Is a gas compression service taxable, and does it matter whether the compressor is instead leased or rented out to the customer?

Plain-English summary

A gas compression services company (referred to as "ABC Production Services") sent the Comptroller its service contract for review, asking how its business was taxed. The Comptroller confirmed the company's compression services -- performed under a contract where possession or control of the compressor is never transferred to the customer -- are not taxable, because it's a service rather than a rental or lease. As the true owner and operator of the compressor, ABC owes tax on the compressors it purchases to perform these services.

The letter also addressed a separate part of ABC's business: contracts that ARE actual leases or rentals of compressors. For those contracts, the compressor may be purchased tax-free for resale (since ABC is reselling the use of the equipment rather than consuming it). And if ABC delivers a leased/rented compressor to a location outside Texas, Texas sales and use tax is not due on that lease/rental at all, under the interstate-sale exemption discussed with the taxpayer.

What this means for you

Gas compression, well-servicing, or similar equipment-based service providers

The tax treatment turns on possession and control, not on how you label the contract. If you keep the equipment and simply perform a service with it, you're the taxable consumer of the equipment (pay tax on purchase, don't collect tax from the customer). If you actually hand over possession under a lease/rental, buy the equipment tax-free for resale and collect tax from the lessee instead -- unless the equipment ships out of state.

Businesses running both service and equipment-rental lines side by side

The same company can have both taxable-input service contracts and resale-exempt rental contracts running simultaneously; keep the two contract types and purchasing treatments clearly separated in your records.

Accountants and tax professionals

This is a clean illustration of the possession/control test distinguishing a nontaxable service from a taxable lease/rental (the same test discussed in other employee-equipment and tools rulings), plus the interstate-delivery exemption for genuine leases/rentals.

Common questions

Q: Is a gas compression service taxable if the provider keeps possession of the compressor?
A: No, per this letter -- it's a nontaxable service, and the provider pays tax on the compressors it buys to perform it.

Q: Can compressors used under actual lease/rental contracts be bought tax-free?
A: Yes, per this letter -- those compressors may be purchased for resale since the equipment itself is being resold (leased) to the customer.

Q: What if a leased/rented compressor is delivered out of state?
A: Per this letter, Texas sales and use tax is not due on that lease/rental when delivery is to an out-of-state location.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9708735L

Original ruling text

August 12, 1997

Dear ***:

Thank you for sending me a copy of your gas compression service contract for my
review.

As we discussed during your follow up visit on Monday, August 11, the gas
compression services performed under the contract are not taxable. ABC
Production Services does not transfer possession or control of the compressor
to its customer. The transaction is not a rental or a lease.

ABC should pay tax on compressors purchased to perform services under this
type of contract.
I understand that ABC also enters into contracts that are lease or rentals.
Compressor for those contracts may be purchased for resale. We also discussed
the exemption for interstate sales. If ABC enters into lease or rental
contracts and delivers the compressors to an out of state location, Texas sales
and use tax is not due on the lease or rental.

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

You may call me toll free at 1-800-531-5441, ext. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Tom Soto
Tax Policy Division