Can a contractor rent equipment tax-free using a resale certificate if the equipment is used to improve real property or perform a taxable service?

Subject

Exempt Contract — Improvement To Realty — Equipment/Machinery — Purchased/Rental/Leased By Contractors In Performance Of Job

Plain-English summary

A contractor claimed a sale-for-resale exemption on equipment it rented to perform services, arguing it shouldn't owe sales tax on the rental. The Comptroller rejected that claim. Contractors who improve new real property (new construction), repair or remodel residential real property, or provide taxable services such as repairing or remodeling nonresidential real property must pay sales tax when they buy, rent, or lease the machinery and equipment they use to do the job -- it doesn't matter who the customer is (exempt entity, direct-pay permit holder, sales-tax permit holder, or anyone else) or whether the contractor separately collects tax on its own services.

The reasoning: under Tex. Tax Code § 151.058, a person performing a taxable service is treated as the consumer of the machinery and equipment used to perform it, and the total charge for the service -- including labor, materials, overhead, and profit -- is taxable regardless of how it's itemized to the customer. Under § 151.302, tangible personal property used to perform a taxable service isn't considered "resold" unless care, custody, and control of that property actually passes to the customer -- which doesn't happen when a contractor merely uses rented equipment to do a job. Rule 3.294(e) reinforces that equipment rental companies cannot accept a resale or exemption certificate from a contractor or taxable-service provider who will use the equipment itself, rather than transfer it, to the customer.

The letter notes one narrow, expiring exception: a prior-contract exemption existed for contractors with contracts (entered into before October 1, 1993) to improve real property for public school districts or nonprofit charitable hospitals licensed under Chapter 241 or 577 of the Health and Safety Code. An equipment rental company could accept a properly completed prior-contract exemption certificate identifying the school/hospital and contract date -- but that exemption was set to expire September 30, 1996, and did not apply to the taxpayer in this letter because its claim was based on the (invalid) resale exemption, not the prior-contract exemption.

What this means for you

Contractors and construction businesses

You cannot use a resale certificate to buy, rent, or lease machinery and equipment tax-free just because you're using it to perform a job for a customer -- even a tax-exempt customer. You are the consumer of that equipment and owe sales tax on it directly to your vendor or rental company.

Equipment rental companies

You should not accept a resale certificate or exemption certificate from a contractor or taxable-service provider who will be using (not reselling) your equipment, except for the now-expired prior-contract exemption described above.

Accountants and tax professionals

Remind contractor clients that the total charge for a taxable service -- labor, materials, overhead, and profit -- is taxable regardless of separate line-item billing, and that equipment/machinery rentals used to perform the job are a cost of doing business subject to tax, not a resold item.

Common questions

Q: Can a contractor avoid sales tax on rented equipment by giving the rental company a resale certificate?
A: No. Per this letter, equipment used to perform a taxable service is not "resold" because care, custody, and control never transfer to the customer, so a resale certificate is invalid for this purpose.

Q: Does it matter if the contractor's customer is tax-exempt (like a school or hospital)?
A: Generally no -- the contractor still owes tax on equipment it purchases, rents, or leases to perform the job, regardless of the customer's exempt status. The only exception noted was a prior-contract exemption for contracts entered before October 1, 1993 with public school districts or certain nonprofit hospitals, which was set to expire September 30, 1996.

Q: Is the total contract price for a taxable service subject to tax?
A: Yes -- per Tex. Tax Code § 151.058 as described in this letter, the full charge including labor, materials, overhead, and profit is taxable, whether or not those items are separately stated.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.058 (consumer treatment for persons performing taxable services)
• Tex. Tax Code § 151.302 (sale-for-resale exemption; requires transfer of care, custody, and control)
• 34 Tex. Admin. Code § 3.294(e) (contractors/service providers must pay tax on rented machinery/equipment)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9603L1408C12

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

March 27, 1996

Dear ****:

Thank you for your letter concerning the validity of a sale for resale
exemption claimed by *** for the rental of equipment used in the
performance of services.

Contractors improving new real property (new construction), contractors
repairing or remodeling residential real property, and persons providing
taxable services such as repairing or remodeling nonresidential real property
are required to pay sales tax to a vendor when purchasing, renting, or leasing
any machinery and equipment they use in performance of their service. It does
not matter who their customers are (i.e., exempt entity, direct pay permit
holder, sales tax permit holder, or any other person) or whether they have to
collect sales tax on their services.

The Texas Tax Code specifically addresses the sale for resale of machinery and
equipment used by persons providing taxable services. Sec. 151.058 states that
a person performing taxable services is the consumer of machinery and equipment
used in performing their services. Sec. 151.058 goes on to state that the total
amount charged for a taxable service is subject to tax including charges for
labor, materials, overhead, and profit, regardless of whether such charges are
separately stated to their customer. Sec. 151.302 regarding sales for resale is
also specific in not allowing a service provider to rent the machinery and
equipment used to provide their service tax free. Sec. 151.302 states that
tangible personal property used to perform a taxable service is not considered
resold unless care, custody, and control of the tangible personal property is
actually transferred to the purchaser of the service. Finally, enclosed Rule
3.294 makes it clear in subsection (e) that contractors and service providers
are required to pay sales tax when renting machinery and equipment from an
equipment rental company.

An equipment rental company may not accept either a
resale certificate or an exemption certificate from a contractor or taxable
service provider who uses the equipment to perform their taxable or nontaxable
services. There is only one exception. There is still a prior contract
exemption for contractors who have contracts to improve real property for
public school districts and for nonprofit charitable hospitals that are
licensed under Chapter 241 or 577 of the Health and Safety Code. The contract
would have to have been entered into before October 1, 1993. This prior
contract exemption will expire September 30, 1996. An equipment rental company
may accept a properly completed prior contract exemption certificate that
identifies the public school or nonprofit charitable hospital and the date of
the contract. However, this exception would not apply to the transaction by
* because the basis of their claim for exemption is the sale for
resale exemption. As explained above, that claim has no valid basis in the Tax
Code and * owes **** the sales tax it charges on any machinery
or equipment rentals.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9603189L