Were percentage-based usage fees paid to an equipment owner taxable lease or rental payments when the owner retained control and was paid only if the equipment reached a customer?

Plain-English summary

The percentage-based usage fees were not taxable lease or rental payments because the equipment owner retained control and did not grant the leasing company enjoyment of the property for a certain time.

The Department also found no taxable sale because ownership did not transfer, and no taxable enumerated service in the described revenue-sharing arrangement.

How the arrangement worked

The owner supplied equipment at its discretion as it became available and helped with training and technical support. The leasing company developed the market, protected and insured the property, leased it to industrial customers, and collected sales tax from those customers.

The owner received a percentage of customer lease payments only when the leasing company actually collected rent on the owner's property.

Why the Department did not find a lease

The ruling compared the arrangement with Rent-It Company, Inc. of Alexandria v. McNamara. In that case, the court focused on the Civil Code requirement that a lease grant enjoyment of a thing during a certain time.

Here, the owner's continuing control and discretionary placement of the property meant the leasing company did not receive that time-defined enjoyment. The Department therefore treated the payments as revenue sharing rather than rent paid by the leasing company.

Common questions

Q: Did the ruling exempt the leasing company's rentals to industrial customers?

A: No. The facts say the leasing company collected and remitted sales tax on those customer rental payments. The ruling addressed the separate usage fees paid upstream to the equipment owner.

Q: Did the equipment owner's training and technical support make the fee taxable?

A: No, on the described facts. The Department found no taxable enumerated service applicable to the revenue-sharing agreement.

Q: Would every percentage-of-rent arrangement receive the same treatment?

A: No. The holding depended on the owner's retained control, discretionary supply of property, payment only when customers rented it, and lack of enjoyment for a certain time.

Citations and references

• La. R.S. 47:301(7) — lease or rental definition
• La. R.S. 47:302(B), 321(B), and 331(B)
• Louisiana Tourism Promotion District sales-tax ordinance § 2(B)
• Louisiana Civil Code arts. 2669 and 2674
• Rent-It Company, Inc. of Alexandria v. McNamara, 490 So. 2d 750
• LAC 61:III.101 — Private Letter Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 03-002

Original ruling text

Private Letter Ruling No. 03-002
Redacted Version
Sales Tax
Sales Tax Treatment of Revenue Sharing Agreements for Leased Property
February 25, 2003
Facts
A leasing company (hereafter “Lease Company”) leases tangible personal property to industrial
customers in Louisiana. Lease Company and the owner of tangible personal property (hereafter
“Tangible Personal Property Owner”), entered into an agreement whereby Tangible Personal Property
Owner supplies items to Lease Company for rental to Lease Company’s customers. The tangible
personal property is provided at Tangible Personal Property Owner’s discretion as it becomes available.
Tangible Personal Property Owner assists with employee training and technical support. In return, Lease
Company pays a “usage fee” to Tangible Personal Property Owner based on a percentage of the lease
payments that Lease Company receives from its customers. The usage fee is paid only when Lease
Company collects lease payments on property provided by Tangible Personal Property Owner. Lease
Company develops the local rental market, provides security and insurance for the tangible personal
property, and collects and remits sales tax on the rental payments received from its customers.
Issue
Are the “usage fees” Lease Company pays to Tangible Personal Property Owner equivalent to lease or
rental payments for tangible personal property acquired for subsequent lease or rental?
The Law
Louisiana Revised Statutes 47:302(B), 321(B), 331(B), and Section 2(B) of the Louisiana Tourism
Promotion District sales tax ordinance impose sales and use tax upon the lease or rental of tangible
personal property in this state. Revised Statute 47:301(7) defines “lease or rental” as “…the leasing or
renting of tangible personal property and the possession or use thereof by the lessee or renter, for a
consideration, without transfer of the title of such property.” Except for mineral drilling equipment, the
lease or rental of tangible personal property for re-lease or re-rental is not exempt or excluded from sales
and use tax. If the usage fees are considered lease or rental payments, they are subject to tax.
Analysis
This matter was addressed in Rent-It Company, Inc. of Alexandria v. Shirley McNamara, Secretary of
the Department of Revenue and Taxation, State of Louisiana (490 So 2d 750). In that case, Rent-It
Company, Inc. of Alexandria (hereafter Rent-It-Alexandria) provided rental inventory to Rent-It
Company, Inc. of Pineville (hereafter Rent-It-Pineville) in exchange for 30 percent of the rental revenue
Rent-It-Pineville received from its customers. The tangible personal property was placed at the
discretion of Rent-It-Alexandria, which received income only when Rent-It-Pineville rented the
inventory to final consumers. The court looked to Articles 2669 and 2674 of the Louisiana Civil Code to
determine whether the agreement was actually a lease or rental.
Art. 2669. Lease or hire, definition.
Lease or hire is a synallagmatic contract, to which consent alone is sufficient, and by which
one party gives to the other the enjoyment of a thing, or his labor, at a fixed price.
Art. 2674. Lease of things.
To let out a thing is a contract by which one of the parties binds himself to grant to the other
the enjoyment of a thing during a certain time, for a certain stipulated price which the other
binds himself to pay him.

Redacted Private Letter Ruling 03-002
Page 2 of 2

Relying on these articles, the court ruled:
Even though it is very hard to define or to classify the relationship between Rent-ItAlexandria and Rent-It-Pineville; whether it is a partnership, joint venture (which Appellees
allege herein) or an agency relationship, it is very clear that this relationship and these
transactions are not a lease according to our Civil Code articles. The key article here is
Louisiana Civil Code article 2674. According to that article, the lease of a thing grants to the
lessee the enjoyment of an item “during a certain time.” In this particular case, Rent-ItAlexandria did not grant to Rent-It-Pineville the use or enjoyment of any item for a certain
period of time, since Rent-It-Alexandria maintained complete control and could remove any
of the items in the Pineville store.
The contract between Lease Company and Tangible Personal Property Owner parallels the arrangement
in Rent-It Company, Inc of Alexandria. Tangible Personal Property Owner, like Rent-It-Alexandria,
retains control over the property, supplying tangible personal property at its discretion as it becomes
available. In return, Lease Company, like Rent-It-Pineville, shares the rental payments collected from its
customers with Tangible Personal Property Owner as a “usage fee” and no fee is paid unless the
property is rented. Because the facts in Rent-It Company, Inc. of Alexandria are so similar to those
presented here, we must conclude that Lease Company, like Rent-It-Pineville, does not have enjoyment
of the property “during a certain time” and therefore is not leasing or renting the property from Tangible
Personal Property Owner.
The Louisiana sales and use tax statutes also impose tax on the sale of tangible personal property and the
providing of certain enumerated services. From an analysis of the facts, it is obvious that the transaction
in question is not a sale of tangible personal property since there is no transfer of ownership of the
property. A review of the services that are taxable under Louisiana sales and use tax laws does not
reveal any scenario where the revenue sharing agreement between Lease Company and Tangible
Personal Property Owner would be taxable under those statutes either.
Conclusion
Revised Statutes 47:302(B), 321(B), 331(B), and Section 2(B) of the Louisiana Tourism Promotion
District sales tax ordinance impose sales or use tax upon the payments paid or received for the lease or
rental of tangible personal property. However, the arrangement between Lease Company and Tangible
Personal Property Owner does not meet the definition of a lease or rental of tangible personal property
and is not subject to tax under these statutes. Furthermore, the transaction discussed is not subject to tax
under any other provision of sales tax law.
Questions or comments about this matter can be directed to the department’s Taxpayer Services
Division at (225) 219-7356.
Cynthia Bridges
Secretary
By: J. A. Cline, Jr., CPA
Tax Research Analyst
Policy Services Division

This correspondence constitutes a private letter ruling (PLR) by the Louisiana Department of Revenue, as provided for by
section 61:III.101 of the Louisiana Administrative Code. A PLR provides guidance to a specific taxpayer at the taxpayer's
request. It is a written statement that applies principles of law to a specific set of facts or a particular tax situation. A PLR
does not have the force and effect of law, and is not binding on the person who requested it or on any other taxpayer.
This PLR is binding on the department only as to the taxpayer to whom it is addressed, and only if the facts presented
were truthful and complete and the transaction was carried out as proposed. It continues as authority for the
department’s position unless a subsequent declaratory ruling, rule, court case, or statute supersedes it.