When a restaurant building is subleased to a franchisee together with a separately billed charge for the restaurant equipment, is sales tax due on the equipment rental charge?

Plain-English summary

A landlord recently subleased a Texas restaurant to a franchisee and, as part of the same deal, also rented the franchisee the restaurant equipment. The landlord believed it would need to collect sales tax on the equipment-rental portion of the charge and asked the Comptroller to confirm.

The Comptroller's answer: no Texas sales tax is due on the breakout amount charged for the equipment. Under Subsection (k)(1) of Rule 3.294 (Rental and Lease of Tangible Personal Property): if a contract for the lease or rental of real property also includes the lease or rental of tangible personal property (such as furniture) as part of the same agreement, no sales tax is due on the amount charged the tenant for that tangible personal property.

The tradeoff: because the tangible personal property rental is treated as part of the tax-free real property lease, the landlord cannot use a resale certificate to buy that equipment tax-free in the first place. Sales or use tax must be paid by the landlord at the time the equipment is originally purchased — the tax is collected once, upstream, rather than passed through on the rental charge to the tenant.

What this means for you

Landlords who lease real property bundled with furniture or equipment

If your lease agreement wraps in equipment or furniture as part of the real property deal, don't charge your tenant sales tax on the equipment portion of the rent. But budget for sales/use tax on your own purchase of that equipment — you can't buy it tax-free with a resale certificate under this treatment.

Restaurant franchisors/franchisees structuring a sublease-plus-equipment deal

The bundled structure changes who bears the tax and when: instead of the tenant paying rental tax on the equipment charge, the landlord pays purchase tax upfront on the equipment itself.

Accountants and tax professionals

A clean, direct application of Rule 3.294(k)(1) — useful whenever a real property lease bundles in tangible personal property as part of one agreement, distinguishing this from a standalone equipment rental (which would be taxable) or from equipment purchased for resale (which would use a resale certificate instead).

Common questions

Q: Is sales tax due on an equipment-rental charge that's bundled into a real property lease?
A: No, under Rule 3.294(k)(1), as long as the tangible personal property lease is part of the same real property lease/rental agreement.

Q: Can the landlord buy the equipment tax-free with a resale certificate?
A: No. Because the rental charge itself isn't taxed, the landlord must pay sales or use tax when originally purchasing the equipment.

Q: Does this apply to any tangible personal property, or just restaurant equipment?
A: The rule's own example is furniture, and this letter applies it to restaurant equipment — the key requirement is that the TPP lease be part of the same real property lease agreement.

Q: Can I rely on this letter for my own lease?
A: No. This opinion is based on the facts presented, and other similar facts may provide a different result; it can be relied on only by the taxpayer it was issued to.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.294(k)(1) (Rental and Lease of Tangible Personal Property — TPP bundled into a real property lease is not separately taxed on the rental charge, but no resale certificate may be used to purchase that TPP)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200002043L

Original ruling text

February 11, 2000

Dear **:

This is in response to your request for a ruling on the following fact
situation and questions:

You recently sublet your restaurant in Texas to a franchisee, You, however, are
also renting the restaurant equipment to them, and believe that you would be
required to collect sales tax on this rent.

Response: Texas sales is not due on the breakout amount for the equipment.

Subsection (k)(1) of Rule 3.294 - Rental and Lease of Tangible Personal
Property provides that:

If a contract for the lease or rental of real property includes the lease or
rental of tangible personal property (such as furniture) as part of the
agreement, no sales tax is due on the amount charged the tenant for the lease
or rental of the tangible personal property. A resale certificate may not be
issued and sales or use tax must be paid at the time the tangible personal
property is purchased.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division