No Exclusion for Louisiana Sales Tax on Rental Equipment for Repair Parts and Materials

In La. Rev. Rul. No 13-003, the Louisiana Department of Revenue addressed the question of whether parts and materials purchased by equipment lease or rental dealers to repair and maintain their lease or rental equipment are excluded from the payment of sales tax.   The Ruling concludes that the exclusion was not applicable, and repair parts or materials are subject to the Louisiana Sales Tax.

Louisiana statutory law provides an exclusion from sales tax for items of tangible personal property which are sold for the purpose of lease or rental. The statutory language states in pertinent part that a “retail sale” for purposes of “state sales and use taxes imposed on transactions involving the lease or rental of tangible personal property… means a sale to a consumer or to any other person for any purpose other than for resale as tangible personal property or for lease or rental in an arm’s length transaction in the form of tangible personal property, and shall mean and include all such transactions as the secretary, upon investigation, finds to be in lieu of sales; provided that sales for resale or for lease or rental in an arm’s length transaction must be made in strict compliance with the rules and regulations.”  La. R.S. 47:301(10)(a)(iii). Tangible personal property means “personal property which may be seen, weighed, measured, felt or touched, or is any other manner perceptible to the senses.” La. R.S. 47:301(16)(a).

Labor and Materials are Not Divisible 

In reaching this decision, the Louisiana Department of Revenue relied on International Paper Company v. East Feliciana School Board, 2002-0648 (La. App. 1 Cir. 3/28/03), 850 So.2d 717, writ denied, 2003-1190 (La. 6/20/03), 847 So.2d 1235.  In that case, the Court addressed whether parts/materials for a machinery repair performed in East Feliciana Parish and delivered back to a paper mill in Alabama qualified for the exclusion for Louisiana sales tax on rental equipment. The petitioner stipulated to taxation for the labor/service component of the repair. Ultimately, the Court reasoned that labor and materials are not divisible. The furnishing of new parts was incidental to and a part of the repair. As such, regardless of whether such items are purchased and installed by the owner of the lease or rental equipment or installed as a repair service which is separately billed by a third party, repair parts and materials for lease or rental equipment do not qualify for the sales tax exclusion.

Thus, when business owners are evaluating the terms of their lease agreement for rental equipment, they should be aware of and plan for the tax implications for the repair of that equipment.  When it comes to repair parts and materials, you will not be excluded from Louisiana sales tax on rental equipment.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.