Were railcar lease charges under car service agreements exempt for a nonrailroad lessee?

Subject

Lease of Railcars

Plain-English summary

Charges under the company's railcar car service agreements were exempt even though the lessee was not a railroad. Florida read section 212.02(10)(g) as excluding charges made under car service agreements without limiting the exclusion to railroad-company lessees.

The Department acknowledged that Rule 12A-1.071 retained a contrary distinction between railroad and nonrailroad lessees. It agreed that the statute controlled and that the nonrailroad limitation could not be enforced against these agreements.

What this means for you

The industry label matched a statutory category, but the ruling still depended on the actual railcar agreements and the 2000 statutory language. It should not be generalized to other equipment leases or different contract forms.

Common questions

Q: Did the lessee have to be a railroad? No.

Q: Did the Department follow the conflicting rule language? No. It concluded that the broader statute controlled.

Q: Were these ordinary leases despite their title? Yes. The ruling recognized that the agreements were railcar leases commonly called car service agreements.

Citations and references

• Fla. Stat. § 212.02(10)(g) — car-service-agreement exclusion from lease or rental
• Fla. Stat. § 212.05 — sales and use tax
• Fla. Admin. Code r. 12A-1.071(4)-(5) — railcar and other tangible-personal-property rentals
• Ch. 87-6, Laws of Florida — statutory car-service-agreement language discussed in the ruling
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-022

Original ruling text

SUMMARY

QUESTION: What is the taxable status of charges made
pursuant to "car service agreements," where the lessee is
not a railroad company?

ANSWER - Based on Facts Below: "Car service agreements" are
exempt from tax, irrespective of whether the lessee is a
railroad company or not.

May 01, 2000

Re: Technical Assistance Advisement 00A-022
XXX ("Company")
Lease of Railcars
Sections 212.02(10)(g), 212.05, F.S.
Rule 12A-1.071(4), (5), F.A.C.

Dear :

This is in response to your letter of March 24, 2000, in which
you requested the issuance of a Technical Assistance Advisement
regarding the taxable status of charges made pursuant to car
service agreements. More specifically, you request a finding
that no sales tax is due with respect to your client's ongoing
leases or payments for the lease of railcars.

RELEVANT STATUTORY CITATIONS

Section 212.05, F.S., provides in part:

It is hereby declared to be the legislative intent that every
person is exercising a taxable privilege who engages in the
business of selling tangible personal property at retail in this
state, including the business of making mail order sales, or who
rents or furnishes any of the things or services taxable under
this chapter, or who stores for use or consumption in this state
any item or article of tangible personal property as defined

herein and who leases or rents such property within the state.

Section 212.02(10)(g), Florida Statutes provides in pertinent
part:

... The term "lease", "let", or "rental" does not mean
hourly, daily, or mileage charges, to the extent that such
charges are subject to the jurisdiction of the United States
Interstate Commerce Commission, when such charges are paid by
reason of the presence of railroad cars owned by another on the
tracks of the taxpayer, or charges made pursuant to car service
agreements.... (emphasis added).

Rule 12A-1.071(4) and (5), F.A.C., provide in relevant part:

(4)(a) If the lessee of tangible personal property removes the
property from the State of Florida, the consideration contracted
to be paid subsequent to such removal is not taxable, provided
the lessee furnishes the lessor with a signed certificate
identifying the property, and the date the property was or will
be removed from this state.... Rental amounts charged or paid
while the property is in Florida are taxable, even though the
property is moved from the state immediately after the lessee
takes possession of it....

(b) The lease of railroad cars to a railroad company for use on
its tracks is exempt, provided the rental charges are subject to
the jurisdiction of the United States Interstate Commerce
Commission and are based on hourly, daily, or mileage charges,
and they are paid by reason of the presence of railroad cars
owned by another on the tracks of the taxpayer. Charges made
pursuant to railroad car service agreements are also exempt.
(emphasis added)

(5) The rental of railroad cars to any lessee, other than a
railroad company, is taxable, subject to paragraph (a) of
subsection (4) and subsection (7) of this section.

[Subsection (7) is not relevant to this discussion.]

TAXPAYER POSITION

Your letter provides in part:

Our client (hereafter "Company") is a lessee of rail cars, which
are hauled by railroads in the shipment of chemicals to Company
for use at its Florida facilities. Within the railcar leasing
industry, such leases are commonly denominated "car service
agreements".
...

... the statute expressly excludes from the definition of
"lease" "let" or "rental"... "charges made pursuant to car
service agreements". This language was added by Chapter 87-6,
Laws of Florida. Accordingly, the Chapter 212 tax is not
imposed with respect to such charges.

Some of the history preceding the 1987 legislation may be
helpful. In 1979, the legislature amended the definition of
"lease", "let", or "rental" in section 212.02, Florida Statutes,
to exclude certain amounts paid with respect to the use of
railcars. Chapter 79-359, Laws of Florida. These are the
payments which railroads make to other railcar owners (including
other railroads) as part of the interchange system. The
conceptual basis for these payments is that the availability of
a car owned by another relieves a hauling railroad of the
obligation to furnish the car. This facilitates the shipment of
goods through the interchange of cars, rather than requiring a
shifting of goods from one car to another at each point of
interchange between railroads. These payments are sometimes
referred to as "rent", although there is no lease in the
conventional sense. Whether the owner of a railcar is another
railroad or a private lessor, it receives these payments from a
hauling railroad. The 1979 legislation did not affect the tax
treatment of conventional railcar leases such as those at issue
here.

In 1981, the Department adopted Rule 12A-1.71(4)(b) and (c) to
implement the 1979 change. These paragraphs provided as
follows:

(b) The rental of railroad cars to a railroad company for use on

its tracks is exempt, provided the rental charges are subject to
the jurisdiction of the United States Interstate Commerce
Commission and are based on hourly, daily or mileage charges.

(c) The rental of railroad cars to any lessee other than a
railroad company, is taxable, subject to paragraph (a) of this
subsection and subsection (5) of this section.

Paragraph (a), which remains in the current rule, provides a
general mechanism for addressing the tax treatment of leased
tangible personal property which is removed from Florida.
Subsection (5) (now subsection (7)) dealt with leases for release, and is not material to the present discussion. Thus, the
Department implemented the 1979 legislation by characterizing as
"exempt" the mileage, hourly and daily (often called "per diem")
charges paid by a railroad, and declaring taxable the rental of
railcars to other lessees.

In 1987, the railcar leasing industry was successful in securing
the enactment of legislation to exclude all railcar leases from
the tax. The car service agreement language now appearing in
section 212.02(10)(g) was used because of the common practice of
captioning railcar leases as "car service agreements", as
illustrated by the enclosed copies of contemporaneous agreements
with three major railcar lessors. A fourth contract is also
enclosed, which is captioned "Car Leasing Agreement". It is
evident that the substance of all these agreements, however
denominated, is the same: they are railcar leases. As a result
of the 1987 legislation, the exclusion of charges made pursuant
to such agreements applies without regard for the identity of
the lessee.

However, in 1988 the Department amended Rule 12A-1.071 in a way
that purports to continue the pre-existing distinction between
railroads and other lessees. Although the 1988 rule change
added a sentence to the effect that "charges made pursuant to
railroad car service agreements are also exempt", this language
was added to the paragraph dealing only with railroads. The
1988 rulemaking preserved as a separate provision the 1981
language which now appears in [Rule Subsection] 12A-1.071(5), to
the effect that the rental of railroad cars other than to a

railroad is taxable. This is inconsistent with the 1987
statutory amendment, which in no sense limits to railroads the
tax exclusion for car service agreements. The limitation that
is now in subsection (5) is invalid. The Department has
acknowledged that it cannot enforce an invalid rule. See, e.g.,
TAA 98A-008 (a rule at variance with the terms of a statute will
not be applied).

The 1979 and 1987 statutory amendments addressed similar
problems. Railcars typically move continually in the stream of
interstate commerce. Documenting the locations of migratory
railcars at specific points in time may be impossible, and
therefore application of provisions such as Rule 12A- 1.071
(4)(a), which requires such documentation, is not feasible.
Subject to constitutional limitations, the legislature might
have attempted to develop a formula for taxing leases of these
unique instrumentalities, but it determined instead that they
should not be taxed.

The industry convention of describing a railcar lease as a "car
service agreement" may not have been understood during the
adoption of the 1988 rule changes. Be that as it may, the
statute is controlling, and the tax is not imposed on charges to
Company for the lease of railcars.....

DEPARTMENT RESPONSE

The Department is in agreement that "car service agreements"
entered into by your client are exempt from tax, and, that the
statute does not limit the exemption for "car service
agreements" to railroad companies.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S. which is binding on the department only
under facts and circumstances described in the request for this
advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than

expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
any backup material, and this response, deleting names,
addresses and any other details which might lead to
identification of the taxpayer. Your response should be
received by the Department within 15 days of the date of this
letter.

Sincerely,

Jonathan E. Swift
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 922-4840

Control No.: 40842