Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 330.2302


330.2302 Lease of Equipment with Optional Operator. A lessor proposes to operate an on-site copy, fax and mail center on the premises of its customer as follows. The lessor will purchase and pay tax or tax reimbursement on the purchase of copiers, fax machines, and mailing meters and will lease this equipment to the customer in the same form as acquired. The lessor will provide all of the supplies used by the equipment. At its option, the customer may supply the personnel to operate the equipment or may contract with the lessor to supply the personnel to operate the equipment. If the lessor's personnel operate the equipment, the lessor will provide a full-time manager and personnel to operate the equipment leased. The lessor will select, hire, and train the personnel it provides.

The customer may also at its option choose to maintain the equipment itself or choose to pay extra for maintenance. The contract provides for a "monthly management fee" and a "monthly fee for allowance." The "monthly management fee" is to provide management reports and counseling to the customer. The monthly fees for allowance cover a stated number of copies, all rental charges for the equipment, all charges for supplies, and all charges for the lessor-supplied equipment operators, within the stated number of copies per month allowance. For additional copies beyond the monthly allowance, there is a charge per copy which includes the cost of supplies. There is also an hourly rate charge for an additional operator, if needed, due to workload. The contract further provides that if the workload is beyond the capabilities of either machine or normal working hours, the customer may elect either to send the overflow copying work to the lessor's off-site main plant at a per copy charge or to have the lessor's personnel work overtime on-site at a specified overtime rate.

In the above situation the question is whether the contract is (1) a contract for the sales of copies by the lessor to the customer or (2) a contract of which the three primary components are the lease of equipment which the customer will use to make copies, the providing of personnel by the lessor, and the sale of supplies.

If the contract is deemed a sale of copies by the lessor to the customer, all amounts paid under the contract are taxable gross receipts from the sale of tangible personal property with no deduction for the cost of the materials used, the labor or service cost, or any other expense with an optional operation provision.

There is not a true lease if it is mandatory that the operator comes with the equipment. This is because there cannot be a true lease unless possession and control of property has been transferred from one person to another. If a person obtains for consideration temporary possession and control of property without an operator, the person has leased the property. However, when a person obtains property with an operator, the question arises whether possession and control actually has been transferred to that person. The test that is used to decide the question is whether the person could have obtained the property under the contract without the operator. If so, we regard the transaction as a lease with an optional operator. In effect, since the operator is optional, the operator is acting on behalf of the lessee. Thus, when the operator is optional, there is a lease of property along with services of the operator. When the operator is mandatory, the operator acts on behalf of the owner and that owner is not regarded as transferring control of the equipment to the customer. Since there is no transfer of possession and control, there is no true lease.

Since this contract provides for an optional operator, the lease is a true lease. Since tax on the equipment is paid by the lessor at time of purchase with the equipment then leased in substantially the same form as acquired, the rentals payable from the lease are not taxable. Likewise, charges attributable to the optional equipment operators are not taxable rentals payable but may be taxable under Regulation 1528(a)(1) because the operators of the copy machines may be performing fabrication of tangible personal property. If so, charges by the lessor for its employee's fabrication labor are taxable as a sale, unless the transaction falls within what is known as the loaned employee rule.

Since the lessor sells the supplies to the customer, it is important to determine whether the lessor or the customer performs the fabrication. Fabrication by oneself is not a taxable sale. In this situation, whether the fabrication is performed by the lessor or the customer is determined by applying the loaned employee rule which recognizes that one company may "loan" employees to another. In essence, the loaned employee is treated as an employee of the "borrower" company. In order to qualify for treatment as a loaned employee, the loaned employee must be an employee of the "lender," the borrower/customer must provide the tools or equipment used, the raw materials and the premises at which the work is done, and the charge must be an hourly rate. In addition, the customer must have other persons who clearly are employees performing similar work or the customer must employ persons who are capable of giving meaningful direction to the loaned employees beyond describing only the result desired. Also, the customer, not the lender, must supervise the loaned employees.

The employees furnished under the above contract do not qualify as loaned employees since an hourly rate is not specified and charges attributable to fabrication labor are taxable. Similarly, the overtime charges also do not meet the hourly requirements of the loaned employee rule. Although specified at an hourly rate, these charges are not solely for the services of the personnel, but rather cover all the cost of copying and duplicating, machine operators, maintenance and repair.

The portion of the contract charges attributable to the labor provided by the lessor's personnel who operate the facsimile and mail meter machines and who make deliveries is not taxable because the charges are for nontaxable services, as are any added charges for optional maintenance services.

The "monthly management fee" is part of an integrated contract for the lease of equipment, the sale of supplies, fabrication labor and services. Some of the components of this contract are taxable such as sales of supplies and fabrication.

Therefore, the portion of the "monthly management fee" attributable to the taxable components are subject to tax. 4/8/94.