Equipment Provided With Operator - Tax Treatment Changed

NOTE: This Article Has Been Replaced by a Revised Article Dated July 7, 2014. See the new article...

Effective October 1, 2009, when equipment is provided with an operator that does more than maintain, inspect, or set up the equipment and the operator is necessary for the equipment to perform in the manner for which it is designed, the transaction is considered to be a service and not a lease or rental of the equipment. This change is provided in 2009 Wis. Act 2, and was made to conform Wisconsin's sales and use tax laws to the requirements of the Streamlined Sales and Use Tax Agreement and the definition of "lease or rental."

Following is a description of the sales and use tax treatment of equipment rentals with operators before October 1, 2009 and October 1, 2009 and thereafter.

Sales and Use Tax Treatment Prior to October 1, 2009

General: When equipment was provided with an operator, the tax treatment of the transaction depended on who was responsible for the satisfactory completion of the job, as explained below.

Leases and Rentals of Equipment: If a person furnished equipment with an operator to perform a job which the lessee supervised and was responsible for the satisfactory completion of, the person furnishing the equipment was considered a lessor renting out the equipment. If it was customary or mandatory that the lessee accept an operator with the leased equipment, the entire charge, including the charge for the operator, was subject to sales or use tax. However, the operator's services were not taxable if billed separately and if the lessor customarily gave the lessee the option of taking the equipment without the operator.

A lessor was allowed to purchase equipment without tax for resale if the lessor used the equipment solely for leasing or renting. A lessor was also allowed to purchase lubricants, repair parts, and repair services for equipment used solely for leasing or renting, without tax for resale.

Example – Crane Provided with Operator Prior to October 1, 2009: Company A provided a crane with an operator to Customer B. Company A did not give Customer B the option of renting the crane without an operator. Company B was on site when the crane was being operated and directed the operator in the operation of the crane. Therefore, Company A was renting the crane to Customer B, and was subject to sales tax on its gross receipts from the rental, including the charge for the operator. If Company A used the crane only to lease or rent it to customers in the same manner that it rented the crane to Company B, then Company A could have purchased the crane without sales or use tax, for resale, by providing a properly completed sales and use tax exemption certificate (Form S-211) to its supplier. Company A could also have purchased all of the repair parts and repair services for this crane without tax for resale.

Equipment Used to Provide a Service: If a person used its own equipment to perform a job and assumed responsibility for the satisfactory completion of the job, the person was considered to be performing a service. The person performing the service was liable for the payment of sales or use tax on its purchases of the equipment used. The sales and use tax treatment of the charge for the service depended on whether the service performed was a taxable service or a nontaxable service.

Service Contract, Maintenance Agreements, and Warranties for Equipment: The sale of a service contract, maintenance agreement, or warranty was taxable provided the equipment to which the service contract, maintenance agreement, or warranty related was subject to sales or use tax.

Sales and Use Tax Treatment Effective October 1, 2009

General: When equipment is provided with an operator, the tax treatment of the transaction depends on whether the operator does more than maintain, inspect, or set up the equipment and if the operator is necessary for the equipment to perform in the manner for which it is designed, as explained below.

Leases and Rentals of Equipment: Leases and rentals of equipment with an operator that only maintains, inspects, or sets up the equipment are subject to sales or use tax. A lessor may purchase equipment without tax for resale if the lessor uses the equipment solely for leasing or renting. A lessor may also purchase lubricants, repair parts, and repair services for equipment used solely for leasing or renting, without tax for resale.

Equipment Used to Provide a Service: If equipment is provided along with an operator and the operator does more than maintain, inspect, or set up the equipment and is necessary for the equipment to perform in the manner for which it is designed, the transaction is considered to be a service and not a lease or rental of the equipment. A service provider is liable for the payment of sales or use tax on its purchases of equipment that it uses to provide a service. A service provider is also liable for the payment of sales or use tax on its purchases of repair parts and repair services for such equipment.

Example – Crane Provided with Operator on or after October 1, 2009: Company A provides cranes with operators to its customers. For all of the crane transactions, the operators provided by Company A operate the cranes while they are in use (i.e., the operators provided by Company A do more than maintain, inspect, or set up the cranes and are necessary for the cranes to perform in the manner for which they are designed). Company A's customers are on site when the cranes are being operated, directing the crane operators in the operation of the cranes, and are responsible for the satisfactory completion of the jobs. Company A is considered to be providing services, rather than leasing or renting the cranes to its customers. Company A is considered the consumer of the cranes, and the consumer of the repair parts and repair services for the cranes, and is liable for the payment of sales or use tax on its purchases of the cranes, repair parts, and repair services.

NOTE: If the service provided is a taxable service (e.g., landscaping services or the repair or maintenance of tangible personal property), the charge for the service is also subject to sales or use tax.

Service Contracts for Equipment: The sale of contracts, including service contracts, maintenance agreements, and warranties, that provide, in whole or in part, for the future performance of or payment for the repair, service, alteration, fitting, cleaning, painting, coating, towing, inspection, or maintenance of equipment, are subject to Wisconsin sales or use tax, unless the sale, license, lease, or rental in Wisconsin of the equipment to the purchaser of the contract is or was exempt from sales and use taxes.

Facts and Questions

Facts:

Question 1: Are Company C's purchases of the cranes prior to October 1, 2009 subject to Wisconsin use tax on or after October 1, 2009 since (a) the cranes are stored, used, or consumed in Wisconsin on or after October 1, 2009 and (b) providing tangible personal property with an operator who does more than maintain, inspect, or set up the tangible personal property is no longer considered a "lease" or "rental" of that property?

Answer 1: No. Since Company C purchased the cranes prior to October 1, 2009, at which time the cranes were not subject to Wisconsin sales or use tax because they were used solely for leasing and renting purposes, the subsequent change in the definition of "lease" and "rental" does not subject the original purchase of those cranes to Wisconsin sales or use tax.

Question 2: Are repair parts that Company C purchased prior to October 1, 2009 for use on cranes that were used solely for lease and rental purposes prior to October 1, 2009 subject to Wisconsin use tax on or after October 1, 2009 since those parts are being stored, used, or consumed in Wisconsin on cranes that are provided along with an operator and which are no longer considered to be "leased" or "rented"?

Answer 2: No. Since Company C purchased the repair parts prior to October 1, 2009, at which time the repair parts were not subject to Wisconsin sales and use tax because they were going to be used on cranes that were being used solely for lease or rental to others, the subsequent storage, use, or other consumption of the repair parts for these cranes purchased prior to October 1, 2009 is not subject to Wisconsin sales or use tax.

Question 3: Are purchases of repair parts and labor for these cranes subject to Wisconsin sales or use tax on and after October 1, 2009?

Answer 3: Yes. Since the use of the cranes no longer meets the definition of "lease or rental" on and after October 1, 2009, repair parts and labor for the cranes may not be purchased without tax for resale, regardless of whether Company C's purchases of the cranes prior to October 1, 2009 qualified for exemption from Wisconsin sales and use tax as property for resale.

Question 4: Does Company C owe Wisconsin sales or use tax on its purchase prior to October 1, 2009 of the extended warranties for the cranes, if the extended warranties cover repairs made to these cranes on and after October 1, 2009?

Answer 4: No. The sale of the warranties to Company C was not subject to Wisconsin sales or use tax because the equipment to which the warranties related was not subject to sales or use tax, either at the time Company C purchased the extended warranties or at an earlier date. Therefore, even though the extended warranty covers repairs to cranes made on and after October 1, 2009, since the warranty was not subject to tax when it was purchased, it does not become taxable on October 1, 2009.

Question 5: Is Company C's purchase of an extended warranty prior to October 1, 2009 relating to a crane that Company C purchased prior to October 1, 2009 that was used solely for lease and rental purposes prior to October 1, 2009 subject to Wisconsin use tax on or after October 1, 2009 since (a) the cranes are stored, used, or consumed in Wisconsin on or after October 1, 2009 and (b) providing tangible personal property with an operator who does more than maintain, inspect, or set up the tangible personal property is no longer considered a "lease" or "rental" of that property?

Answer 5: No. Company C's purchase of the extended warranty is not subject to Wisconsin use tax on or after October 1, 2009 because (a) Company C purchased the extended warranty prior to October 1, 2009, at which time Company C's purchases of the crane to which the warranty related was not subject to Wisconsin sales or use tax (the crane was going to be used solely for lease or rental to others), and (b) Company C did not make a taxable purchase of the crane at an earlier date.

Question 6: If Company C purchases an extended warranty on or after October 1, 2009 for a crane that it purchased prior to October 1, 2009, does Company C owe Wisconsin sales or use tax on the purchase of the warranty?

Answer 6: No. The sale of the extended warranty to Company C is not subject to Wisconsin sales or use tax because the sale of the equipment to which the extended warranty relates is or was exempt to Company C.

Page last updated December 4, 2009