Does a company owe Texas sales tax when it swaps in identical replacement computer equipment to relocate a customer's data center, then rents back the old equipment during the transition?

Plain-English summary

The Comptroller's Tax Administration Division addressed a company's "T-Swap" program, a way of relocating a customer's data center without "bringing down" the customer's computer system. Under the program, the company ships equipment identical to the customer's existing equipment to the customer's new location. Once that new equipment is installed and running, the customer's old equipment at the original location is returned to the company.

The ruling treats this as a taxable sale of equipment. If title to the old equipment passes to the company when the new (or reconditioned) equipment is sold to the customer, the company may collect tax only on the net price of the new equipment — that is, the sale price after subtracting a trade-in credit for the old equipment. The invoice or contract needs to show the amount allowed as trade-in credit against the price of the new equipment.

The letter also addresses an interim step: while the customer's systems are being transferred to the new location's computer, the company rents the customer's own old equipment back to the customer. Tax must be collected on that rental charge as well.

The Comptroller notes the opinion is based on the facts presented, and that other, similar facts could lead to a different conclusion.

What this means for you

Businesses that swap or trade in equipment during a relocation

If you ship replacement equipment to a customer and take the customer's old equipment as a trade-in once the new equipment is running, you're making a taxable sale. You can reduce the taxable amount by the trade-in credit, but only if the invoice or contract clearly documents that credit against the price of the new equipment.

Businesses that rent equipment back to a customer during a transition

If, as part of a swap arrangement, you temporarily rent equipment back to the customer (for example, so the customer's system keeps running while it's transferred to new hardware), that rental charge is separately taxable and tax must be collected on it.

Common questions

Q: Is shipping identical replacement equipment to a customer's new site a taxable event?
A: Yes — the ruling treats it as a sale of equipment subject to sales tax.

Q: Can the company avoid tax on the full price of the new equipment?
A: Tax is due on the net price after a trade-in credit, but only if title to the old equipment transfers to the company at the time of sale and the trade-in credit is identified on the invoice or contract.

Q: Is the temporary rental of the old equipment back to the customer taxable?
A: Yes. The ruling states the company should collect tax on that rental.

Q: Does this ruling apply to any company doing something similar?
A: Not automatically. The Comptroller states the opinion is based on the facts presented, and other facts — even if similar — may lead to a different conclusion. Letters on STAR generally support a detrimental-reliance claim only for the taxpayer who received the letter.

Citations and references

No statutes or rules are cited in 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/9302L1231C14

Original ruling text

February 8, 1993

Dear **:

Thank you for your letter concerning the sales tax consequences of your
"T-Swap" program-a method of relocating data centers without "bringing
down" the customer's computer system.

You explained that under the program ** ships to the
customer's new location equipment that is identical to the customer's
old equipment. Once the equipment at the new location is installed and
running, the equipment at the customer's old location is returned to
**.

This transaction is a sale of equipment and subject to sales tax. If
title to the old equipment is transferred to ** when the
new equipment (or reconditioned equipment) is sold to the customer,
then ** may collect tax on the net price of that new
equipment. The invoice or contract should identify the amount allowed
as trade-in credit against the price of the new equipment.

I understand that ** will rent the old equipment back to
the customer while the customer's systems are transferred to the
computer at the new location. ** should collect tax on
this rental.

This opinion is based on the facts presented other facts, although
similar, may result in a different conclusion.

If you have any questions or need more information, please call. My
number is 512/463-4614. Or you may write to the Tax Administration
Division.

Sincerely,

Adina Whittemore
Tax Administration Division