Can a service provider (like a caterer or wedding consultant) rent tangible personal property tax-free using a resale certificate, and what happens if a customer wrongly issues one to avoid tax?

Subject

Purchaser — Subject To Criminal Sanctions — If Resale Or Exemption Certificate Issued To Escape Tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9308125L

Plain-English Summary

This letter responds to an inquiry — apparently from a trade association, since the Comptroller refers to "your members" — about a recurring problem: caterers, wedding consultants, and other event planners rent tangible personal property (such as tables, chairs, or equipment) to use in providing their event services, but some of their customers try to issue a resale certificate or exemption certificate to avoid paying tax on that rental.

The Comptroller explains that a person who provides a service, rather than a rental, is responsible for paying sales tax on the tangible personal property they rent to perform that service. They cannot buy or rent that property tax-free, even though they are required to collect tax on the sales or services they provide to their own customers. Section 151.302(b) of the sales tax law and Rule 3.293(f)(3) apply to tangible personal property used to perform a taxable service.

The letter acknowledges the difficulty association members face when a purchaser or renter issues a resale certificate for property that isn't actually re-rented, and flatly refuses to pay the tax or deducts it from the invoice — even when the member knows the purchaser/renter should be paying tax.

On the question of audit exposure, the Comptroller states that it will review documentation on a case-by-case basis; if the seller/lessor made a good-faith effort to collect the tax, the Comptroller will not assess the tax against the seller in an audit. Instead, the Comptroller will use that information to generate an audit of the purchaser who wrongly avoided the tax. In addition, Section 151.707 of the sales tax code provides a criminal penalty for persons who knowingly issue resale certificates for items that are not resold.

The letter closes by acknowledging there's no easy answer, since the "good faith" question can only be resolved on a case-by-case basis.

What This Means For You

If you rent property to provide a service, you generally can't do so tax-free. Caterers, wedding consultants, event planners, and similar service providers who rent tangible personal property (rather than reselling or re-renting it) must pay sales tax on that rental themselves — a resale certificate isn't the right tool here, because the property is being consumed in providing a service, not resold.

Good-faith documentation matters if you're the one collecting (or failing to collect) the tax. The letter indicates that on audit, the Comptroller will look at whether the seller/lessor made a good-faith effort to collect tax from a purchaser who improperly issued a resale or exemption certificate. If the seller can show that good-faith effort, the Comptroller says it will not assess the tax against the seller — and will instead pursue the purchaser.

Improperly issuing a resale certificate carries criminal exposure, not just a tax bill. Section 151.707 makes it a criminal offense to knowingly issue a resale certificate for items that are not actually resold. A customer who issues a certificate just to dodge tax on a rental used to receive a service is exposed to this penalty, not just back tax.

There's no bright-line test for "good faith" — it's evaluated case by case. The Comptroller is explicit that it cannot offer a general rule that would give sellers full comfort in advance; each situation is reviewed on its own facts during an audit.

Q&A

Q: Can a caterer or event planner rent tables, chairs, or other equipment tax-free by using a resale certificate?
A: No. The letter states that persons who provide services, rather than rentals, are responsible for paying sales tax on the tangible personal property they rent to provide those services, and are not allowed to make these purchases (or rentals) tax-free.

Q: What law says a service provider can't rent property tax-free?
A: Section 151.302(b) of the sales tax law and Rule 3.293(f)(3) apply to tangible personal property used to perform a taxable service, per the letter.

Q: What happens if a customer wrongly issues a resale certificate to avoid paying tax on a rental?
A: The letter says the Comptroller may audit that purchaser and use documentation from the seller to do so. Separately, Section 151.707 of the sales tax code provides a criminal penalty for persons who knowingly issue resale certificates for items that are not resold.

Q: If a member of the association made a good-faith effort to collect tax but the purchaser refused, will the member owe the tax on audit?
A: The letter says that on a case-by-case basis, if the Comptroller determines the seller made a good-faith effort to collect the tax, it will not assess the tax in the audit against the seller.

Q: Is there a general rule for what counts as a "good faith effort" to collect tax?
A: No. The letter states the issue of "good faith" can only be resolved on a case-by-case review, and it could not offer an answer providing a greater level of comfort in advance.

Q: Who signed this letter and what office issued it?
A: The letter is signed by Michael D Doyle, Director, Tax Administration.

Original ruling text

August 6, 1993

Dear **

Thank you for your inquiry concerning rentals to caterers, wedding consultants,
and other event planners.

It is the responsibility of persons who provide services, rather than rentals,
to pay sales tax on the rental of tangible personal property used to provide
their services. They are not allowed to make these purchases tax-free, even
though they are required to collect tax on sales of goods or services to their
customers. Neither are they allowed to rent or lease the tangible personal
property tax-free if used to provide a service. Section 151 .302(b) of the
sales tax law and Rule 3.293(f)(3) apply to tangible personal property used to
perform a taxable service.

I understand the problems your members face when persons issue resale
certificates for the rental of tangible personal property which is not
re-rented. I wish there was an easy solution to this problem when a purchaser
flatly refuses to pay the tax or deducts it from their invoice, even when your
member knows that the purchaser/renter should be paying the tax.

With regard to our position concerning a possible audit of one of your members,
I will go so far as to say that on a case by case basis, we will review the
documentation on file, and if we determine that the seller made a good faith
effort to collect the tax, we will not assess the tax in the audit. I can tell
you that we will then use the information to generate an audit on the
purchaser. In addition, Section 151.707 of the sales tax code provides a
criminal penalty for persons who knowingly issue resale certificates for items
that are not resold.

I wish I could give you an answer that would provide a greater level of comfort
to your members, but the issue of "good faith" can only be resolved on a case
by case review. If I can be of further assistance, please contact me.

Sincerely,

Michael D Doyle
Director
Tax Administration