Was a natural-gas compression contract a taxable equipment rental, and how were separate delivery, installation, monitoring, and service charges treated?

Plain-English summary

The natural-gas compressor contract was a taxable lease or rental, not a nontaxable compression service.

The customer selected the location, supplied fuel, protected the unit, and received continuous compression for a monthly fee. The compressor operated autonomously for long periods; the owner's mechanic maintained and adjusted it but did not exercise the direct, continuous control of an equipment operator.

The ruling taxed the monthly compressor charge plus monitoring, cleaning, calibration, adjustment, maintenance, and repair charges. Separately stated delivery and installation charges were not taxable under the authorities discussed.

Why the customer possessed or used the compressor

A lease required possession or use of tangible property for consideration without transfer of title.

For autonomous equipment, possession depended on who detained it at a chosen location. The customer chose the well site and benefited from the compressor. Even if neither party physically possessed it, the customer's beneficial use still made the arrangement a rental under the ruling.

Separate-charge treatment

Delivery

Separately stated delivery was excluded under Patterson Services.

Installation

Separately stated installation was excluded from sales price under the court decision discussed in the ruling.

Monitoring and servicing

Monitoring ensured continued operation of the leased equipment and was part of taxable gross proceeds. Cleaning, calibration, adjustment, routine maintenance, and minor repairs were also taxable even when separately billed.

Prospective application

The ruling replaced Policy and Procedure Memorandum 70.3 and applied to gas-compression transactions on and after the ruling's effective date.

Common questions

Q: Was the monthly compressor fee taxable?

A: Yes, as a lease or rental.

Q: Did the owner's mechanic make it a service?

A: No. Maintenance visits did not amount to direct operation of the autonomous compressor.

Q: Were delivery and installation taxable?

A: Not when separately stated under the authorities applied in the ruling.

Q: Were monitoring and maintenance taxable?

A: Yes, as part of rental gross proceeds.

Citations and references

• La. R.S. 47:301(7)(a), (13)(a), and (18)
• La. R.S. 47:302(B), 47:321(B), and 47:331(B)
• La. Civ. Code arts. 2669, 2673, 2674, and 3421
• LAC 61:I.4303 — rental operating and maintenance costs
• Department of Revenue v. Baton Rouge SMSA Limited Partnership, No. 423,577 (19th Jud. Dist. Ct. June 18, 1998)
• Secretary of Revenue v. Patterson Services, Inc., 382 So. 2d 971 (La. App. 1st Cir. 1980)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 04-009

Original ruling text

Revenue Ruling
No. 04-009
December 2, 2004
Sales and Use Tax
Gas Compression Contracts
This Revenue Ruling discusses the sales tax treatment of contracts involving the furnishing of
gas compression services. This Revenue Ruling supersedes department Policy and Procedure
Memorandum 70.3 (effective date November 18, 1985).
Issue
When the pressure of a natural gas field is less than the pressure of the pipeline system that
transports this product, the gas is delivered into the system by a compressor. Questions arise over
whether compressor units set up in gas fields that operate continuously for weeks or months
without stopping are non-taxable service transactions or the lease or rental of tangible personal
property that is subject to state and local sales taxes. La. Rev. Stat. Ann. § 47:301(7) defines a
lease or rental as a transaction allowing another person to possess or use tangible personal
property for a consideration without transferring title to the property. Conversely, providing a
service where the owner maintains control over the tangible personal property would not be a
lease or rental.
Facts
A natural gas compressor owner (hereafter owner) and a natural gas well owner (hereafter
customer) enter into an agreement for use of a compressor that will deliver natural gas collected
from the customer’s well into a pipeline gathering system. The agreement lists the model of
equipment used and the expected volume and pressure of gas delivered into the pipeline based on
the specifications of the well being served. The length of the contract is for 24 months at which
time it may be extended by mutual agreement or continued on a monthly basis until terminated
by one of the parties. The owner delivers and installs the compressor at a location designated by
the customer and provides a mechanic to maintain and adjust the compressor during the
operating period. The mechanic is also available 24 hours per day in the event of a malfunction
or shut down. An adjustment in the monthly charge is made if the equipment remains down for
an excessive period of time. The customer agrees to protect the owner’s property, provide fuel to
power the unit, and allow access to the equipment by the owner’s employees. The customer or
his employees are not allowed to make adjustments to the compressors except to turn them off in
case of an emergency.
The owner receives a flat monthly fee for use of the compressor. In addition to the monthly fee,
the customer is separately billed for delivery, installation, monitoring, and servicing of the
equipment. Servicing includes cleaning, calibrating, adjusting, routine maintenance, and minor
repairs.

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Questions
The following questions have been asked regarding this issue:
1.

Is the monthly charge for the compressor a taxable lease or rental of tangible personal
property or nontaxable gas compression services?

2.

Are the separate charges for delivering, installing, monitoring, and servicing, the
equipment subject to sales and use tax?

3.

Does this ruling conflict with prior pronouncements by the Department of Revenue and if
so, will this ruling be enforced retroactively or prospectively?

Analysis
According to La. Rev. Stat. Ann. § 47:301(7)(a), “‘Lease or rental’ means 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.” Breaking the statute into its
component parts, four conditions are necessary for a taxable lease or rental to exist. They are:
1.

Possession or use;

2.

of tangible personal property;

3.

for a consideration;

4.

without the transfer of title.

In providing this analysis, it is assumed that the property involved is tangible personal property,
that the customer pays a consideration to the owner of the property, and that title to the property
is not transferred to the lessee or renter. Instead what is at issue is the extent and scope of the
words “possession or use.”
Section 47:301(7)(a) requires that the lessee or renter must have “… possession or use …” of the
owner’s tangible personal property. “Possession” or “use” as defined in § 47:301(7)(a) can be
understood in light of the Civil Code definitions of “lease” and “to let out a thing.” According to
La. Civ. Code Ann. art. 2669, “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.” La. Civ. Code Ann. art. 2673 separates leases into the “letting out of things” and the
“letting out of labor or industry.” Regarding the letting out of things, La. Civ. Code Ann. art.
2674 states, “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.”
Thus, enjoyment of a thing for a certain time helps to clarify “possession” or “use” in
§ 47:301(7)(a). The dictionary definition of these two terms also provides clarification on the
meaning of § 47:301(7)(a).
Possession
Because Louisiana’s sales tax statutes do not define possession, the generally prevailing meaning
of this term should be used.1 Webster’s Unabridged Dictionary 1405 (2d ed. 1983) defines
1

See Cox Cable New Orleans, Inc. v. City of New Orleans, 624 So.2d 890, 894 (La. 1993).

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possession as, “n. 1. a possessing or being possessed; ownership, occupancy, hold, etc.” This
implies that a person may have control over property legally (by ownership) or physically (by
occupancy and hold). Black’s Law Dictionary 1183 (7th ed. 1999) describes “possession” as
follows:
possession, 1. The fact of having or holding property in one’s power; the exercise of
dominion over property. 2. The right under which one may exercise control over
something to the exclusion of all others; the continuing exercise of a claim to the
exclusive use of a material object. 3. (usu. pl.) Something that a person owns or
controls; PROPERTY (2).
Since a lease or rental consists of the possession or use of tangible personal property without the
transfer of title, the exercise of control over property must be viewed in the context of actual or
physical possession rather than legal possession through ownership.
Under La. Civ. Code Ann. art. 3421, “Possession is the detention or enjoyment of a corporeal
thing, movable or immovable, that one holds or exercises by himself or by another who keeps or
exercises it in his name.” This is consistent with La. Civ. Code Ann. art. 2669, which provides
that one party gives to the other the enjoyment of a thing under a lease. A person has enjoyment
of a thing when he controls it either by operating the property or detaining it at a place of his
choosing. Webster’s Unabridged Dictionary 1253 (2d ed. 1983) defines an operator as “n. 1. one
who or that which operates or produces an effect.” Regarding machinery, it defines an operator
as “4. a person who works some machine; as, a telephone operator.” This latter definition
suggests that the property is under the direct control of a person. Running a bulldozer is an
example often used to demonstrate this situation. Bulldozers must be under the continuous and
direct control of an operator who has possession regardless of where the property is at the time of
use. An owner may provide personnel to monitor or supervise the operation of or to maintain the
bulldozer, but the person sitting in the seat has control. If the renter or his agent operates the
equipment, then the transaction is a lease or rental and is subject to tax.
But bulldozers require continuous human input to ensure that the machine performs correctly.
Many items, like paintings, do not require someone to operate them. Paintings simply hang on
walls to be viewed by admirers. As expressed in La. Civ. Code Ann. art. 3421, in these instances
possession of the property belongs to the party that “detains” the item at a location of his
choosing. Renters have possession of paintings because they detain them on their premises or at
locations they designate.
Use
Section 47:301(7)(a) implies that a customer can lease or rent tangible personal property by
obtaining use without possession. However, the sales tax statutes do not offer a definition of use
as it relates to leases and rentals. Under La. Rev. Stat. Ann. § 47:301(18), “use” is “…the
exercise of any right or power over tangible personal property incident to the ownership
thereof…” However, leases and rentals occur without the transfer of title, so “use” under
§ 47:301(7) has a different meaning than “use” under § 47:301(18). Black’s Law Dictionary
1540 (7th ed. 1999) defines “use” as “The application or employment of something…” As with
possession, there are many forms of use, but beneficial use may occur without an exchange of
ownership. “Beneficial use” is “The right to use property and all that makes that property

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desirable or habitable, such as light, air, and access, even if someone else owns the legal title to
the property.” When an owner relinquishes possession of tangible personal property, the
customer is leasing or renting the property even though actual or physical possession of the
property is not transferred to the customer.
Possession or Use of the Compressors
Similar to the painting on the wall, no one really operates a compressor. It functions
autonomously without human direction. A mechanic may start the compressor and occasionally
make adjustments to its operation but he does not truly operate the unit. Unlike a bulldozer that
must function under the direct and immediate control of an operator, a compressor does not. A
compressor runs for weeks or months at a time without any human intervention. Therefore,
possession or use of the compressor is determined by who detains the property at a place of their
choosing instead of who operates it.
Response
Question #1 – Is the monthly charge for the compressor a taxable lease or rental of tangible
personal property or nontaxable gas compression services?
The charge for the compressor is a taxable lease or rental of tangible personal property because
the customer has possession or use of the property for a certain period of time for a certain
stipulated price. Utilizing the definitions and explanations above, one can analyze several
possible scenarios where tangible personal property is used in various fashions and title does not
transfer to the customer. First, the owner retains possession of the property and provides a
nontaxable service, which can occur in two ways. The owner can personally operate the
equipment or detain the property at a place of his choosing. An example of the first case is where
the owner or his employee performs services for the customer by operating a piece of equipment,
such as a bulldozer. Because the owner has direct and immediate control of the property, he
retains possession even when the customer designates where the service will occur. But the
owner also retains possession when he detains the tangible personal property at a location of his
choosing such as gaming devices at a video arcade. The devices are tangible personal property
and customers have use of them for a consideration, but the transaction is not a lease or rental
because the owner has retained possession by detaining the devices at a location of his choosing.
These examples fall into the category of a nontaxable service.
The second scenario is where the customer obtains actual or physical possession of the tangible
personal property. As described above, possession can occur in two ways. First, the customer
secures the tangible personal property for a fee and personally operates the equipment. Using the
bulldozer example, the customer or his agent operates the machine. Since the customer has direct
and immediate control of the equipment, he has possession and is leasing the property even if the
owner provides personnel to maintain or supervise the operation of the equipment. The customer
can also possess tangible personal property by detaining it at a location of his choosing. An
example of this is the lease or rental of a painting. The customer does not operate the painting
but still has possession by detaining it at a location of his choosing.
Although more theoretical than the first two, the third scenario is that neither the owner nor the
customer has actual or physical possession of the tangible personal property. La. Rev. Stat. Ann.
§ 47:301(7)(a) defines a lease or rental as possession or use of tangible personal property by the

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lessee or renter. If neither party has possession, the transaction is a lease or rental whenever the
customer receives a beneficial use from it. As such, the owner of the property must retain
possession by either having direct and immediate control over the property or retaining it at a
place of his choosing to remove the transaction from the classification of a lease or rental.
In this case, the gas compression contract represents a lease or rental because the compressor is
detained at a location chosen by the customer, which indicates that he has possession of the
property. Even though a mechanic regularly visits the compressor to maintain or adjust it, this
does not rise to the level of operating the equipment. But even if the property is not in the
possession of the customer, he has use of it. Thus, if neither party has possession, the transaction
is still considered a lease or rental since the customer has use of the property.
Question #2 – Are the separate charges for delivering, installing, monitoring, and servicing,
the equipment subject to sales and use tax?
Installation—This matter was litigated in the Department of Revenue v. Baton Rouge SMSA
Limited Partnership d/b/a BellSouth Mobility, No. 423,577 (19th Judicial District Court Jun. 18,
1998). The case involved the sales and use tax treatment of separately stated charges for the
installation of cellular telephones into vehicles. The court ruled that separately stated installation
charges are not, as the Department contended, fabrications of tangible personal property but are
services explicitly excluded from the definition of sales price under La. Rev. Stat. Ann. §
301(13)(a). Although this case involved the sale of tangible personal property, the installation of
an item that is rented would also qualify for this treatment.
Delivery—In Secretary of Revenue v. Patterson Services, Inc., dba Patterson Rental Tools, 382
So.2d 971, (La. App. 1 Cir. 1980), the Department sought to tax transportation charges for the
delivery of rental equipment from the lessor to his customers whether made by common carriers
or the lessor’s own vehicles. The court ruled that the transportation charges were not part of the
lease or rental and were not subject to tax. The Department acquiesced with this decision and
there has been no statutory change altering the taxability of this item. Therefore, separately stated
delivery charges are not subject to tax even for rental equipment.
Monitoring—La. Rev. Stat. Ann. §§ 302(B), 321(B), 331(B) and the sales tax ordinance of the
Louisiana Tourism Promotion District levy the sales tax on the “gross proceeds” derived from
the lease or rental of tangible personal property. In keeping with these statutes’ taxation of “gross
proceeds,” La. Admin. Code tit. 61, § I.4303 provides, “Operating expenses and maintenance
costs for keeping leased property in repair cannot be deducted from gross proceeds in arriving at
the taxable base.” When an owner-lessor personally provides or contracts with another party to
provide monitoring service in conjunction with the lease or rental in order to assure operation or
continued suitability of his leased property, the monitoring charge is a component of the taxable
base even when separately billed to the customer. If the owner charges a fee for monitoring
equipment he is leasing to the customer, this charge is part of the lease or rental and is included
in the taxable sale.
Service—The charges for most other services rendered and charged for by lessors in connection
with their leases of compressors and other tangible personal property form part of the “gross
proceeds” from leasing and renting. These taxable charges include, by way of example and not
limitation,

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those for inspection, calibration, cleaning, repairing, and adjusting the leased or rented property.
The charges for these services are part of taxable “gross proceeds” even if separately stated.
Question #3 – Does this ruling conflict with prior pronouncements by the Department of
Revenue and if so, will this ruling be enforced retroactively or prospectively?
The position described in this Revenue Ruling replaces Policy and Procedure Memorandum 70.3
(effective November 18, 1985). Therefore, the position asserted in this Revenue Ruling should
be construed as applying to transactions for the furnishing of gas compression equipment
occurring on and after the effective date of this Revenue Ruling.
Conclusion
The gas compression contract represents a taxable lease or rental under La. Rev. Stat. Ann. §
47:301(7)(a). A lease or rental exists when the owner relinquishes possession of the property and
allows the customer to operate or detain it or allows the property to operate autonomously.
Leases and rentals are taxable on the entire “gross proceeds” paid by lessees or renters, without
any deductions for operating expenses and maintenance costs. The ruling is applicable to
transactions for the furnishing of gas compression equipment occurring on and after the effective
date of this ruling.
For more information regarding this topic, taxpayers should contact the Taxpayer Services
Division at 225.219.7356.
Cynthia Bridges
Secretary
By:

J. A. Cline, Jr., CPA
Revenue Tax Research Analyst
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue
employees. It is issued under LAC 61:III.101.C to apply principles of law to a specific set of facts.
A Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a
statement of the Department's position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.