How is sales tax applied when a company rents equipment from its own subsidiary — for re-rental, for its own use, plus fuel and maintenance?

Plain-English summary

Lake Steel, Inc. rents construction cranes and related equipment to customers, and also does its own contracting. It owns no equipment itself — it rents everything from its wholly owned subsidiary, Rental. When re-renting to customers, Lake Steel pays Rental 75% of the customer's rent; when using equipment for its own contracting jobs, it pays no rent, its only consideration being an agreement to maintain and repair the equipment (beyond ordinary upkeep). Lake Steel provides all fuel and maintenance for Rental's equipment. It asked how sales tax applies to its payments to Rental and to its fuel and maintenance costs.

The Department gave a use-by-use answer.

• Equipment rented to re-rent = purchase for resale (not taxable). Where Lake Steel rents equipment from Rental solely to re-rent it to customers, that's a purchase "for resale as such" (§§ 1105(a), 1101(b)(4)). Lake Steel owes no tax and should give Rental a Resale Certificate (Form ST-120) (§ 1132(c)).
• Fuel for customer rentals = resale, but only until Sept. 1, 1982. Gasoline bought to power equipment rented to customers was purchased for resale and not taxable — but as of September 1, 1982, the resale exclusion no longer applies to gasoline (Ch. 454, Laws of 1982; TSB-M-82(28)S).
• Equipment taken for Lake Steel's own use = taxable barter. Using equipment in exchange for a maintenance obligation is a barter sale; tax is due from each party by the value given (20 NYCRR 526.7(d)). Under the related-corporation rule, the transfer is taxable at the consideration paid, or at fair market value if the consideration doesn't reflect true value (20 NYCRR 526.6(d)(8)(i)). So tax is due on each own-use, based on the fair market value of the rental.
• Extraordinary repair services to Rental aren't taxed. Section § 1105(c)(3) taxes repairing property not held for sale — but Rental holds the cranes for rental in the regular course of business, so Lake Steel's extraordinary repair services (its barter consideration) to Rental aren't taxable, and services Lake Steel buys to meet that obligation are purchased "for resale."
• Parts transferred with the service aren't taxed; ordinary upkeep is. Parts Lake Steel buys to fulfill its extraordinary-maintenance obligation and actually transfers to Rental with the service are excluded from tax (§ 1101(b)(4)(i)(B)). But purchases of services and parts for ordinary repair and maintenance are taxable under § 1105(c)(3).

What this means for you

Renting through a related company doesn't erase sales tax — each use is analyzed on its own. Equipment moved between a parent and subsidiary can be resale-exempt when it's re-rented to real customers, but self-use in exchange for services is a taxable barter, and the related-corporation rule can force valuation at fair market value.

"For resale" needs a resale certificate. When you rent equipment purely to re-rent it, give the owner a resale certificate. That documents the resale position for the equipment and for services/parts that ride along with a taxable service.

Watch the ordinary-vs-extraordinary maintenance split, and the gasoline change. Ordinary upkeep purchases are taxable; extraordinary repairs bartered for use of equipment held-for-rental are treated differently. And note the fuel exclusion ended for gasoline on September 1, 1982.

Common questions

Q: My company rents equipment from our subsidiary and re-rents it to customers. Is that taxable?
A: No, when the equipment is used solely to re-rent to customers it's a purchase for resale — give the subsidiary a resale certificate. Tax is collected on the customer rentals instead.

Q: We use some of that equipment for our own jobs, "paying" only by maintaining it. Any tax?
A: Yes. That's a taxable barter between related corporations, valued at the consideration paid or, if inadequate, at the equipment's fair-market rental value.

Q: Are our maintenance and parts costs taxable?
A: Extraordinary repair services to equipment the owner holds for rental, and parts transferred with those services, aren't taxed here. But purchases for ordinary day-to-day repair and maintenance are taxable under § 1105(c)(3).

Citations and references

Statutes:

• Tax Law § 1105(a) — tax on retail sales, including rentals, of tangible personal property
• Tax Law § 1101(b)(4) — definition of "retail sale"; resale and service-use exclusions
• Tax Law § 1101(b)(4)(i)(B) — property used in a taxable service and transferred to the customer
• Tax Law § 1105(c)(3) — tax on repairing/servicing tangible personal property not held for sale
• Tax Law § 1132(c) — resale certificate

Regulations:

• 20 NYCRR 526.7(d) — barter transactions taxed by value given
• 20 NYCRR 526.6(d)(8)(i) — sales between related corporations taxed at consideration or fair market value

Other guidance referenced:

• TSB-M-82(28)S — end of the resale exclusion for gasoline (Ch. 454, Laws of 1982), effective Sept. 1, 1982

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a83_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(47)S
Sales Tax
November 29, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S820201A

On February 1, 1982 a Petition for Advisory Opinion was received from Lake Steel, Inc.,
3370 Broadway, DePew, New York 14043.
The issues raised are: (1) whether Petitioner's payments to its subsidiary, for equipment
which Petitioner rents to its own customers, are subject to State and local sales tax, and (2) whether
Petitioner's gasoline and maintenance expenses which are allocable to its rental of equipment to
customers are subject to State and local sales tax.
Petitioner is an operating company which rents construction cranes and related equipment,
with or without operators, to various customers in western New York State. Where operators are
supplied they are placed under customer control as to hours and activities. Petitioner also acts as a
contractor and uses cranes and related equipment in performing jobs for customers. Petitioner does
not own any cranes or equipment. Instead, Petitioner rents the cranes and equipment from its wholly
owned subsidiary, Lake Steel Equipment Rental, Inc. (Rental). Rental rents its cranes and equipment
solely to Petitioner.
Where Rental leases its equipment to Petitioner for re-rental, Petitioner pays Rental a fee
equal to 75% of the rent paid by Petitioner's customer. Equipment rented by Petitioner under such
circumstances is used exclusively for rental to customers. To perform its own contracting work,
Petitioner obtains equipment from Rental without paying rent. Petitioner states, in this regard, that
in those instances where equipment is furnished to Petitioner by Rental for use by Petitioner in
contracting jobs, the "only consideration paid by [Petitioner] for the use of rental equipment is an
oral agreement to maintain the equipment and follow the same provisions as are in a Lake-customer
rental agreement . . . " Petitioner provides gasoline and maintenance service for all the equipment
owned by Rental. Indeed, Petitioner is responsible for providing all necessary maintenance and repair
to the equipment during the life of such equipment. This involves not only ordinary day-to-day
maintenance, but all extraordinary repairs and part replacements which became necessary. The
elements of such repair and maintenance are not specifically attributable either to self-use or rental
to customers by Petitioner. In almost all cases Petitioner's employees perform the maintenance work.
Section 1105(a) of the Tax Law imposes a sales tax on the receipts from the retail sale of
tangible personal property. The term retail sale (which includes rentals) is defined, in relevant part,
as follows:
(4) Retail sales. (i) A sale of tangible personal property to any person
for any purpose, other than (A) for resale as such or as a physical
component part of tangible personal property, or (B) for use by that
person in performing the services to tax under paragraphs (1), (2), (3)
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-83(47)S
Sales Tax
November 29, 1983
and (5) of subdivision (c) of section eleven hundred five where the
property so sold becomes a physical component part of the property
upon which the services are performed or where the property so sold
is later actually transferred to the purchaser of the service in
conjunction with the performance of the service subject to tax. Tax
Law, 1101(b)(4).
When Petitioner rents equipment from Rental for rental in turn to its customers, the
equipment is used solely by Petitioner for purposes of rental to its customers. For purposes of the
Tax Law, Petitioner has purchased the equipment in these instances for "resale as such". Petitioner,
therefore, is not required to pay state or local sales taxes upon the rental of equipment from Rental
under these circumstances. Petitioner should in such instances present Rental with a properly
completed Resale Certificiate (ST-120), pursuant to section 1132(c) of the Tax Law. Resale
Certificates should be similarly used in those transactions described below as not being subject to
tax because constituting purchases for resale or for use in providing a taxable service.
The gasoline purchased by Petitioner to be used in connection with equipment rented to
Petitioner's customers was similarly purchased exclusively for resale. The amount paid by Petitioner
for this gasoline was thus not subject to State or local sales taxes. However, it is to be noted that as
of September 1, 1982, such resale exclusion became no longer applicable with respect to gasoline,
by virtue of the enactment of Chapter 454 of the Laws of 1982. See Technical Services Bureau
Memorandum TSB-M-82(28)S.
Where Petitioner rents the cranes and related equipment for its own use, such transfer
constitutes a sale. Such sale is in the nature of a barter transaction, the consideration given for the
use of the cranes and equipment being Petitioner's undertaking to provide maintenance and repairs
beyond such ordinary and incidental maintenance and repair which a bailee for hire is ordinarily
required to provide. See 8 C.J.S., Bailments § 24. Petitioner's obligation to provide such
extraordinary repair and maintenance services is hereafter referred to as its "contractual obligation."
(In the usual instance of a rental of a vehicle with a concomitant obligation to provide only ordinary
repair and maintenance, such repair and maintenance would not constitute an element of the
consideration given for the use of the vehicle).
In a barter transaction, sales tax is due from each party, measured by the value of the property
given. 20 NYCRR 526.7(d). However, special rules apply in the case of transactions'between related
corporations, as follows:
The sale of property by one related corporation to another related
corporation is a retail sale, and taxable to the extent of the
consideration paid, or the fair market value, if the consideration paid
is not an adequate indication of the true value of the property
transferred.

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TSB-A-83(47)S
Sales Tax
November 29, 1983
Example 11: On February 1, 1976, Corporation A transfers
to its subsidiary, Corporation B, ten 1975 trucks for a total of
$40,000. The fair market value of the trucks is $100,000. Corporation
A has made a taxable retail sale to Corporation B in the amount of
$100,000. 20 NYCRR 526.6(d) (8) (i).
In the present instance, then, tax would thus be due with respect to each use of the vehicles by
Petitioner for its own purposes, based on the fair market value of the rental, assuming that the fair
market value of the consideration (viz., the services performed pursuant to the "contractual
obligation") being given is smaller than the fair market value of the rental.
Viewing the transaction from the other side, Rental is "purchasing" the service of repair and
maintenance of tangible personal property, with respect to those elements of repair and maintenance
performed pursuant to Petitioner's "contractual obligation". Section 1105(c)(3) cf the Tax Law
imposes a tax on the receipts from the sale of the service, except for resale, of ". . . maintaining,
servicing or repairing tangible personal property . . . not held for sale in the regular course of
business." Since the cranes and equipment are in fact held for sale in the regular course of business
by Rental, the party purchasing the service, the tax imposed under such provision is not applicable
to the sale to Rental by Petitioner of such services constituting consideration. Insofar as Petitioner
has occasion to purchase a service in order to satisfy its "contractual obligation" to maintain, service
and repair the cranes and equipment in question the purchase of such service would be "for resale,"
and thus not subject to tax, and Petitioner's sale of such service to Rental would not be subject to tax
by virtue of the exclusion contained in section 1105(c)(3) of the Tax Law, quoted supra.
Finally, where Petitioner purchases parts and other tangible personal property to be used in
fulfilling its "contractual obligation" to maintain, service and repair Rental's equipment, it is using
such property in the performance of a service subject to tax under section 1105(c)(3) of the Tax Law,
within the meaning of section 1101(b)(4)(1)(B) of the Tax Law, quoted above. Accordingly, no tax
is due on Petitioner's purchases of such parts and other tangible personal property, where the same
is "actually transferred to" Rental in conjunction with the performance of the service, because such
purchases are excluded from the definition of retail sale by section 1101(b)(4)(i)(B) of the Tax Law,
quoted supra.
It is to be noted that, in accordance with the foregoing, Petitioner's purchases of services and
parts with respect to ordinary repairs and maintenance would be subject to tax under Section
1105(c)(3) of the Tax Law.

DATED: November 2, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau