Can a contractor rent equipment tax-free to improve real property on a federal construction project like the Superconducting Super Collider?

Plain-English summary

A subcontractor working on the federally funded Superconducting Super Collider construction project (January through June 1991) asked the Comptroller's office whether a rented scissor lift was taxable. The Comptroller answered no exemption applies: contractors cannot rent equipment tax-free for use improving real property on federal government jobs. That has been true since October 2, 1984, when the Texas Legislature repealed the sales tax exemption that had previously covered equipment purchased or rented by contractors for use on federal contracts.

The letter also addresses how to treat itemized charges on an equipment rental invoice. When a lessor separately itemizes charges for the equipment, gasoline, delivery/pickup, and repairs, the charges for the equipment itself, for delivery and pickup, and for repairs are all taxable. A separately stated charge for gasoline, however, is not subject to tax — but only because no operator was provided with the equipment.

What this means for you

Contractors on federal construction jobs

Don't assume federal-government work carries a Texas sales/use tax exemption for equipment you rent to do the job. Since October 2, 1984, there is no such exemption for equipment purchased or rented by a contractor to improve real property under a federal contract — the rental (and the associated itemized service charges) is taxable just as it would be on a private job.

Equipment lessors invoicing contractors

If you rent equipment to a contractor and itemize the invoice, tax applies to the base equipment charge, delivery/pickup charges, and repair charges. A separately stated fuel/gasoline charge escapes tax only when the equipment is rented "bare" (no operator supplied) — bundle in an operator and that treatment could change.

Accountants and tax professionals

This letter predates STAR's more recent citation practices and does not cite a specific Tax Code section by number, but the substantive rule is clear: the pre-1984 federal-contract equipment exemption is gone, and standard sales tax sourcing rules for itemized rental charges (equipment, delivery, repairs taxable; separately stated gasoline for unoperated equipment not taxable) apply.

Common questions

Q: Is equipment rented for a federal government construction job exempt from Texas sales tax?
A: No. Effective October 2, 1984, the Texas Legislature repealed the exemption that had covered equipment purchased or rented by contractors for use on federal contracts. Rentals for improving federal real property are taxable, including for this project's January–June 1991 period.

Q: If my equipment rental invoice breaks out separate charges, which ones are taxed?
A: The charge for the equipment itself is taxable. Delivery and pickup charges are taxable as services/expenses connected to the rental. Repair charges billed by the lessor are also taxable.

Q: Is a separately stated gasoline charge on an equipment rental taxable?
A: Not if the equipment is rented without an operator, as it was in this case (a bare scissor lift rental). A separately stated gasoline charge is not subject to sales tax under those circumstances.

Q: Can I rely on this letter for my own equipment rental?
A: Only if you're the taxpayer it was issued to. This is a redacted STAR letter based on the facts as presented to the Comptroller's office; different facts could change the outcome, and it may no longer reflect current policy.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301754L

Original ruling text

January 14, 1993

Dear **:

Thank you for your recent letter regarding certain charges incurred while
working on the federally funded new construction superconducting super collider
project for the period of January l991 through June 1991. In relation to this
project, you asked about the taxability of rental equipment, specifically a
scissor lift.

From our telephone conservation, I understand that your company is a
subcontractor using lump-sum contracts.

Response: A contractor may not rent equipment tax free to be used to improve
real property for the federal government. A contractor's rental of equipment
for use on federal jobs was taxable for the time period January - June 1991 and
is taxable today.

Effective October 2, 1984, the Texas Legislature repealed the sales tax
exemption for equipment purchased or rented by contractors for use on federal
contracts.

From our telephone conversation, I understand that the lessor rented the
scissor lift to your company bare, without an operator.

When a lessor of the equipment itemizes charges connected to an equipment
rental such as charges for the equipment, gasoline, delivery and pickup, and
repairs to the equipment, the charge for the equipment is taxable. The charge
for pickup and delivery is taxable as services or expenses connected to the
rental of the equipment. The lessor's charge for repairing the equipment is
also taxable.

A separately stated charge for gasoline is not subject to sales tax if no
operator is provided for the equipment.

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 1-800-531-5441, 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