A contractor doing improvement-to-realty work for a tax-exempt entity (an airport) rents equipment for the job — is that equipment rental taxable, even though the airport's own purchases would be exempt?

Plain-English summary

Someone asked about the taxability of equipment a contractor rents for use on an improvement-to-realty contract with an airport (a tax-exempt governmental entity). The Comptroller's answer turns entirely on title transfer, not on the airport's exempt status:

Rented/leased equipment is taxable. Equipment rented or leased by the contractor for use performing the contract is taxable — the reimbursable-cost component of a government contract doesn't extend to equipment rentals by the contractor. Sales tax is a transaction tax on the sale, lease, or rental of a taxable item, and a taxable "sale" happens when title or possession transfers for consideration. Because a lessor never transfers title to the contractor (only possession), the taxable moment is when possession of the rented equipment passes to the contractor — and the contractor is legally barred from issuing a resale certificate to the lessor, since the contractor already knows it will use (not resell) that equipment in performing the contract.

Purchased equipment CAN be handled tax-free — but only if the contract transfers title to the airport. A contract provision specifying that title to equipment the contractor purchases passes to the airport lets the contractor issue a resale certificate for that equipment (buying it tax-free, then reselling it to the airport by title transfer). This mechanism works precisely because the contractor can pass title along — something that's structurally impossible with rented/leased equipment, since the contractor never held title to begin with.

The workaround for equipment the contractor needs to rent: the airport itself can lease the equipment tax-free by issuing an exemption certificate directly to the lessor, then furnish that equipment to the contractor for use on the job — routing the transaction through the airport's own exempt status instead of trying to pass the exemption through the contractor.

What this means for you

Contractors working improvement-to-realty jobs for tax-exempt government entities

Don't assume your equipment rentals are exempt just because your government client is tax-exempt — equipment you rent or lease for the job is taxable to you, full stop, because you never hold title to pass along. If your contract gives title to purchased equipment to the exempt entity, you can use a resale certificate on that purchased equipment — but that mechanism doesn't reach equipment you merely rent.

Government agencies contracting for realty improvements

If you want equipment used on your project to be tax-free, consider leasing the equipment directly yourself (issuing your own exemption certificate to the lessor) and furnishing it to your contractor, rather than relying on the contractor's rental arrangement to somehow inherit your exempt status.

Accountants and tax professionals

A clean illustration that the sale-for-resale/exemption-certificate mechanism for government contracts depends specifically on whether title passes — purchased-and-retitled equipment can flow through a resale certificate, but rented/leased equipment structurally cannot, regardless of the ultimate user's tax-exempt status.

Common questions

Q: Is equipment a contractor rents for a government improvement-to-realty job taxable?
A: Yes — the government client's exempt status doesn't extend to the contractor's own equipment rentals, because the contractor never holds title to pass along.

Q: What if the contract gives the government entity title to equipment the contractor purchases?
A: Then the contractor can issue a resale certificate and buy that equipment tax-free, reselling it to the government entity via the title transfer.

Q: How can equipment used on the job be made tax-free if the contractor needs to rent it?
A: The government entity can lease the equipment directly itself, using its own exemption certificate with the lessor, and then furnish that equipment to the contractor for use.

Q: Can I rely on this letter for my own government contract?
A: No. This opinion is based on the facts presented; additional or different facts could change the answer.

Citations and references

Statutes:

• Tex. Tax Code § 151.005(1) (definition of sale)
• Tex. Tax Code § 151.051(a) (imposition of sales tax)
• Tex. Tax Code § 151.006(2) (resale certificate not available for property incidental to a real property lease)
• Tex. Tax Code § 151.151 (exemption certificates)
• Tex. Tax Code § 151.154 (resale certificates)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200003147L

Original ruling text

March 29, 2000

Subject: Sales Tax Help

Dear **:

Thank you for your recent email concerning the taxability of equipment rented
by a contractor for use in the performance of a contract with the airport.

Equipment rented or leased by the contractor for use in the performance of the
contract is taxable. The reimbursable cost component of the contract does not
apply to equipment rentals by the contractor. A contract provision that
specifies that title to equipment purchased by the contractor passes to the
airport allows the contractor to issue a resale certificate. That equipment can
be purchased for resale to the airport. When a contractor rents equipment for
use in the performance of the contract, the contract language does not apply
because the contractor cannot transfer title to the equipment to the airport.

The sales tax is a transaction tax that is imposed on the sale, lease or rental
of a taxable item. A sale occurs when title to or possession of a taxable item
transfers for consideration. The contract can specify when title passes.
Because the lessor never transfers title to the contractor, the taxable moment
occurs when possession of the equipment is transferred to the contractor. The
sales tax law also prohibits the contractor from issuing a resale certificate
to the lessor because the contractor knows he will use the equipment in the
performance of the contract.

The airport may lease the equipment tax-free by issuing an exemption
certificate to the lessor and furnish it to the contractor for use.

See Texas Tax Code Sections 151.005(1), 151.051(a), 151.006(2), 151.151, and
151.154.

You may view or down load the sales tax law at and
then click on the following:

1. State Government
2. Texas Statutes
3. Tax Code
4. Chapter 151
5. Scroll down to the referenced statutory section

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may write to Tax Policy Division, Comptroller of Public Accounts,
P.O. Box 13528, Austin, Texas 78711-3825. My e-mail address is
.

Sincerely,

Eddie C. Washington
Tax Policy Division