Texas sales tax treatment of leases and rentals of tangible personal property

Texas sales tax treatment of leases and rentals of tangible personal property according to Comptroller Rule 3.294. Key points include:

• Leases and rentals are taxable as sales.

• Operating Lease:

  • Allows use of leased property for a specific period.
  • Written contracts are treated as operating leases unless they qualify as financing leases.
  • Oral leases are always considered operating leases.
  • Sales tax is due on each payment.

• 

  Financing Lease:

  • Treated similarly to a sale.
  • Full tax liability must be collected and remitted upfront.
  • Defined as a lease containing one of the following:
    1. Title transfer to the lessee at the end of the lease.
    2. Bargain purchase option (less than 10% of fair market value at option exercise time).
    3. Lease term is 75% or more of the property’s economic life, with no return option.
    4. Residual value is less than 10% of the property’s fair market value at lease inception, with no return option.

• Special Rules for Equipment Leases with an Operator:

  • If a lump sum price is charged (labor + materials), it is treated as a service (taxable or nontaxable depending on the work).
  • If equipment rental is separately stated, it is subject to sales or use tax as tangible personal property rental.
  • Labor charges may or may not be taxable depending on the service performed.