When a rental company rents out a package that mixes exempt film-production equipment with taxable items, how should sales tax be charged on the package?

Subject

Film Production Equipment Rental Packages — Taxable/Exempt Bundling, Exemption Certificates, and "Thrown-In" Promotional Items

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9311L1270F14

Plain-English Summary

This 1993 letter responds to a company that rents out equipment packages to film, video, and audio production companies, following up on a phone conversation about "the new sales tax exemption for the film industry" and how it applies to the company's rental packages. The Comptroller's Tax Administration Division laid out three rules:

1. Bundled pricing is fully taxable. As a general rule, if the company sells, leases, or rents taxable items together with exempt (non-taxable) items for a single package price, the entire charge is taxable.
2. Separately stating the exempt charge preserves the exemption. The company can instead break out the charge for equipment used directly in the production from the charge for taxable items, and collect tax only on the taxable-item charge. To document this exempt treatment, the production company (the renter) must complete an exemption certificate.
3. "Thrown-in" items can be treated as untaxed promotional items. The company explained that some packages include hand tools and other items not used directly in the production process, which are not listed in the catalog, are not separately charged for, and which the company itself already pays tax on when it buys them. If the package price would stay the same whether or not a customer wanted these items included, the Comptroller said these can be treated as "promotional items" — meaning the company does not need to charge or collect tax on their rental. The company should keep paying tax when it purchases these items itself, and the production company must still complete an exemption certificate to document the overall exempt transaction.

The letter closes by noting the answer is based on the facts as presented, and that other facts could change the outcome.

What This Means For You

If you rent out production equipment packages to film/video/audio companies: How you price the package controls the tax result. A single all-in price for a mix of taxable and exempt items makes the whole thing taxable. To get exempt treatment on the production-equipment portion, itemize and separately state that charge from any taxable items in the package.

If you're a production company renting the equipment: You need to complete an exemption certificate to document the exempt portion of any package — this letter mentions that requirement twice, once for the general bundling rule and again for the promotional-items scenario.

If you "throw in" extra hand tools or accessories at no charge: Those items can escape tax on the rental side (as promotional items) only if all three conditions in the letter are met — not in the catalog, no separate charge, and the package price doesn't change based on whether the customer wants them. The rental company must still pay tax when it originally buys those thrown-in items; the promotional-item treatment only affects the rental charge to the customer, not the company's own purchase.

Scope note: This letter does not name or cite the specific statute or rule creating "the new sales tax exemption for the film industry" — it only explains how to apply bundled-pricing and promotional-item principles to that already-existing exemption. It is addressed to one taxpayer's specific rental-package facts and says other facts could change the answer.

Q&A

Q: If I rent a package that combines exempt production equipment (cameras, lights, etc.) with taxable items for one flat price, is any of it exempt?
A: No. Under this letter's general rule, when taxable and non-taxable goods or services are sold, leased, or rented together for one price, the entire charge is taxable.

Q: How can I get exempt treatment on the equipment used directly in production?
A: Separate the charge for that equipment from the charge for the taxable items in the package, and collect tax only on the taxable-item charge. The production company must complete an exemption certificate to document the exempt transaction.

Q: I throw in extra hand tools with some rental packages at no charge — do I owe tax on those?
A: Not on the rental to the customer, according to this letter, as long as the tools aren't in your catalog, you don't charge for them separately, and the package price is the same whether or not the customer wants them — the Comptroller called these "promotional items." You do still need to pay tax when you buy those tools yourself.

Q: Does the customer still need paperwork if part of the package is treated as exempt or promotional?
A: Yes. The letter states twice that the production company must complete an exemption certificate to document the exempt transaction, both under the general bundling rule and in the promotional-items scenario.

Original ruling text

November 15, 1993

Dear *****:

I enjoyed talking with you on Friday concerning the new sales tax
exemption for the film industry and your rental packages.

As a general rule, when you sell, lease, or rent taxable goods or
services with non-taxable goods or services for one price, the entire
charge is taxable. When you rent taxable items along with items that
qualify for the new exemption, you should collect tax on the package
price.

On the other hand, you may separate the charge for the taxable items
from the charge for equipment used directly in the production, and
collect tax on only the charge for the taxable items. The production
company must complete an exemption certificate to document the exempt
transaction.

You explained that for some packages you "throw in" hand tools and
other items not used directly in the production process. These
"thrown-in" items are not listed in your catalog, you do not charge
for them, and the company pays tax on these items when they are
purchased. Under these conditions, and if the package price would be
the same if a customer did not want these items included in the
package, we will consider these items "promotional items." That means
you do not need to assess a charge for and collect tax on their
rental. You should continue to pay tax when you buy these items. Don't
forget, a production company must complete an exemption certificate to
document an exempt transaction.

This answer is based on the facts as presented. Other facts may change
your tax responsibilities.

If you have any questions or need information, my number is
1-800-531-5441 ext. 3-4614. Or you may write to the Tax Administration
Division.

Sincerely,

Adina Whittemore
Tax Administration Division

NOTE: Previous Accession Number 9311071L.3 and/or 9311071L