In a three-party sale-leaseback chain (Company A sells to Company B, which sells to Company C, which leases the equipment back to Company B), who owes Texas sales tax and at which step?

Plain-English summary

A taxpayer asked about a three-party sale-leaseback chain: Company A shipped taxable equipment to Company B, which never used the equipment and instead sold it to Company C; Company C then leased the equipment back to Company B under an operating lease, collecting sales tax on the lease payments.

The Comptroller confirmed how the resale-certificate mechanism should work through this chain: Company B may issue a resale certificate to Company A (since B is reselling, not using, the equipment), and Company C may issue a resale certificate to Company B (since C is buying to lease, not to use). As long as those certificates are properly completed and issued, neither the A-to-B sale nor the B-to-C sale is taxed — tax is deferred down the chain until the equipment is actually put to use. That taxable moment arrives at the operating lease: Company C must collect Texas sales tax from Company B on the lease payments, since that's where the equipment is finally being used.

What this means for you

Businesses structuring sale-leaseback deals

If your equipment passes through multiple sales before ending up leased back to its original handler, resale certificates at each intermediate sale step can keep those transfers tax-free — but don't assume the whole structure escapes tax. The lease payments themselves, representing actual use of the equipment, are where sales tax attaches, and the lessor (here, Company C) is responsible for collecting it.

Accountants and tax professionals

This letter is a clean template for the "chain resale, tax once at use" principle that governs equipment sale-leaseback and similar multi-party transactions: each intermediate sale-for-resale step is exempt with a proper resale certificate, and the tax obligation lands on whichever transaction actually delivers use of the property to an end user — in an operating lease, that's the lease payment stream.

Common questions

Q: In a sale-leaseback chain, does every sale in the chain get taxed?
A: No — sales made for resale, supported by a properly completed resale certificate, aren't taxed. Only the transaction where the equipment is actually used (here, the operating lease) is taxed.

Q: Who collects sales tax on the operating lease payments?
A: The lessor — in this scenario, Company C, which owns the equipment and leases it back to Company B, must collect Texas sales tax on the lease payments.

Q: What if the resale certificates aren't properly completed?
A: The letter's tax-free treatment of the intermediate sales is expressly conditioned on the certificates being properly completed and issued as described; without that, the ordinary sales tax rules would apply to those sales instead.

Citations and references

No specific Tax Code section or Comptroller rule number is quoted in 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/9910815L

Original ruling text

October 20, 1999

Dear **:

Thank you for your recent fax regarding a sale/leaseback transaction and Texas
sales tax.

You stated in your fax that Company A shipped taxable equipment to Company B.
Company B has not made use of the equipment, and is selling the equipment to
Company C. Company C will lease back the equipment to Company B under an
operating lease, and will collect Texas sales tax on the lease payments.

Company B may issue a properly completed resale certificate to Company A.
Company C may issue a properly completed resale certificate to Company B.
Company C must collect Texas sales tax from Company B on the operating lease.

Provided the resale certificates are issued as stated above, Company A is not
required to collect Texas sales tax on the sale to Company B, and Company B is
not required to collect Texas sales tax on the sale to Company C. As
previously stated, Company C must collect Texas sales tax on the operating
lease to Company B.

This opinion is based on the facts presented. Additional or different facts
may yield different results.

You may call me toll free 1-800-531-5441, extension 5-9787, if you have any
questions or need more information. The direct line is 512/305-9787. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Philip Knisely
Tax Policy Division