How did Texas tax financing leases of removable energy-management systems, including demonstration units, interest, and installation charges?

Plain-English summary

The Texas Comptroller treated a financing lease of the described energy-management system as a sale.

The systems were installed in commercial buildings, with wiring in wall and ceiling conduit and a wall-mounted control unit sending wireless commands to air-conditioning, heating, and lighting. Demonstration systems were removable if a prospect did not buy or later defaulted.

Under the new statute effective October 2, tax was due when the lessee took possession or the first payment became due, whichever came first. For a demonstration installation, tax was collected when the lease agreement was signed.

The entire lease amount was taxable unless interest and installation charges were separately stated. If both were separately stated, the letter said only the material was taxable.

For future lease inventory, the business could give a resale certificate and buy the equipment tax-free. It could recoup tax already paid on lease equipment as the equipment was leased by taking a deduction on its sales-tax return.

What this means for you

Energy-system lessors

The historical timing rule used possession or first payment, with a special signing-date instruction for demonstration systems.

Businesses drafting leases

Separately stating interest and installation changed the taxable amount under the letter.

Accountants and tax professionals

Track resale-certificate purchases and deductions for previously taxed lease inventory. Verify current financing-lease, installation, interest, and demonstration-use rules.

Common questions

Q: Was the financing lease treated as a sale?
A: Yes.

Q: When was tax due?
A: At possession or the first payment due date, whichever came first.

Q: When was a demonstration system taxed?
A: When the lease agreement was signed.

Q: Was the full lease amount taxable?
A: Yes, unless interest and installation charges were separately stated.

Q: Could future lease equipment be bought with a resale certificate?
A: Yes.

Citations and references

• The letter refers to a new statute effective October 2 but does not identify it by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8410L0634C13

Original ruling text

October 1, 1984

Dear ***:

Thank you for your recent letter regarding the sale by way of a financing
lease of energy management systems. In your letter you state:

We sell and install energy management systems. In the past, we have used leasing
companies when the owner needed to spread out the investment. We are considering
leasing the equipment ourselves. We need to know how state sales tax is applied to
a lease.

We pay sales tax on the equipment and materials used in our system when we purchase
them. The sales tax cost is then passed on to the owner in the price of the installed
system. If we choose to lease these systems ourselves, do we apply sales tax to the
total cost of the lease? This lease includes the following:

A. Material and equipment on which we have already paid sales tax-
B. Labor-
C. Profit on direct sales-
D. Cost to owner of lease-

TOTAL LEASE AMOUNT $

We would appreciate your response on the matter as we have lease proposals pending.

In our subsequent phone call you gave me the following additional information:

1) The systems are installed in commercial buildings and are usually priced
above $***.
2) The wiring to install the unit is run through conduit in the walls and ceiling.
The wiring is not a major part of the lease price.
3) The control unit itself hangs on the wall and is the only item that is actually
electrically wired. It issues its commands to the air conditioning, heating and
lighting by wireless remote control.

4) You will install a complete system in a potential customers building to demonstrate
its energy saving potential. If the prospect does not buy the system, or if he buys
and later defaults, you will remove the system from his building.

As we discussed, a financing lease is treated as a sale. Under the new statute,
effective October 2, the tax will be due at the time the lessee takes possession of
the property or when the first payment is due, whichever is earlier. On demonstration
installations, tax should be collected when the lease agreement is signed.

The entire amount of the lease will be taxable unless you separately state interest and
installation charges. If these are separately stated only the material will be taxable.

For future reference, you may issue a resale certificate and purchase your inventory of
lease equipment tax free. You may recoup the tax you have already paid on lease equipment
as you lease it by taking a deduction on your sales tax return.

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

Please feel free to contact us if you have additional questions. You may write us, call
toll free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Tax Administration Division