I'm leasing land, a car wash building, and the car wash equipment together to my own S corporation -- is that lease subject to Texas sales tax?

Subject

Real Property/Building/Restaurant — Leased Together With Tpp/Furniture/Equipment

Plain-English summary

A taxpayer planned to buy the equipment and materials to build a car wash, then lease the land, the car wash building, and the car wash equipment -- all together, as one package -- to his own Subchapter S Corporation for a ten-year term. He would pay sales tax up front on the equipment and materials used to build and improve the car wash.

The Comptroller ruled that the combined lease of the land, building, and equipment to the S Corporation is treated as a lease of real property, and real property leases are not subject to sales tax. The letter draws a direct analogy: this is the same rule that lets a landlord rent out a furnished apartment without charging the tenant sales tax on the portion of the rent that covers the furniture.

Bottom line: the lease payments are not taxable. The taxpayer still pays sales tax on his own purchase of the equipment and materials when he builds the car wash, but the rent he later collects from the S Corporation under the combined lease of land, building, and equipment is not subject to sales tax.

What this means for you

Owners leasing a building and its equipment together to a related business

If you lease real property (land and a building) together with the tangible personal property/equipment that's part of that facility as a single package, the whole arrangement can be treated as a real property lease -- meaning the rent isn't subject to sales tax, even though equipment (personal property) is part of what's being leased.

S corporation owners financing improvements themselves

Here, the individual owner bought the equipment and materials (paying sales tax on that purchase) because the S Corporation couldn't get financing, then leased everything to the S Corporation. That structure didn't change the tax result: the lease itself was still real-property in character and not separately taxed.

Anyone comparing this to a furnished apartment

The Comptroller explicitly analogizes to a furnished apartment lease: a landlord doesn't have to charge sales tax on the furniture-use portion of monthly rent. The same logic applied here to a leased car wash building and its equipment.

Common questions

Q: Is the lease of the land, building, and car wash equipment to the S Corporation subject to Texas sales tax?
A: No. The Comptroller ruled the combined lease is a lease of real property and is not subject to sales tax.

Q: Does the taxpayer still owe sales tax on anything in this scenario?
A: Yes -- the taxpayer stated he would pay the appropriate sales tax on the equipment and materials used to build and improve the car wash when he purchased them.

Q: Why does leasing equipment together with a building avoid sales tax?
A: The ruling relies on the same provision that lets a landlord rent a furnished apartment without charging sales tax on the portion of rent attributable to the furniture -- when tangible personal property is leased together with real property as part of one arrangement, the combined lease is treated as a real property lease.

Q: Does this ruling name a specific statute or rule?
A: No -- the letter refers only to "the same provision in the tax law" that governs furnished-apartment rentals, without citing a specific rule number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611889L

Original ruling text

November 20, 1996

Dear ***:

Thank you for your recent letter concerning your
leasing of land, a car wash building, and car wash equipment to your Subchapter
S Corporation ("S Corporation").

In your letter, you stated your S Corporation cannot
obtain financing for the purchase of the equipment for this project, therefore
you will purchase the equipment and materials to build the car wash and lease
the equipment along with the building and land to the S Corporation for a
period of ten years. You will pay the appropriate sales tax on the equipment
and materials for the improvements of the car wash.

The lease of the land, building, and equipment to the S
Corporation is considered the lease of real property and is not subject to
sales tax. This is based on the same provision in the tax law that allows a
person to rent a furnished apartment without having to pay sales tax to his
landlord on the portion of the rent relating to the furniture each month.

I hope this satisfactorily answers your questions.
Should you require additional information, please feel free to call Gilbert
Zamora of my Tax Policy Division toll free at 1-800-531-5441, extension 3-4502.

Please let me know if I can be of further assistance to you.

Sincerely,

Karey W. Barton
Manager, Tax Policy Division