Does a rental company owe sales tax on the amount it charges a customer for a rented piece of equipment that was stolen during the rental period?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a question from an insurer about sales tax on a stolen rental machine. A contractor doing business in Harris County had rented a piece of heavy equipment from a rental company also based in Harris County. While the contractor had it, the machine was stolen. This was a straight rental, not a lease. The rental company then charged the contractor's insured client the equipment's fair market value, plus 8.25% sales tax on that charged amount.

The Comptroller ruled that the 8.25% sales tax should not have been charged. Sales tax is due on the transfer of a taxable item for consideration — but when a rental company bills a customer for a rented item that has been lost, misplaced, or stolen, there is no transfer of a taxable item from the rental company to the customer. Because no such transfer occurred, no sales tax is due on that charge.

The letter notes this opinion is based on the specific facts presented, and that other, similar facts could lead to a different result.

What this means for you

Equipment rental companies

If a customer's rented item is stolen, lost, or misplaced during the rental period and you bill the customer for its fair market value, this letter says you should not also charge sales tax on that amount. The charge compensates you for the lost equipment; it is not a sale or transfer of tangible personal property to the customer, so it falls outside the sales tax base.

Contractors and other equipment renters (and their insurers)

If your rental company bills you for equipment that was stolen while in your possession, you can point to this ruling as support that sales tax should not apply to that charge, distinguishing it from a normal taxable rental payment for equipment you actually used and returned.

Accountants and tax professionals

The key distinction here is between (1) taxable rental charges, which are payments for the use of tangible personal property and are subject to sales tax, and (2) a charge for stolen, lost, or misplaced equipment, which the Comptroller treats as not involving any transfer of a taxable item and therefore not subject to sales tax — even though both charges arise out of the same rental agreement.

Common questions

Q: Is sales tax due when a rental company charges a customer for equipment that was stolen during the rental?
A: No. Per this letter, sales tax is not due on a charge by a rental company for a rented item that has been lost, misplaced, or stolen, because there is no transfer of a taxable item for consideration in that situation.

Q: Does it matter whether the arrangement was a rental or a lease?
A: In this case the transaction was specifically identified as a rental, not a lease. The ruling addresses a rental charge for stolen equipment.

Q: Was sales tax charged on the original rental payments for using the equipment before it was stolen?
A: The letter does not address that; it addresses only the charge for the fair market value of the stolen machine plus the 8.25% sales tax added to that charge, which the Comptroller found should not have applied.

Q: Can other taxpayers rely on this letter?
A: No. The letter states the opinion is based on the facts presented, and other facts, though similar, may provide a different result. STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

No specific statutes or administrative rules are cited in the text of 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/9508L1366B01

Original ruling text

August 24, 1995

Dear **:

This is in response to your request for a ruling on tax
liability on an amount charged for a stolen rental machine.

FACTS: Your insured client, a contractor doing business in Harris
County, rented a piece of heavy equipment from a rental company
also doing business in Harris County, Texas. During the course of
the rental the machine was stolen. The transaction was a rental,
not a lease. The rental company charged your insured client the
fair market value, plus 8.25% sales tax on the value charged.

Is sales tax due in this situation.

RESPONSE: Sales tax is not due on a charge by a rental company
for a rented item that has been lost, misplaced or stolen. Sales
tax is due on the transfer of a taxable item for consideration.
In this situation, there is not a transfer of a taxable item by
the rental company to your client and therefore no sales tax
would be due.

This opinion is based on the facts presented. Other facts
though similar may provide a different result. You may call
me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9508413L