I have an operating lease on a printing press that started before 10/1/95 -- can I cancel it and sign a new letter agreement so the equipment qualifies for the manufacturing exemption going forward?

Subject

Operating Lease Agreement — Entered Into Before 10/1/95 For Manufacturing Equipment — Cancellation And Renegotiation Guidelines

Plain-English summary

A taxpayer leasing a printing press asked the Comptroller whether it could cancel its existing equipment lease and renegotiate it through a letter agreement attached to the canceled lease. The press had been leased since October 1, 1993, with an original end date of February 28, 2001. The taxpayer proposed to cancel the lease on a prospective basis and put a new lease in place under the same terms, starting on the same date as the cancellation and running through the same original end date. The lessee would give the lessor an exemption certificate for manufacturing equipment.

The outcome is exempt going forward. The Comptroller confirmed the answer is "yes" -- the letter agreement is sufficient to constitute a renegotiation of the contract, and it establishes a new contract date. That new contract date is what allows the equipment to qualify for the manufacturing exemption, so long as the lessee provides the lessor with a manufacturing-equipment exemption certificate.

This letter is a narrow, fact-specific confirmation: it addresses whether a particular cancel-and-renegotiate mechanism (a letter agreement tied to the canceled lease, same terms, new start date, same original end date) is enough to create a fresh contract date for exemption purposes. It does not restate the underlying 10/1/95 rule change that made the contract date matter in the first place -- that context isn't spelled out in this letter.

What this means for you

Lessees of manufacturing equipment under a pre-10/1/95 lease

If your equipment lease predates October 1, 1995 and doesn't currently qualify for the manufacturing exemption, this letter confirms one way to fix that going forward: cancel the old lease and enter a new lease (documented by a letter agreement attached to the canceled lease) on the same terms, effective on the cancellation date. That creates a new contract date, and you can then give your lessor a manufacturing-equipment exemption certificate.

Lessors of equipment used in manufacturing

Once you receive a properly completed manufacturing-equipment exemption certificate tied to the renegotiated lease's new contract date, the letter indicates the equipment can be treated as qualifying for the exemption from that point forward.

Businesses considering renegotiating rather than fully re-papering a lease

You don't need an entirely new, freestanding lease document -- a letter agreement attached to the canceled lease, keeping the same terms and end date, was sufficient in this case to count as a renegotiation that resets the contract date.

Common questions

Q: Does canceling and renegotiating a lease through a letter agreement count as creating a new contract?
A: Yes. The Comptroller confirmed the letter agreement attached to the canceled lease is sufficient to constitute a renegotiation of the contract for purposes of establishing a new contract date.

Q: Does the new lease have to change any terms from the original lease?
A: No, based on the facts in this letter -- the proposal kept the same terms and the same original ending date (February 28, 2001), only shifting the start date to the cancellation date.

Q: What does the lessee need to give the lessor to claim the exemption?
A: An exemption certificate for manufacturing equipment.

Q: Why does the contract date matter here?
A: Establishing a new contract date is what allows the equipment to qualify for the manufacturing exemption -- the letter doesn't further explain the underlying rule, but confirms this renegotiation mechanism achieves that new date.

Citations and references

No specific statute or rule citation appears in the body of this letter; it addresses the taxpayer's specific renegotiation proposal directly.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9612872L

Original ruling text

December 2, 1996

Dear ***:

In your letter of November 22, 1996, you asked if an equipment lease could
be canceled and renegotiated through a letter agreement attached to the
canceled lease. The equipment being leased is a printing press that was
leased beginning October 1, 1993 with an ending date of February 28, 2001.
You propose to cancel the lease on a prospective basis with a new lease
under the same terms as the existing lease taking effect on the same date
as the cancellation with the same ending date as the original lease.

The lessee would be required to give the lessor an exemption certificate for
manufacturing equipment.

You asked if the letter agreement would be sufficient to constitute a
renegotiation of the contract for purposes of establishing a new contract
date which would allow the equipment to qualify for the manufacturing
exemption. The answer is "yes."

I hope this satisfactorily answers your inquiry.

Sincerely,

Wade Anderson
Director, Tax Policy