If a company places copy machines at retailer locations and charges a monthly fee based on the number of copies sold, is that a lease of the copier, and can the retailer buy paper and toner tax-free with a resale certificate?

Subject

Copying Machine Placed At A Retailer's Location With A Monthly Fee Based On Copies Sold Is A Taxable Lease, Not A Sale Of Paper And Toner

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9305L1241B11

Plain-English Summary

A company placed copy machines at various Texas business ("retailer") locations under an agreement letting the business and its customers use the equipment, and charged a monthly fee based on the number of copies sold — 5 cents per copy, minus a "profit" amount paid to the location owner and minus copy credits. The company had asked the Comptroller to reconsider a preliminary determination that the Texas businesses hosting the machines (not the copier company) were responsible for collecting and remitting Texas sales tax on the copy sales, on the theory that those businesses were acting as the company's agents.

After a closer look at the agreement, the Comptroller agreed with its own earlier preliminary position: the Texas businesses hosting the machines are responsible for collecting and remitting sales tax on the copy sales, because the arrangement is a lease of the copier to the location owner, not an agency relationship. This conclusion follows the Comptroller's own earlier administrative Hearings 11,113 and 13,246, which held that companies placing copiers at various locations and charging monthly fees based on copies made were leasing the machines.

Because the monthly rental charge already includes the cost of paper and toner, and there is no separate sale of paper or toner to the location owner, the location owner cannot issue a resale certificate to buy paper and toner tax-free — that supply is part of the taxable lease of the equipment, not a separate wholesale purchase for resale. The letter also confirms that the start-up fee charged under the agreement is taxable, but if any part of that fee is refunded to the business, the business is entitled to a pro-rata refund of the sales tax it paid on the refunded portion.

What This Means For You

If you place equipment at another business's location for a per-use fee

Charging a periodic fee tied to usage (here, a per-copy rate netted against a "profit" share and credits) is treated by the Comptroller as a lease/rental of the equipment to the location owner — not a sale of finished copies by you, and not an agency arrangement where the host business collects tax on your behalf while you remain the "seller."

If you are the business hosting the equipment

As the lessee of the equipment under this kind of arrangement, you (the location owner), not the equipment-placement company, are responsible for collecting and remitting Texas sales tax on the copy sales made through the machine.

If supplies (paper, toner) are bundled into a rental fee

Where the monthly rental charge covers consumables like paper and toner and there is no separately stated sale of those supplies, the location owner may not use a resale certificate to buy them tax-free — the entire rental charge, supplies included, is subject to tax as part of the lease.

If your agreement includes a start-up or setup fee

A start-up fee under this type of agreement is taxable when charged. If it is later refunded (in whole or in part), the business is entitled to a pro-rata refund of the sales tax paid on the refunded amount.

Q&A

Q: Is placing a copy machine at a retailer's location and charging a monthly fee based on copies made treated as a lease or a sale of copies?
A: A lease. The Comptroller determined that the company is leasing the copier to the location owner, consistent with earlier administrative Hearings 11,113 and 13,246 involving the same type of arrangement.

Q: Who is responsible for collecting and remitting sales tax on the copy sales — the copier company or the business hosting the machine?
A: The Texas business hosting the machine (the lessee/location owner) is responsible for collecting and remitting the sales tax on the copy sales, not the copier-placement company.

Q: Can the location owner buy paper and toner tax-free with a resale certificate since it's used to make copies sold to customers?
A: No. Because the monthly rental charge already includes the cost of paper and toner and there is no separate sale of those supplies to the location owner, the location owner may not issue a resale certificate for the paper and toner.

Q: How is the monthly lease/rental amount calculated under this type of agreement?
A: The letter describes it as the difference between the number of copies made at 5 cents per copy and the amount deducted for the "profit" paid to the location owner and copy credits.

Q: Is the start-up fee under the agreement taxable?
A: Yes, the start-up fee is taxable. However, if any portion of the fee is later refunded, the business is entitled to a pro-rata refund of the sales tax paid on the refunded amount.

Q: What administrative precedent did the Comptroller rely on?
A: Hearings 11,113 and 13,246, which the Comptroller cites as having determined that companies placing copiers at various locations and charging monthly fees based on the number of copies sold were leasing the copy machines.

Original ruling text

May 28, 1993

Dear **:

Thank you for your letter of March 12, 1993, concerning my preliminary
determination that the Texas businesses are agents for your firm and that your
firm has the responsibility for reporting Texas sales tax on the copy sales.

After closer examination of your agreement, I concur that the Texas
lessees are responsible for collecting and remitting Texas sales tax on the
copy sales.

The Comptroller has determined in earlier administrative hearings that
companies that place copiers at various locations and make monthly charges
based on the number of copies sold were leasing the copy machines. Likewise,
** is leasing the copiers to the location owners. See the enclosed
Hearings 11,113 and 13,246. The monthly lease is the difference between the
number of copies made at 5 cent per copy and the amount deducted for the
"profit" paid to the location owner and copy credits.

The monthly rental charge includes the cost of paper and toner. There are
no separate sales of paper and toner to the location owner. The agreement
states:

** and the Business desire to allow * to locate a
***-owned copy machine and related products ("the Equipment") and
proprietary signage at the Business Location set forth above. The Equipment
will be available for use by the Business and its customers.
(Emphasis added.)

Because of this provision allowing the business to use the "equipment,"
businesses may not issue a resale certificate for paper and toner. The start-up
fee is also taxable. However, if any portion of the fee is refunded, the
business is entitled to a pro rata refund of sales tax on the amount refunded.
The businesses are leasing the copiers for the purpose of using them to sell
copies.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

NOTE: Previous Accession Number 93070049.4 and/or 9307049L