Did equipment added to a pre-October 2, 1984 Texas master lease preserve the occasional-sale exemption?

Plain-English summary

The Texas Comptroller treated a master equipment lease signed on November 14, 1980 as a single transaction that qualified for the occasional-sale exemption under Tax Code § 151.304(b)(1), provided the lessor had paid Texas tax when buying the equipment.

Retiring or adding individual equipment under the existing agreement did not create a renewal or extension. Even more than two additions in a 12-month period did not, by itself, destroy the exemption.

But the letter also applied an important October 2, 1984 cutoff. Leases and rentals no longer qualified for the occasional-sale exemption after that date. If later equipment additions increased the lease price above its pre-October 2 amount, sales tax was due on the increase.

What this means for you

Equipment lessors and related companies

For this historical agreement, the original contract date and prior payment of Texas tax were essential. The ruling did not treat every later equipment schedule as a separate lease.

Accountants and tax professionals

The holding is tied to a superseded historical transition rule. Preserve it as an explanation of this 1985 letter, not as a statement that new leases qualify today.

Businesses reviewing legacy contracts

A grandfathered contract could still produce taxable amounts when post-cutoff additions increased the contract price.

Common questions

Q: Did adding more than two pieces of equipment in a year end the exemption?
A: No. The Comptroller viewed the master lease as one transaction, despite multiple additions.

Q: What condition applied to the original equipment?
A: The lessor had to have paid Texas tax on the equipment's purchase price.

Q: Were all later additions exempt?
A: No. Additions made on or after October 2, 1984 were taxable to the extent they raised the lease price above the pre-cutoff amount.

Q: Does this mean a new lease can claim the occasional-sale exemption?
A: No. The letter expressly says leases and rentals stopped qualifying as of October 2, 1984.

Citations and references

• Tex. Tax Code § 151.304(b)(1) (occasional-sale exemption, as applied in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8501L0634D12

Original ruling text

January 24, 1985

Dear ***:

Thank you for your letter requesting a ruling on the taxability of your
client's leases under a "master lease agreement." You provided the
following information concerning your client's ("the Lessor") situation.

The Lessor is an individual primarily engaged in the business of
operations management for his corporation which is also the Lessee
in the hereinafter described lease transaction. The Lessee is
engaged in manufacturing and distributing durable goods. On
November 14, 1980 the Lessor and Lessee entered into the Master
Lease Agreement providing for the lease of equipment used in the
Lessee's trade or business. The Master Lease Agreement is but one
agreement; however, several taxable items are leased under the
provisions of the agreement. Retirements and additions of equipment
are allowed by way of exhibits attached to and made a part of the
Master Lease. The terms applicable to the additions are outlined in
the exhibit. As the Lessee's business expands, more than two
additions may occur in a twelve (12) month period. The Lessor is
not a party to other lease agreements and does not hold out as
engaging in the business of leasing taxable items.

Because the master lease agreement was entered into prior to October 2,
1984, the lease agreement qualifies for the occasional sale exemption
under Sec 151.304(b)(1) if your client paid Texas tax on the purchase
price of the equipment. The lease agreement represents a single
transaction regardless of how many individual pieces of equipment are
included in the lease. The retirements and additions of equipment do not
constitute a renewal or extension of the lease; the original master lease
agreement remains in effect. The addition of more than two pieces of
equipment in a twelve-month period does not cause the master lease
agreement to lose the occasional sale exemption.

As of October 2, 1984, leases and rentals no longer qualify for the
occasional sale exemption. If any additions are made to the lease on or
after October 2 that increase the lease price above the pre October 2
amount, sales tax is due on the amount by which the price is increased.

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

If we can be of further help, please call us at 1-800-252-5555 toll free
from anywhere in Texas. You may write us at the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division