In a janitorial cost-plus contract where the vendor buys and amortizes cleaning equipment over three years but the equipment stays at the customer's site under the customer's access and risk of loss, should the vendor pay tax on the equipment itself, or collect tax on the amortized charge to the customer?

Plain-English summary

A janitorial services company ("Corporation X") had a long-running practice on its cost-plus contracts: it buys cleaning equipment, imputes an interest percentage, and recovers the equipment's cost from the customer over a three-year amortization period, historically paying sales tax on the monthly amortization amount itself. A customer on a new $57,000 equipment contract (beginning July 1, 1997) pushed back, refusing to pay sales tax on the amortization charge on the theory that the equipment was now theirs, and demanding written state confirmation before paying. Corporation X asked the Comptroller to resolve whether it should pay tax when purchasing the equipment, or instead collect tax from the customer on the monthly amortized charge.

The Comptroller pointed to a prior Hearing Decision (H-26,068, 1990) involving this same company and related entities, where an Administrative Law Judge had already ruled on materially identical facts: because the equipment, materials, and supplies were drop-shipped directly to the customer's building, kept at all times in the customer's own maintenance/engineering areas with the customer having access at all times, risk of loss resting on the customer from delivery onward, and none of it removable by the company for use on other jobs, "care, custody, and control" had been turned over to the customer -- meaning these items were properly purchased tax-free as a resale. The 1990 contract also transferred title to the equipment to the customer automatically, and even without a title-transfer clause for materials/supplies, "possession...transferred for consideration" independently satisfied the statutory definition of "sale." The Comptroller confirmed the current contract language (Section 3C) reads essentially the same as in 1990, now with added language explicitly transferring "right, title, and interest" in the equipment/materials/supplies to the customer. Based on this, Corporation X is considered to be RESELLING the equipment, materials, and supplies to its customers: it may issue resale certificates to ITS suppliers for these purchases, but must collect tax on its TOTAL charge to the customer for janitorial services -- including the separately stated amortized equipment cost.

Currency alert: STAR flags that Rule 3.285, Resale Certificates; Sales for Resale, was amended 11/01/2017 -- current guidance on care, custody, and control of tangible personal property used in providing a taxable service should be checked against the present-day rule rather than relying solely on the 1990 hearing decision cited in this 1997 letter.

What this means for you

Janitorial and custodial service companies structuring cost-plus equipment contracts

If your contract genuinely transfers care, custody, and control of equipment/materials/supplies to the customer (drop-shipped to their site, kept in their space, customer has access at all times, customer bears risk of loss, and you can't reclaim the items for other jobs), you may be reselling those items rather than consuming them -- buy them tax-free from your suppliers via resale certificate, and collect tax on your full charge to the customer instead, including any separately stated amortized equipment cost.

Customers on cost-plus service contracts with amortized equipment charges

Whether the amortized equipment charge you pay is taxable depends on the specific contract terms governing possession, access, and risk of loss -- a customer's assumption that "since the equipment is ours, no tax is due" isn't automatically correct; it depends on how the resale/care-custody-control analysis comes out.

Accountants and tax professionals

Check current Rule 3.285 (amended 2017) rather than relying only on this letter's citation to a 1990 hearing decision -- the underlying care/custody/control principle likely persists, but confirm against the current rule text.

Common questions

Q: Should the janitorial company pay tax on equipment it buys for a cost-plus contract, or collect tax on the customer's amortized charge?
A: Per this letter, when care/custody/control of the equipment passes to the customer, the company should collect tax on its total charge to the customer (treating the equipment purchase as a tax-free resale), not pay tax itself on the equipment purchase.

Q: What factors indicate that care, custody, and control passed to the customer?
A: Per the cited 1990 hearing decision, factors included drop-shipping directly to the customer's site, storage in the customer's own space, the customer having access at all times, risk of loss on the customer from delivery, and the vendor being unable to remove the items for other jobs.

Q: Is this analysis still current?
A: The core reasoning likely still applies, but STAR flags that Rule 3.285 was amended in 2017 -- verify against the current rule text.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.285 (Resale Certificates; Sales for Resale)

Prior decision cited in this letter:

• Comptroller's Hearing Decision H-26,068 (1990) (same taxpayer, materially identical cost-plus contract facts)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9707585L

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.

July 14, 1997

Dear ***:

This is in response to your request for a ruling regarding one of CORPORATION
X cost-plus contracts and whether or not CORPORATION X should pay sales tax
when purchasing the fixed assets for this account. Your fact situation is
restated below, followed by my response:

Currently CORPORATION X is purchasing the equipment, imputing an interest
percentage and recovering the cost of the equipment from CORPORATION X customer
over a three year period. In the past CORPORATION X has always paid tax on the
monthly three year amortization amount.

This particular customer has contacted CORPORATION X and is taking the position
that since the equipment is theirs, they refuse to pay sales tax on the
amortization amount until they have received written notice from the state
indicating why they should pay the tax. CORPORATION X has recently purchased
approximately $57,000 of equipment for the new contract with this customer,
which began July 1st of 1997. Therefore, CORPORATION X needs to resolve this
matter quickly. CORPORATION X, as the vendor, uses the equipment when
performing janitorial services for the customer. The equipment stays at the
customer's location at all times.

Your question is: should CORPORATION X pay tax when purchasing the equipment
and whether or not CORPORATION X should charge the customer tax on the monthly
amortization fee?

Response: Generally, janitorial service providers are required to pay tax on
all soap, cleaners, chemicals, materials, supplies and equipment used to
perform services.

However, in Comptroller's Hearing Decision H-26,068 (1990), involving
CORPORATION X and related corporate entities, the Administrative Law Judge
allowed CORPORATION X on its cost-plus contracts to issue a resale certificate
on its purchases for these contracts and required CORPORATION X to collect tax
on its charge to the cost-plus customer. The ALJ's conclusion reads as
follows:

The items in Account 51 are more troublesome. Under these cost-plus contracts
the equipment, materials, and supplies were drop-shipped directly from a
supplier to the customer's building. They were kept at all times in the
maintenance or engineering areas of the customers building and the customer had
access to them at all times. Further, risk of loss was on the customer from the
moment the materials were delivered. In addition, none of the materials or
equipment could be removed from the building by the Petitioners for use on
other jobs. Under those circumstances I find care, custody, and control was
turned over to the customer. The threshold question of whether the materials
and equipment were "sold" to the customers should also be answered in the
positive. The contract specifically provided that title to the equipment was
automatically transferred from Petitioners to their customers. However, the
contract made no title transfer provisions for the materials and supplies.
However, possession was transferred (for consideration) to the customer;
therefore the statutory definition of "sale" is also met in the case of the
materials and supplies.

I conclude that the equipment, materials, and supplies in Account 51 were
properly purchased tax free as a purchase for resale. Those items should be
deleted from the audit.

Section 3C of the current contract reads basically the same as it did in 1990,
with the addition of language stating that CORPORATION X transfers "right,
title, and interest in such equipment, materials and supplies" to Owner.

Therefore, under the cost-plus contract you provided, CORPORATION X is
considered to be reselling to its customers the equipment, materials and
supplies. CORPORATION X may issue a resale certificate to its suppliers for
the purchases of the equipment, materials and supplies that are transferred to
the care, custody and control of its customers. CORPORATION X is required to
collect tax on its total charge (including the separately stated amortized cost
of the equipment) to its customers for the janitorial services.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please
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. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division