We want to raise financing secured by five operating units within our petrochemical refinery, structured as a sale/leaseback: we'd transfer bare legal title to a lender trust and immediately lease the units back, keeping full operational control, maintenance responsibility, and a repurchase option, while continuing to own the land underneath. Is this transaction subject to Texas sales and use tax?

Plain-English summary

A company that had operated a petrochemical refinery and chemical manufacturing facility for over 50 years wanted to raise financing secured by five of its existing operating units within that facility. The structure: a sale/leaseback functioning as a secured loan — the company would transfer bare legal title to the units to a lender trust for security purposes, immediately lease the units back, and receive the financing proceeds. Throughout the arrangement, the company would keep the land under the units, continue treating the units as its own for federal income tax purposes (no gain/loss recognized, lease payments deducted as interest), remain responsible for maintenance, property taxes, insurance, and risk of loss, and keep using the units in its manufacturing operations. The deal had a 5-year term (renewable 2 more years), a company repurchase option throughout, an ability to substitute equivalent assets for any unit, and — if the company didn't repurchase at term end — a requirement that it act as the lender's sales agent, bearing risk if a resale came in below a set floor.

An appraiser had separately concluded, for financial-accounting purposes, that the units could be dismantled, removed, and used by someone else, with relocation costs under 10% of fair market value (not counting reinstallation costs) — a fact that might suggest the units are more like removable personal property than fixed realty.

The taxpayer argued two independent grounds for nontaxability:

1. The refinery units are real property, so transferring them isn't a taxable sale of tangible personal property — citing prior Comptroller letters holding similar petrochemical/chemical plants to be realty for sales tax purposes. The taxpayer distinguished a separate line of Comptroller precedent (Decision No. 35,553 and an April 1997 letter) that found certain OTHER equipment to be personal property, arguing those cases don't apply here because this sale/leaseback happens well after the units were installed and used for a substantial period, and the company's clear, unchanged intent at installation was for the units to be permanent parts of the facility — which, under Decision No. 35,553's own reasoning, is exactly what makes something real property.
2. The transaction is simply a nontaxable financing arrangement — a secured loan, not a true sale — citing separate prior Comptroller letters recognizing financing arrangements as non-taxable regardless of how they're titled.

The Comptroller's response combined both threads into one holding: "The transaction you describe is a financing arrangement involving real property as collateral and possibly other property substituted for the realty and is not subject to sales tax." In other words, the deal is nontaxable both because it's a financing arrangement AND because the underlying units are real property (or become real-property-equivalent collateral via substitution) — the appraiser's physical-removability findings don't override the parties' original, unchanged installation intent.

What this means for you

Energy, refining, and heavy-manufacturing companies structuring sale/leaseback financing on fixed equipment

A sale/leaseback of permanently installed operating equipment can be structured as a nontaxable financing arrangement, even when the "sale" transfers bare legal title and even when a physical appraisal shows the equipment COULD technically be removed at relatively low cost — what matters most is the original, unchanged intent at installation that the equipment become a permanent part of the facility.

Lenders and financiers structuring secured-loan transactions using industrial real property/equipment as collateral

This letter supports treating this kind of title-transfer-for-security-purposes financing structure as a nontaxable loan rather than a taxable sale, particularly where the borrower retains all the practical burdens and benefits of ownership (maintenance, taxes, insurance, risk of loss, continued use).

Businesses relying on an appraiser's "removability" conclusion to argue equipment is personal property

Be careful: this letter shows the Comptroller weighting the ORIGINAL installation intent over a later appraisal's technical removability findings. An appraisal supporting easy removal for accounting/financing purposes doesn't automatically flip previously-realty equipment into taxable personal property.

Accountants and tax professionals advising on industrial sale/leaseback transactions

This letter usefully combines two independent nontaxability arguments (real property classification via installation intent, and financing-arrangement characterization) into a single holding — worth citing both threads together when structuring similar transactions, and worth distinguishing carefully from the separate line of Comptroller precedent (Decision No. 35,553; the April 1997 letter) addressing equipment found to remain personal property under different facts.

Common questions

Q: Is a sale/leaseback financing arrangement on refinery equipment subject to Texas sales tax?
A: No, according to this letter — it's a nontaxable financing arrangement involving real property (or substituted property) as collateral, not a taxable sale.

Q: Does it matter that an appraiser concluded the units could be physically removed at relatively low cost?
A: No — the company's original, unchanged intent at the time of installation (that the units be permanent) controls the real-property classification, not a later technical removability assessment.

Q: Does the "sale" of bare legal title to a lender trust change the analysis?
A: No — because the arrangement functions as a secured loan (with the company retaining ownership burdens/benefits, tax treatment as owner, and a repurchase option), it's treated as a financing arrangement rather than a true taxable sale.

Q: Can I rely on this letter for my own sale/leaseback financing transaction?
A: No. This opinion is based on the facts presented, and if there are any additional or different facts, the opinion may change; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller relies instead on prior Comptroller precedent discussed in the letter — rulings dated February 5, 1997 and November 19, 1997 (No. 9711120L) finding similar petrochemical/chemical plants to be real property; Comptroller's Decision No. 35,553 (1997) and an April 24, 1997 letter (No. 9704351L) addressing OTHER equipment found to remain tangible personal property under different facts (installation-intent timing distinguishes this case); and rulings dated May 6, 1993 and May 16, 1995 recognizing nontaxable financing arrangements.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9811991L

Original ruling text

November 17, 1998

Dear Sirs:

Thank you for your letter to Ms. Shoemate regarding the transfer of an existing
petrochemical refinery as either realty or personalty under the following
facts. Ms. Shoemate has asked me to respond.

Company A owns an existing petrochemical refinery and chemical manufacturing
facility (the "Facility") that has been utilized in manufacturing various
chemicals and petrochemical products for over fifty years. Company A now
desires to enter into a financing arrangement with respect to five existing
operating units (the "Units") within the Facility.

The financing arrangement is a loan structured as a sale/leaseback with Company
A transferring bare legal title to the Units to a trust (The "Lender") for
security purposes and immediately leasing the Units back from the lender. Upon
the transfer of record title to the Units to the Lender, Company A will receive
the proceeds of the financing arrangement. Company A will continue to own all
the land under the entire facility (including the land under the Units) and
will not lease the land in connection with the financing arrangement.

For federal income tax purposes, Company A will: (i) continue to be treated as
the owner of the Units, (ii) not recognize any gain or loss on the transfer of
bare legal title to the Lender and (iii) deduct the lease payments as interest
expense. Under the terms of the financing arrangement, the Units will remain
in place at the Facility and Company A will continue to be responsible for
maintenance, property taxes, insurance, risk of loss, and the other risks and
benefits of ownership of the Units. Company A plans to continue using the
Units in its manufacturing activities at the Facility.

The Financing arrangement has an initial term of five years and may be renewed
by Company A for an additional two years under certain circumstances. At any
time, Company A may exercise an option to repurchase all or some of the Units
by repayment of the financing proceeds received from the Lender with respect to
such Units. In addition, Company A may substitute for any of the Units other
assets having the same value and remaining economic useful life as the Unit
being substituted. As part of the transaction, Company A must agree, under
certain circumstances, to make a deposit equal to approximately one-half of the
financing proceeds received from the Lender.

At conclusion of either the five year primary lease term or the two year option
term (if exercised), Company A similarly may repurchase the Units for an amount
equal to the financing proceeds received from the Lender. In the event Company
A does not exercise its purchase option at the conclusion of the lease term,
Company A will act as agent of the Lender to sell the Units. If any such sale
is for an amount less than 85% of the financing proceeds received from the
Lender, Company A is liable for such shortfall (up to an amount equal to 85% of
the financing proceeds). In addition, Company A is liable for any diminution
of value of the Units resulting from excess wear and tear or from the Units
being idled. If a sale of the Units yields an amount greater than the
financing proceeds received from the Lender, Company A will receive such excess
proceeds.

Each of the Units produces a basic or intermediary refinery or chemical product
that can be (i) transferred to other operating units within the Facility for
further processing into a finished petroleum, chemical or other product or (ii)
sold to third parties for use or further processing into a finished product.
Each of the Units shares certain utilities and other support systems with other
operation units in the Facility. The Unit components are bolted to concrete or
steel foundations specially designed for the components and have a remaining
average economic useful life of 30 years. [FOOTNOTE: In connection with certain
financial accounting considerations related to the financing arrangement, an
appraiser has concluded that the Units could be dismantled, removed, sold or
used by a party other than Company A, and that the costs of dismantling,
removing and relocating the Units would be less than 10% of their estimated
fair market value; the appraiser's cost estimate does not take into account the
substantial costs of reinstalling the Units at another location. The appraiser
also has concluded that the Facility could continue to operate if the Units
were removed; however, Company A would have to purchase from other parties the
basic or intermediary refinery or chemical products produced by the Units in
order to continue selling the products currently sold by the Facility.]

You submit that the sale, leaseback and repurchase (If a repurchase option is
exercised) of the Units are not subject to Texas sales and use tax on the
following separate and independent grounds.

1. Petrochemical and chemical plants such as the Facility are considered real
   property for sales tax purposes, and thus the transfers of the Units are not
   subject to tax. See Comptroller's Ruling Letters dated February 5, 1997
   (signed by Adina Harrell and addressed to ** and **)
   and November 19,1997 ( number 9711120L, signed by Wade Anderson).
   [FOOTNOTE: You note that the holdings in Comptroller's Decision No. 35,553
   (1997) and Comptroller's Ruling Letter dated April 24, 1997 (
   document number 9704351L, signed by Wade Anderson) that certain equipment
   remained tangible personal property do not apply in this case because the
   sale/leaseback transaction is being entered into after the Units have been used
   by Company A for a substantial period. Indeed, the rationale of Comptroller's
   Decision No. 35,553 that the taxpayer's intention in installing a unit is
   controlling supports a ruling that the Units in this case are real property in
   that Company A's clear intent at the time of installing the Units at the
   Facility was that they be permanent accessions to the real property. Moreover,
   you note that Company A's intent that the Units be permanent accessions to real
   estate remains unchanged.]

2. The transaction constitutes a nontaxable financing arrangement. See
   Comptroller's Ruling Letters dated May 6, 1993 (signed by Vic Hinterlang and
   addressed to **) and May 16, 1995 (signed by Gilbert Zamora and
   addressed to **)

Response: The transaction you describe is a financing arrangement involving
real property as collateral and possibly other property substituted for the
realty and is not subject to sales tax.

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 Policy Division, Comptroller of Public Accounts. You may also
e-mail our tax help section at: [email protected]>

Sincerely,

Tom Soto
Tax Policy Division