Is a separately-stated property tax reimbursement on an equipment rental invoice taxable in Texas?

Subject

Property Tax Reimbursement — Rental/Leases Of Equipment — Lump Sum/Separately Stated Charges — Guidelines

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408L1320D12

Plain-English Summary

The Texas Comptroller ruled on whether a lessor can bill a customer for property tax reimbursement on an equipment rental (presumed to be an operating lease) without charging sales tax on that amount.

The answer turns on two conditions that must both be true:

1. The property tax reimbursement is separately stated and clearly identified as such on the invoice, and
2. The reimbursement is for the property tax the lessor actually paid on that same specific piece of equipment covered by that particular lease contract or invoice.

If both conditions are met, the reimbursement is excluded from the taxable sales price and no sales tax applies to it. But if the reimbursement is instead a prorated share of property taxes on all of the lessor's rental equipment — not just the unit being leased under that invoice — then the reimbursement is part of the taxable sales price and must be taxed, even if it is separately stated on the invoice as "property tax reimbursement."

In the ruling, the taxpayer had submitted an invoice with a separately stated line item for property tax reimbursement. The Comptroller noted that if the amount reflected property tax the lessor paid on the same equipment being leased, no tax should be charged on that line item. However, the Comptroller also warned that a prorated allocation of tax paid across all rental equipment (rather than just the leased unit) would be taxable regardless of how it's labeled or stated on the invoice.

What This Means For You

Equipment lessors

Simply separately stating a "property tax reimbursement" line item on your rental invoices is not enough on its own to exclude it from sales tax. You must be able to show the charge corresponds specifically to the property tax you paid on the exact unit of equipment being rented under that invoice — not an allocated or averaged share of your total property tax bill across your whole rental fleet. If you use a prorated/blended reimbursement method, that amount is taxable even when it's broken out as its own line item.

Lessees / renters of equipment

If your rental invoice includes a "property tax reimbursement" charge, ask your lessor whether it's tied to the specific equipment you're renting or is a prorated allocation across the lessor's fleet. That distinction determines whether sales tax should be applied to that charge.

Accountants and tax professionals

This ruling is a good illustration of a general Texas sales tax principle: separately stating a charge on an invoice is necessary but not sufficient to exclude it from the taxable sales price. The substance of what the charge represents — tax paid on the specific leased asset versus an allocated share of a broader tax liability — governs the outcome.

Q&A

Q: If a lessor separately states "property tax reimbursement" on the rental invoice, is that automatically excluded from sales tax?
A: No. Separate statement is only one of two required conditions. The reimbursement must also be for property tax paid on the same specific equipment covered by that lease or invoice.

Q: What if the property tax reimbursement is prorated across all the lessor's rental equipment rather than tied to the specific unit rented?
A: Then it is part of the taxable sales price and must be taxed, even though it is separately stated and labeled as a property tax reimbursement.

Q: Does this ruling apply to all types of leases?
A: The ruling presumes the lease/rental at issue is an operating lease. It is based on the specific facts presented to the Comptroller, and the Comptroller noted the opinion could change if additional or different facts were involved.

Citations

No statutes, rules, or cases were cited in this letter ruling.

Original ruling text

August 18, 1994

Dear *****:

I am writing in response to your letter questioning the application of sales
tax on rentals of equipment specifically regarding property taxes. Presumably
the lease/rental is an operating lease. Property tax reimbursement is not
included in the taxable sales price of equipment rentals only when (1)
separately stated and clearly identified on the invoice and (2) reimbursement
is for the property tax paid on the specific equipment being leased in this
contract or invoice. Otherwise, property taxes are included in the taxable
sales price of the equipment rental.

You enclosed an invoice showing a line item amount for property tax
reimbursement. This invoice reflects property tax only. If the lessor is
billing property tax reimbursement that the lessor paid on the same equipment
covered in this original lease contract, then the lessor should not charge tax
on the separately stated amount for the property tax reimbursement.

However, if the property tax is a prorated reimbursement of all property taxes
paid on all rental equipment, the reimbursement is part of the sales price and
must be taxed. This will apply even if separately stated and identified.

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

You may also write to Tax Administration Division, Post Office Box 13528,
Austin, Texas 78711-3528.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9408684L