Does a company owe sales tax on a computer lease it shares with two other companies through time sharing?

Subject

Computer Time — Sharing

Plain-English summary

A company was buying a new computer system through a five-year true lease (a lease that doesn't transfer ownership). The computer was going to be used by that company and two other companies. The plan was for the lease to be billed entirely to the first company, which would then be reimbursed by the other two for their share of the total bill.

The company asked the Comptroller whether it would pay full tax on the lease and simply be reimbursed, or whether the reimbursement arrangement would create a second taxable transaction because the computer wasn't being leased solely for resale.

The Comptroller's response distinguished two scenarios:

• If the company is leasing the computer for its own use and also "time sharing" it with the two other entities, sales tax is due on the lease of the equipment, and sales tax must also be collected on the charges to the other two companies for their time sharing. The letter states that time sharing is a taxable data processing service.
• If, instead, all three companies are joint lessees of the computer system — meaning the lease contract itself shows all three as lessees — and the company paid tax on the full lease price to the lessor, then it can receive reimbursement from the other two lessees for their share of the lease price and their share of the tax paid, without that reimbursement being a separate taxable event.

The Comptroller noted the opinion was based on the facts presented and could change if the facts were different.

What this means for you

Businesses sharing computer equipment with related or affiliated companies

How the lease is structured matters. If your company leases equipment for its own use and then separately bills other companies for using it ("time sharing"), you owe tax on the lease itself, and you must also collect tax from those other companies because time sharing is treated as a taxable data processing service. That means tax could effectively apply twice — once on the lease and again on the time-sharing charges.

Companies structuring a lease as joint lessees

If you want to avoid that double layer of tax, this letter indicates that having all parties named as joint lessees directly on the lease contract makes a difference. In that structure, one lessee can pay the full tax to the lessor and then be reimbursed by the other joint lessees for their share of both the lease price and the tax, without a new taxable transaction being triggered.

Accountants and tax professionals

The key distinction in this ruling is the paperwork: whether the using companies are joint lessees under the lease contract itself, versus one company leasing the equipment and separately charging others for "time sharing" access. The letter treats time sharing of computer equipment as a taxable data processing service, which is the basis for taxing the reimbursement charges in the first scenario.

Common questions

Q: If my company leases a computer and lets two other companies use it, splitting the bill, do I owe tax twice?
A: According to this letter, if you're leasing the computer for your own use and additionally time sharing it with the other companies, sales tax applies to the lease itself, and sales tax must also be collected on what you charge the other companies for the time sharing, because time sharing is a taxable data processing service.

Q: Is there a way to split a lease among multiple companies without extra tax on the reimbursements?
A: This letter says that if all three companies are joint lessees as shown on the lease contract, and the paying company paid tax on the full lease price, it can be reimbursed by the other lessees for their share of the price and the tax without triggering another taxable transaction.

Q: Does it matter how the lease contract is written?
A: Yes. The ruling turns on whether the lease contract itself evidences that all the companies are joint lessees, as opposed to one company being the sole lessee that separately bills others for time sharing.

Q: Can I rely on this letter for my own situation?
A: This letter was issued to a specific taxpayer based on the facts they described, and the Comptroller noted the opinion could change if the facts are different. Under Texas rules, STAR letters can only be relied upon by the taxpayer to whom they were issued.

Citations and references

No statutes, rules, or other legal authorities are cited in the original text of this 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/9209L1192E04

Original ruling text

September 16, 1992

Dear ****:

Thank you for your recent letter asking about the sales tax consequences of a
shared lease of computer equipment.

Your facts: We are currently in the process of purchasing a new computer system
through a five year lease. The lease is a true lease which does not give
ownership to this company. The computer is being purchased for use by this
company and two other companies. We are proposing to have the lease billed to
this company in total and then receive reimbursement from the other two
companies for their portion of the total bill.

Your question: Does this company pay the full tax for the system and then
receive reimbursement? Or will that trigger another taxable transaction because
the computer will not be leased solely for resale purposes?

Response: It appears you are leasing a computer system for your own use and
also for time sharing with two other entities. If this is correct, sales tax is
due on the lease of the equipment. Sales tax must al so be collected on the
charge to the two other companies for time sharing. Time sharing is a taxable
data processing service.

However, if the three companies are, in fact, joint lessees of the computer
system as evidenced by the lease contract, and your company paid tax on the
full lease price to the lessor, then your company may receive reimbursement
from the other two lessees for their share of the lease price and their share
of the tax paid.

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, you may call me toll free
at 1-800-252-5555, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division