151.055(a) tax on the excess of purchase price over rental receipts, described above.

The 75% manufacturing equipment tax reduction did not erase this liability. A reduced (75% off) sales tax rate applied to manufacturing equipment purchased on or after January 1, 1994, but the ruling makes clear this reduction does not apply to the tax liability Company A incurs under § 151.055(a) when selling rental inventory as an occasional sale. Separately, if Company A made a genuine taxable retail sale of manufacturing equipment (crushers and an asphalt plant) to Company C, Company C could issue an exemption certificate claiming the 75% reduction on that equipment. Intraplant transportation equipment (loaders, dozers, off-road dumps) did not qualify for that 75% reduction.

Motor vehicles and the merger. After Company A sold its manufacturing rental machinery to Company C, Company A planned to merge into Company C. Company A owned motor vehicles encumbered by debt. The ruling notes there is no occasional-sale provision under the Motor Vehicle Rental and Sales Tax Law (Chapter 152 of the Texas Tax Code), but since a merger occurs by operation of law rather than as a "sale" of the vehicles, no motor vehicle tax would be due on the vehicles in the merger itself.

The overall reorganization plan did not qualify as a single tax-free occasional sale of "entire operating assets." Rule 3.316(d) exempts a sale of an entire operating business or identifiable segment, but the rule contemplates a single sale. Because the taxpayer's plan involved (a) motor vehicles apparently excluded from the transfer and (b) two separate transactions (one to Company B, one to Company C) rather than one, the plan as described did not satisfy Rule 3.316(d)'s occasional-sale exemption for the transfers as a whole.

What This Means For You

If you bought equipment tax-free under a resale certificate to rent or lease it out: Selling that equipment later — even as part of what looks like a business reorganization or "occasional sale" — does not wipe out your sales tax exposure. You will owe tax on the amount by which your original purchase price exceeds the rental receipts you've collected on that specific item.

Track each item separately. Don't try to net rental income from one piece of equipment against the purchase price of another, and don't aggregate small tools with larger equipment purchases — the Comptroller requires item-by-item accounting.

Know the difference between "inventory" and "operating assets." If you're planning to sell a business or a business segment tax-free as an occasional sale under Rule 3.316(d), understand that resale or rental inventory purchased tax-free under a resale certificate generally does not count as part of your "operating assets" for that exemption — only genuine business assets do.

Structure asset transfers as a single transaction if you want the operating-assets exemption. Splitting a business reorganization into multiple sales to different entities, or excluding certain assets (like encumbered vehicles) from the transfer, can defeat the occasional-sale exemption for a sale of the "entire" operating assets.

Mergers are treated differently from sales for motor vehicles. Because a merger happens by operation of law, transferring vehicles as part of a merger (as opposed to selling them) is not itself a taxable "sale" for motor vehicle tax purposes — even though there's no separate occasional-sale exemption under the Motor Vehicle Rental and Sales Tax Law.

If you're buying manufacturing equipment in a taxable transaction, check the reduced-rate rules. A 75% reduction applied to manufacturing equipment purchased on or after January 1, 1994, but it did not apply to a seller's § 151.055(a) tax liability from selling previously tax-free rental inventory, and it did not extend to transportation equipment used within the plant.

Q&A

Q: If I sell equipment that I originally bought tax-free for rental purposes, do I owe tax even if the sale itself is an "occasional sale"?
A: Yes. Under Rule 3.316(g)(1) and Tex. Tax Code § 151.055(a), you must include in your taxable receipts the amount by which your original purchase price exceeds the rental receipts (taxable or exempt) you've already collected on that item, even if the sale otherwise qualifies as an occasional sale.

Q: Can I combine several pieces of equipment together and net out the rental income against the total purchase price?
A: No. The ruling states an aggregate method may not be used — each piece of equipment stands on its own, and rental receipts from one item cannot be applied to the purchase price of another, even if bought together for the same rental purpose.

Q: Is a resale or rental inventory considered part of a business's "operating assets" for the occasional-sale exemption?
A: No. Because a resale certificate cannot be issued for operating assets, and rental/resale inventory bought tax-free under a resale certificate is separate from the business's operating assets, that inventory does not get the same operating-assets occasional-sale exemption under Tex. Tax Code § 151.304 and Rule 3.316(d).

Q: Does transferring vehicles as part of a corporate merger trigger motor vehicle tax?
A: Not according to this ruling — because a merger occurs by operation of law rather than through a sale, no motor vehicle tax is due on vehicles transferred solely because of the merger, even though the Motor Vehicle Rental and Sales Tax Law (Chapter 152) has no separate occasional-sale exemption.

Citations

• Tex. Tax Code § 151.055(a) — tax owed on the excess of purchase price over rental/lease receipts when resale-certificate property purchased for rental is later sold in an occasional sale
• Tex. Tax Code § 151.005(2) — definition of "sale or purchase" includes a rental or lease of a taxable item
• Tex. Tax Code § 151.304 — occasional-sale exemption for the sale of the entire operating assets of a business or an identifiable segment
• 34 Tex. Admin. Code § 3.316(d) — occasional sale of the entire operating assets of a business or an identifiable segment
• 34 Tex. Admin. Code § 3.316(e) — occasional sale rule referenced regarding the equipment's later sale
• 34 Tex. Admin. Code § 3.316(g)(1) — tax owed on resale-certificate rental/lease property later sold as an occasional sale
• 34 Tex. Admin. Code § 3.64(b)(2) — exemption for transfer of motor vehicles upon initial incorporation of a subsidiary for no consideration other than stock
• 34 Tex. Admin. Code § 3.64(b)(5) — motor vehicle rule referenced regarding transfers in a merger
• Tex. Tax Code Chapter 152 (Motor Vehicle Rental and Sales Tax Law) — no occasional-sale provision exists under this chapter

Original ruling text

February 11, 1994

Dear **:

Thank you for your letter of January 17,1994, concerning the taxability of road
construction equipment and manufacturing equipment bought under a resale
certificate that will be sold as an occasiona1 sale under Rule 3.316(d) or (e)
concerning occasional sales.

Rule 3.316(g)(1) is based on Texas Tax Code Section 151.055(a) that states:

If a person purchases tangible personal property by means of a sale for resale
for the purpose of renting or leasing the property for use but subsequently
sells the property in an occasional sale before the person has collected and
paid to the state an amount of sales tax that would have been due if the person
had not acquired the property at a sale for resale, the person at the time of
the occasional sale shall include in his receipts from taxable sales the amount
by which the purchase price of the item at the occasional sale exceeds the
amount received from renting or leasing the property. (Emphasis added.)

** (COMPANY A) may sell the equipment bought tax free for resale as
part of an occasional sale; however, COMPANY A will be liable for any
additional tax as set out in the above cited statutory provision. This means
COMPANY A will owe sales by the amount the original purchase price exceeds the
rental receipts (taxable or exempt).

An aggregate method may not be used. The purchase price of equipment may be
combined with small tools if the tools also bought tax free for rental or
lease. Each piece of equipment stands on its own. Rental receipts from one item
cannot be applied to the purchase price of another item.

The statute defines a sale or purchase to include the rental or lease of a
taxable item [Texas Tax Code Section 151.005(2)]. Thus, the statute makes no
such distinction between a sale or rental inventory. Furthermore, Section
151.304 exempts the sale of the entire operating assets of business or of an
identifiable asset of a business as an occasional sale. A resale (sale or
rental) inventory bought tax free under a resale certificate is not part of the
operating assets of the business. A resale certificate cannot be issued for
operating assets.

The facts in the document that you refer to (microfiche document 9003T1020D03)
are not the same as your client's. The taxpayer in this document was a direct
payment permit holder that bought items for its own use tax free by issuing a
direct payment exemption certificate. This inventory was neither a sale nor a
rental inventory. In addition, the occasional sale was made to another direct
payment permit holder and Section 151.055(a) applies to tangible personal
property bought under a resale certificate.

COMPANY B's sale of the "entire" manufacturing division (trade receivables and
inventory of base, aggregate, and asphalt to a newly formed corporation,
COMPANY C will not be taxable. The receivables are an intangible and the
inventory will qualify for exemption under the sale for resale exemption.
COMPANY A's sale of the manufacturing. equipment and transportation equipment
is subject to the provisions of Section 151.055(a) as previously cited.

The 75% reduction in the sales tax on manufacturing equipment bought on or
after January 1, 1994, does not apply to any tax liability that COMPANY A
incurs under Section 151.055(a) when it sells rental inventory to COMPANY C as
an occasional sale. COMPANY B does not appear to own any operating assets. If
COMPANY A makes a taxable retail sale of the manufacturing equipment (crushers
and asphalt plant) to COMPANY C, then COMPANY C may issue an exemption
certificate claiming a 75% exemption from the sales tax. Intraplant
transportation equipment (the loaders, dozers, and off-road ramps) do not
qualify for the 75% tax reduction or exemption.

After selling the manufacturing rental machinery to COMPANY C, COMPANY A will
merge with COMPANY C. COMPANY A owns motor vehicles that are encumbered with
debt. There is no occasional sales provision under the Motor Vehicle Rental and
Sales Tax Law (Chapter 152 of the Texas Tax Code). However, COMPANY C will not
be due on the motor vehicles because a merger is an operation of law, not a
sale of the motor vehicles.

Rule 3.316(d) exempts the sale of the entire operating assets of a business or
of an identifiable segment of a business. Please note that the term "sale" is
in the singular. This means that COMPANY A's entire operating assets must be
sold in a single transaction. The facts presented indicate that neither the
entire operating assets are sold (the apparent exclusion of the motor
vehicles), nor are the assets sold in a single transaction (a sale of assets to
COMPANY B and a sale to COMPANY C).

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

You may call toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

January 17, 1994

State Comptroller of Public Accounts
Tax Correspondence Section
111 W. 6th Street
Austin, Texas 78701

Dear Mr. Sharp:

** (COMPANY B) is considering reorganizing its corporate family.
Currently COMPANY B owns 100% of the stock of ** (COMPANY A).
COMPANY B has two identifiable divisions, the contracting and road construction
division and the manufacturing division, ** (COMPANY C). COMPANY C
surface mines limestone to manufacture base, aggregate, and hot mix asphalt,
etc.

COMPANY A purchases tax free road construction equipment and manufacturing
equipment under a resale certificate. The equipment is rented to the two
divisions of COMPANY B. Applicable sales taxes are collected and reported by
COMPANY A on the rentals charged to COMPANY B and COMPANY C. The rental rate
charged by COMPANY A also includes a non-separable charge for maintenance and
repairs of the rented equipment. COMPANY A purchases the repairs parts under a
resale exemption.

Our plan is to transfer tax free, various identifiable segments of COMPANY A's
assets to COMPANY B and a newly formed corporation, COMPANY C We believe rule
3.316 (d) Sale of a Business or and Identifiable Segment of a Business, is the
specific section in the Occasional Sale rule that will govern our tax free
transfers of assets. We would like a clarification of this rule and comments
from you if you agree these transfers can be made without incurring sales
taxes. If you feel tax would be due, please state why. Our questions and
concerns are as follows:

COMPANY A will transfer the entire rental road construction equipment, rental
small tools, and the tax free inventory of repair parts for that equipment, as
an identifiable segment of COMPANY A, to COMPANY B's road construction
division. The segment income generated from the rental of the road construction
equipment and small tools is separately maintained on COMPANY A's books of
records as is the applicable expense on that equipment such as depreciation and
repairs. However, Hearing No. 26,443 leads one to believe that inventory is not
an operating asset. Hearing No. 12,534 states that leased equipment is an
operating asset.

1. Based on the above stated facts, can COMPANY A sell to COMPANY B's road
   construction division the rental road construction equipment and small tools
   and repair parts inventory, tax free, by way of an Occasional Sale?

If your answer is yes then we request clarification on section (g) of rule
3.316. In general terms, it states: if a taxable item is purchased tax free for
rental or lease and is later sold in an Occasional Sale under (d) or (e), then
the lessor owes tax on the difference between the lessor's purchase price and
accumulated rental charges. My questions concerning this section are as
follows:

2. In prior periods, sales taxes were not collected by COMPANY A on the rental
   of road construction equipment because the equipment was used under exemption
   in the construction of roads for the State of Texas. Can the exempt tax free
   rental charges be combined with the tax paid charges as one total, to compare
   to COMPANY A's purchase price of road construction equipment and small tools?

3. Is the computation for section (g) based on each piece of equipment or can
   we use an aggregate method?

In one of your letters dated March 9, 1990 (9003T1020D03) your representative
stated 'The taxpayer does not owe tax on the valid tax free inventory when the
inventory is sold as part of an occasional sale of the entire operating assets
of an identifiable segment of the business.

4. Under the sales tax law is a sale inventory and a rental inventory the
   same?

5. If the same, why can a tax free inventory be sold by way of an occasional
   sale and not a tax free rental inventory?

COMPANY B plans to sell the entire manufacturing division, consisting of trade
receivables and inventory of base, aggregate, and asphalt to a newly formed
subsidiary corporation, COMPANY C.

6. If all of the operating assets of COMPANY B's manufacturing division are
   sold as one transaction, will it qualify as an Occasional Sale and therefore
   not be subject to any sales taxes?

COMPANY A will then sell to COMPANY B's newly formed subsidiary corporation,
COMPANY C all manufacturing rental equipment and intra plant transportation
equipment. COMPANY C would owe only twenty-five percent of the sales taxes on
manufacturing equipment since manufacturing equipment purchased in 1994 is
allowed a seventy-five percent reduction in the taxes charged.

7. Is this reduction in the tax rate for manufacturing equipment still
   applicable, and will this transaction qualify for the reduced rate? How will
   the value of the equipment subject to tax be calculated?

a. Manufacturing equipment (Crushers and Hot Mix Asphalt Plants).
b. Intra plant transportation equipment (Loaders, Dozers, Off Road Dumps).

COMPANY A will then merge with COMPANY C. At the time of the merger COMPANY A
will own motor vehicles that are encumbered by debt.

8. If all of the operating assets and liabilities of COMPANY A are merged into
   COMPANY C as one transaction, will this transfer qualify as an Occasional Sale
   and thus not be subject to any sales taxes or motor vehicle tax?

COMPANY A also leases motor vehicles to COMPANY B. Motor vehicle tax was paid
on these vehicles when purchased for lease. It is our understanding the Motor
Vehicle Tax Law is a separate law from the Sales Tax Law. The following
questions concern the taxability of transferring motor vehicles between
corporations.

9. Is there an Occasional Sale exemption for transfers of motor vehicles?

10. COMPANY B's road construction division will purchase road construction
    vehicles from COMPANY A as an identifiable segment of a business. Will motor
    vehicle tax be owed? If tax is due, how will the value of the vehicles subject
    to tax be calculated?

Motor Vehicle rule 3.64(b) (2) exempts the transfer of motor vehicles in
connection with the initial incorporation of a subsidiary corporation, if the
transfer is for no consideration other than stock. It is my understanding, that
if debt on the vehicles is transferred to the new subsidiary corporation along
with the vehicles, then motor vehicle taxes would be owed.

11. Is this correct? If so, how will the value of vehicles subject to tax be
    determined and calculated?

Another question is whether the stipulation in rule 3.64(b) (2) ". . . for no
consideration other than stock . . ." applies to rule 3.64(b) (5). In a Merger
the entire business of a corporation is transferred. This includes debt.

12. Can motor vehicles be transferred tax free within a merger it debt is also
    transferred to the surviving corporation (i.e. COMPANY A merger with COMPANY
    C)?

If there are other aspects of these transfers you feel are pertinent, please
include them with your comments. Thank you for your prompt attention to this
matter. If you feel you need additional information, please call.

Sincerely,

Secretary