Is Texas sales tax due when a facsimile-service company installs, rents, and maintains fax equipment in hotel rooms so guests can send and receive faxes?

Plain-English summary

A Delaware company (referred to in the letter as "ABC CO.") provides in-room facsimile service to hotel guests. Its fax machines and related equipment are installed in hotel rooms across the country, including in Texas, even though ABC CO. has no office, employees, or other business presence in Texas beyond that equipment. Guests place calls to send faxes, or use an assigned number to receive them, all routed over the hotel's existing phone lines and the public telephone network. The hotel purchases the service from ABC CO. and in turn bills its guests for it.

ABC CO. asked the Comptroller's office how sales tax applies to several possible charges it might bill the hotel: installation of the fax equipment, a service/maintenance fee, and a fixed monthly service charge per fax machine.

The Comptroller explained the controlling concept first: tangible personal property used to perform a taxable service can be purchased tax-free for resale if it is transferred to the "care, custody, and control" of the customer as part of the service — meaning the customer has the right to move, relocate, and operate the equipment. The same rule applies to equipment rented to a business, like ABC CO., that provides taxable services such as facsimile service. Applying that rule to each of ABC CO.'s questions:

• Installation charges are taxable or not in the same manner as the charge for the equipment itself. If the equipment is directly operated by the purchaser of the telecommunications service, the installation — like the equipment — can be purchased or rented tax-free for resale. Otherwise, the installation charge is taxable.
• Maintenance/service fees follow the same rule: taxable or not in the same manner as the underlying equipment charge. If the equipment is directly operated by the purchaser of the service, the maintenance can be purchased tax-free; otherwise the maintenance charge is taxable.
• A fixed monthly per-machine service charge for equipment transferred to the care, custody, and control of the purchaser of the telecommunications service may be purchased tax-free for resale.

The Comptroller also confirmed that the hotel — not ABC CO. — is the one selling telecommunications service to the guest, so the hotel should collect sales tax from guests on its total charge for the facsimile service and equipment, and should give ABC CO. a resale certificate in lieu of tax on the hotel's payments for that telecommunications service. However, the hotel must pay tax to ABC CO. on payments for equipment that is not directly operated by the guest, and tax also applies to installation and repair/maintenance charges on that equipment.

On use tax, the Comptroller noted that Texas, as a member of the Multistate Tax Compact, allows credit against Texas use tax for a similar tax already paid to another state on the same transaction (regardless of whether that other state offers a reciprocal credit), which would offset ABC CO.'s use tax liability on its equipment used in Texas for incoming faxes. No such credit applies against tax due on equipment rented to hotels where the equipment was not transferred to the guest's care, custody, and control. Separately, the Comptroller confirmed ABC CO. would owe Texas property tax on its equipment located in the state and would receive separate application materials for sales tax and franchise tax registration.

What this means for you

Businesses providing equipment along with a taxable service

Whether your installation, maintenance, and rental/service charges for equipment can be purchased or billed tax-free for resale turns on a single fact: does the customer have the right to move, relocate, and operate the equipment? If yes, the equipment and directly related installation and maintenance charges qualify for resale treatment; if the equipment stays under your (the service provider's) control, those charges are taxable.

Hotels and other businesses reselling a vendor's service to end customers

If you resell a vendor's telecommunications or similar service to your own customers (here, hotel guests), you should collect sales tax from those customers on your total charge for the service, and you can give your vendor a resale certificate in lieu of tax on the portion of your payments that corresponds to the resold telecommunications service. But if any of the underlying equipment is not directly operated by your customer, you owe tax to your vendor on that equipment charge, plus any related installation and maintenance fees.

Out-of-state companies placing equipment in Texas

Even without a Texas office or employees, placing equipment in the state can create sales, use, franchise, and property tax obligations. This letter confirms a credit is available against Texas use tax for similar tax already paid to another state on the same equipment/transaction (Texas being a member of the Multistate Tax Compact), but that credit does not extend to tax owed on equipment rented out to Texas hotels that never transfers to the guest's care, custody, and control.

Common questions

Q: What does "care, custody, and control" mean for purposes of buying equipment tax-free for resale?
A: It means the customer has the right to move, relocate, and operate the equipment. If that right is transferred to the customer as part of the taxable service, the equipment (and related installation/maintenance) can be purchased or rented tax-free for resale.

Q: Who collects sales tax when a fax-service company sells through a hotel to hotel guests?
A: The hotel is treated as the seller of the telecommunications service to the guest and should collect sales tax from the guest on its total charge; the hotel gives the fax-service company a resale certificate in lieu of tax on the hotel's payments for that service.

Q: Are installation and maintenance charges taxed the same as the equipment itself?
A: Yes. The letter states installation charges and maintenance/service charges are each taxable or not in the same manner as the charge for the underlying equipment, based on whether the equipment is directly operated by the purchaser of the service.

Q: Does an out-of-state company that only places equipment in Texas hotels have Texas tax obligations?
A: Yes. The Comptroller confirmed the company would need to register for Texas sales tax and would receive Texas franchise tax information, and it also owes Texas property tax on equipment located in the state.

Citations and references

No specific statutes are cited in the text of this letter. The current version of this ruling references 34 Tex. Admin. Code Rule 3.285 (Resale Certificates; Sales for Resale) via an editor's alert, but that citation was added by the Comptroller's office when publishing the letter, not part of the original 1994 correspondence.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9412L1336C01

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.

December 8, 1994

Dear **:

Thank you for your recent letter that is restated in part with responses
below.

ABC CO. is incorporated in the state of Delaware; its principle office is
located in **, California. ABC CO. has one other U.S. office located
in **, New Jersey. ABC Company ("ABC CO.") is in the business of
providing to hotels in-room facsimile services for use by guests of the hotel.
This service is offered under the trade name of *. ABC CO. employs
a direct sales force to market this service throughout the United States
and Canada. The hotel guest purchases this service from the hotel and the
hotel bills the guest for the service. The hotel is invoiced by
ABC CO. for the cost of the *** service.

Although the fax machines and related equipment would be installed in hotels
located in the State of Texas, these machines belong to ABC CO.. ABC CO.
has no business location/operation or business presence, in the state of
Texas, except to the extent described above. Also, ABC CO. does not have
any employees in the state of Texas.

** uses existing telephone systems and lines, both internal to the hotel
and external. There are two distinct fax data flows depending on whether the
guest is sending or receiving faxes.

a. When a hotel guest sends a fax, the data is sent to the receiving fax
machine as a pure out-dial call. The data is routed via the hotel PBX
to the local Public Switched Telephone Network then via a Long Distance
Network (whichever one the hotel uses for long distance voice calls) then
back to the local Public Switched Telephone Network in the destination
city, finally to the receiving fax machine.

b. For the guest to receive a fax a slightly different routing is used
to avoid the problems inherent in sending a fax into a hotel through the
PBX system. The guest requests an ** DID number via the fax machine.
This call is handled just like an outgoing fax except it is routed to our
Service Bureau at the City A Telephone Company. Our system assigns
one of the DID numbers reserved for our use by City A and establishes a
"fax mailbox" on our computer for that number. Incoming faxes to a guest
are sent via the Public Switched Telephone Networks and Long Distance
Networks to City A and stored in the mailbox. Our computer then
initiates a paging signal, via Company B, which causes the * control
unit (***) in the guest room to dial our Service Bureau. This call
Is another outgoing fax call via the PBX, local Public Switched Telephone
Network and Long Distance Network (again, the same one used by the hotel
for long distance voice calls) to City A. Our computer then delivers
the fax over the same connection to the fax machine in the guest room.

I'd like to make a few comments before answering your questions. It
appears that ABC CO. both uses equipment and rents equipment to hotels
to facilitate their performance of telecommunications services for their
guests.

Tangible personal property used to perform a taxable service may be
purchased tax free for resale if it is transferred to the care, custody
and control of the customer as part of the service. The service provider
should give his suppliers a resale certificate in lieu of tax. The same
rationale would apply to equipment that is rented to a firm in the business
of providing taxable services such as facsimile services.

Care, custody and control means the customer has the right to move,
relocate, and operate the components.

Please answer the following questions based on the information stated
above.

1. If ABC CO. were to charge the hotel to install the fax machines/equipment
   should taxes be charged on the Installation fee?

Response: Installation charges are taxable or not in the same manner as the
charge for the equipment itself. If the equipment is directly operated by the
purchaser of the telecommunications service the installation, like the
equipment itself, could be purchased or rented for resale. Otherwise the
charge is taxable.

2. If ABC CO. were to charge the hotel a service fee (for and maintenance),
   should taxes be charged?

Response: Maintenance charges are taxable or not in the same manner as the
charge for the equipment itself. If the equipment is directly operated by the
purchaser of the telecommunications service the maintenance, like the equipment
itself, could be purchased tax free. Otherwise the charges are taxable.

3. If ABC CO. were to charge the hotel a service fee (a fixed monthly charge
   for each fax machine payable to ABC CO. by the hotel for the provision of
   service), should taxes be charged?

Response: Equipment that is transferred to the care, custody, and control of
the purchaser of the telecommunications service may be purchased tax-free
for resale.

4. Should ABC CO. charge the hotel sales tax on the fax usage or should the
   hotel charge tax to the guest who uses the fax machine? How does ABC CO.
   protect itself against tax liability if the hotel doesn't collect/remit taxes?
   Are we required to obtain a resale certificate from the hotel?

Response: The hotel is selling telecommunications services to its guests.
The hotel should collect sales tax from its guests on its total charge for
providing facsimile services and equipment to its guests. The hotel
should give ABC CO. a resale certificate in lieu of tax on its payments to
ABC CO. for telecommunications services provided to guests. The hotel must
pay tax to ABC CO. on its payments for equipment that is not directly operated
by the guest in sending and receiving facsimiles. Tax must also be paid on
installation and repair/maintenance fees on equipment in the later category.

5. Does ABC CO. need to register as a vendor in the state of Texas? If so,
   please send us a vendor application.

Response: Under separate cover, I am sending you a sales tax application.

6. Are there other types of registrations required? If so please send us
   the necessary applications.

Response: Under separate cover, you will receive information on Texas
franchise tax.

7. Although ABC CO. will have paid sales tax in California for the
   facsimile machines/equipment, does ABC CO. still have a sales/use tax
   requirement for the machines located in your state?

Response: As a member of the Multi-State Compact, Texas will allow credit
against use tax due for a like tax due and paid to other states on the
same transaction whether or not the other state allows such a credit for
tax paid to this State. This would be applied toward any tax liability
ABC CO. incurred for its use of its equipment in Texas on incoming facsimile
transmissions. No such credit would be allowed against tax due to be
collected from Texas hotels on equipment rentals to the hotels where the
equipment was not transferred to the care, custody, and control of the hotel
guest purchasing facsimile services.

8. Are we required to pay a property tax for our equipment in your state?

Response: Yes.

9. Does ABC CO. have any other tax responsibilities? If so, please let us
   know.

Response: Not to my knowledge.

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

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration, Comptroller
of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9412897L