Was the total charge for installing leased electrical capacitors on existing commercial systems subject to Texas sales tax?

Plain-English summary

The total charge for selling and installing the electrical capacitors was taxable. Although the requester described itself as a lump-sum contractor, the Comptroller looked at the attached lease and a later phone conversation and concluded that the transaction was a sale and installation of tangible personal property.

The lease expressly required the equipment to remain personal property and to be removable without damaging the realty. The letter also classified the agreement as a financing lease, which it treated as a sale with tax due at the time of sale. It allowed credit for tax already paid to suppliers and said resale certificates could be issued for items bought for resale.

What this means for you

In this historical letter, the contract language controlling whether installed equipment remained personal property mattered more than the requester's contractor label. A financing lease accelerated the tax to the time of sale.

Common questions

Was installation labor taxable? Yes. The letter said charges to install tangible personal property became taxable October 1, 1987.

Why were the capacitors treated as personal property? The lease required them to remain personal property and be installed so they could be removed without damaging the realty.

Could the business recover tax already paid to suppliers? The letter allowed a credit against tax owed and permitted resale certificates for items to be resold.

Citations and references

• 34 Tex. Admin. Code Rule 3.338 (attached and cited for credits and resale treatment)
• 34 Tex. Admin. Code Rule 3.294 (attached and cited for financing leases)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8710L0840C13

Original ruling text

October 22, 1987

Dear *****:

Thank you for your letter inquiring about the taxability of finance
charges associated with the sale and installation of tangible personal
property.

You indicated in your letter that you operated as a lump-sum contractor
and therefore, paid tax on all purchases at the time of purchase.

However, based on subsequent phone conversation and examination of the
lease agreement attached with your letter it was noted that the operation
you described was a sale and installation of tangible personal property.

You install electrical capacitors to electrical and heating systems
thereby causing the system to operate more efficiently and result in cost
savings. The systems are added to existing commercial realty.

The total charge for the sale and installation of the electrical
capacitors is subject to the sales tax. Charges to install tangible
personal property became taxable effective October 1, 1987. You may take
credit for tax paid to suppliers against tax owed. Rule 3.338 is attached.
You may issue resale certificates for items that are going to be resold.

This determination is also based on the terms of your equipment lease
agreement which states that, "the equipment shall at all times remain
personal property and lessee shall take all such actions as shall be
necessary to prevent the equipment from becoming part of the real
property on which it is placed, including the installation and maintenance
of each item of equipment so that it may be removed without damage to such
real property".

Additionally, since this is a financing lease it is treated as a sale and
the tax is due at the time of sale. Rule 3.294 is attached.

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,

Eddie C. Washington
Tax Policy Division