Could parties make an affixed cogeneration plant taxable personal property merely by stating that characterization in their lease?

Plain-English summary

The Comptroller recognized that parties can sometimes preserve the personal-property identity of items affixed to land. Attorney General Opinion M-298 said an agreement could characterize property as personalty when its true fixture status was doubtful, the agreement was made in good faith, and it was not designed to evade the applicable tax.

That principle did not control here. The cogeneration plant was “obviously an improvement to realty,” so contract language treating it as personal property was not enough to change its classification.

The resulting lease was a lease of real property and was not subject to sales tax.

What this means for you

The historical letter made contract intent secondary to the property's objective status. An agreement could help resolve a genuinely doubtful fixture, but it could not convert an obvious real-property improvement into taxable personal property.

Common questions

Could lease language always determine fixture status? No.

When could the parties' agreement matter? When the property's true status was doubtful and the agreement was made in good faith rather than to avoid tax.

How was the cogeneration plant classified? As an improvement to realty.

Was the lease subject to sales tax? No.

Citations and references

• Texas Attorney General Opinion M-298 — quoted for when parties may characterize doubtful fixture property as personalty.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8708L0828G08

Original ruling text

August 26, 1987

Dear **:

Thank you for your letter concerning the treatment of leased assets as real or
personal property. Specifically you asked whether the parties to a lease
agreement may affect the characterization of property as real or personal for
Texas sales tax purposes.

There have been occasions where parties to a contract were able to sustain the
identity of personal property that was affixed to the land, however, the
circumstances were such that it was permissible.

Attorney Generals Opinion M-298 the issue of whether rental payments made for a
pipeline were subject to Texas sales tax.

"'[W]hatever is affixed to the soil belongs to the soil...' In some instances
it is difficult to determine just whether a fixture has become a part of the
realty, or whether it retains its original character as personal; as for
instance, where it is questionable whether annexation is a permanent character
or not. In such cases where the true status of the property is doubtful, it
would perhaps be permissible for the parties by agreement to impress it with
the character of personalty so long as the agreement was made in good faith,
and not for the purpose of evading or contravening the statutory provision [or
applicable tax]. . ."

As you can see this particular passage states that where the true status of the
property is doubtful, it may be permissible for the parties to the contract to
impress upon the property the character of personalty so long as it is made in
good faith. The cogeneration plant is obviously an improvement to realty,
therefore, the passage impressing the property as personalty is not sufficient
to alter that conclusion.

Therefore, the lease would be considered a lease of real property and not
subject to sales tax.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,

F. Wayne McDonald
Tax Policy Division