Does Texas use tax apply to equipment brought in from out of state, and what is the one-year exception?

Plain-English summary

A taxpayer planned to contribute equipment that had been located out of state to a Texas subsidiary, which would in turn contribute it to a Texas joint venture (50% owned by the subsidiary). The equipment was of two kinds: previously used equipment on which tax had been paid to another state, and rental equipment on which tax had been collected on the rental receipts but not paid at the time of purchase. The taxpayer asked how Texas would tax bringing this equipment into the state.

The Comptroller held that equipment brought into Texas is subject to Texas use tax on its purchase price. For the non-rental equipment, Texas allows a credit for the amount of sales or use tax legally due and paid to the other state. For the rental equipment, use tax is still due, and it cannot be reduced by the tax the owner had collected on the rental receipts.

The important exception is the one-year provision in Rule 3.346(c)(5): if the equipment was purchased for use outside Texas and was actually used outside Texas for more than one year before it entered Texas, it is not presumed to be for Texas use, and no Texas tax is due. This applies to both the rental and non-rental equipment. Finally, moving the equipment from the taxpayer to the subsidiary and then to the joint venture creates no sales tax liability as long as no consideration is received for it.

What this means for you

Businesses moving equipment into Texas

Bringing owned equipment into Texas generally triggers use tax on the purchase price. If you already paid sales or use tax on it to another state, you can credit that against the Texas tax — but only tax that was legally due and actually paid.

Rental-fleet owners

If you bought equipment tax-free and collected tax only on the rental stream, bringing that equipment into Texas still owes use tax on the purchase price, and the rental tax you collected does not offset it.

The one-year safe harbor

Equipment bought for out-of-state use and genuinely used outside Texas for more than a year before entering Texas escapes Texas use tax entirely — the presumption that it was bought for Texas use does not apply. Keep records showing where and how long the equipment was used.

Contributions with no consideration

Transferring equipment into a subsidiary and then into a joint venture is not a taxable sale as long as nothing of value is received in exchange.

Common questions

Q: Do I owe Texas use tax on equipment I bring in from another state?
A: Generally yes — use tax is due on the purchase price when the equipment is brought into Texas for use here.

Q: Do I get credit for tax I paid to another state?
A: Yes, for non-rental equipment, Texas credits the sales or use tax that was legally due and paid to the other state against the Texas use tax.

Q: I collected tax on the rental receipts — does that reduce the Texas use tax?
A: No. Use tax on the rental equipment is due on the purchase price and cannot be reduced by tax collected on the rental receipts.

Q: Is there any way to avoid the Texas tax?
A: Yes. Under Rule 3.346(c)(5), if the equipment was bought for use outside Texas and actually used outside Texas for more than one year before entering Texas, no Texas tax is due.

Q: Does contributing the equipment to a subsidiary or joint venture trigger sales tax?
A: No, as long as no consideration is received for the transfer.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

Rule cited: 34 Tex. Admin. Code § 3.346(c)(5) — the one-year provision: equipment purchased for out-of-state use and actually used outside Texas for more than one year before entry is not presumed to be for use in Texas.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8809L0904F08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller September 22, 1988

Dear **:

Thank you for your letter concerning a company's sales tax
liability on equipment brought into Texas from out of state.

You stated that the taxpayer will contribute equipment which has
been located out of state to a Texas subsidiary which will in turn
contribute it to a Texas joint venture which will be 50% owned by
the Texas subsidiary. The equipment is basically two types.
First, equipment which has been previously used by the taxpayer
and on which tax has been paid to another state. The second type
of equipment is rental equipment on which tax has been collected
on the rental receipts and reported, but tax was not paid at the
time of purchase. In addition to taxability of the equipment, you
asked whether this would constitute a contribution to capital
since no stock is being issued to the taxpayer in exchange for the
equipment which is being contributed by it through its subsidiary
and then by its subsidiary to the joint venture.

The equipment brought into Texas is subject to the Texas use tax.
The tax is due based on the purchase price. However, credit will
be allowed against the Texas use tax due up to the amount of sales
or use tax that was legally due and paid on the non-rental equip-
ment to the other state. Use tax is due on the rental equipment
and the tax due cannot be reduced by the amount of tax collected
on the rental receipts.

If the equipment was purchased for use outside Texas and was used
outside Texas for more than one year before the date of entry into
Texas, the equipment will not be presumed to have been for use in
Texas and the Texas tax would not be due. This applies to both
the rental and non-rental equipment. Please refer to Rule
3.346(c)(5).

As long as consideration is not received for the equipment
contributed to the subsidiary and then to the joint venture, the
transfer(s) will not result in any sales tax liability.

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 additional information, you may
call me at 463-4666 or write me at Tax Correspondence Division.

Sincerely,
Jo Ann Dieck
Tax Correspondence Division