96-158
Response October 28, 1996
Request
XXXXX
XXXXX
Utah State Tax Commission
210 N 1950 W
Salt Lake City, UT 84134
Subject:
Utah State Tax Commission's ruling on Internal Revenue Code, Section
62(c), Accountable Plan (documentation attached) in Reference to a Use or Sales
Tax on the Rental of Tangible Personal Property
Dear XXXXX
I am writing to you to get the Utah State Tax
Commission's written determination on Internal Revenue Code Section 62(c),
Accountable Plan. Normally, as I
understand it, when someone rents or leases their personal tangible property
there is a State use or sales tax. In
the Other Expense Allowance Arrangement (paper trail) under IRC Section 62(c)
an employee who holds his own tools, retains title to the tools, retains
possession of his/her tools, sets up an “accountable plan” (tool rental
program) with their employer. This
Other Expense Allowance Arrangement (IRC Sect. 62(c) “Accountable Plan”),
similar in some ways to a Leaseback arrangement, allows the employee to rent
their tools to their employer or agent for the employer.
The employee under this arrangement does not pay
FICA, MEDICARE on this portion of their income. This provides some FICA/Medicare tax relief for those employees
who own their own tools. This
arrangement never exceeds 35% of their wages.
The employer or employee are not making a profit from this
arrangement. The employee realizes a
modest net income increase to help offset the cost of owning and purchasing
tools and equipment as an employee.
Obviously, any additional tools purchased from the realized savings are
subject to sales tax.
This arrangement does not change an employee's
federal or state income tax liability.
The average savings realized by an employee is approximately 7 1/2% on
the portion of income that falls under an accountable plan. If the state charges a use tax under this arrangement
an employee would not be able to participate.
This program is a “paper” arrangement that has specific guidelines. I am faxing two IRS letters that should give
you good insight to the program. Thank
you for your time and courteous attention on this matter.
Sincerely,
XXXXX
XXXXX
Advisory Opinion - Application of sales tax to use
of tools or equipment owned by the operator.
Dear XXXXX
We
have received your request for tax advice pertaining to situations in which a person
is hired to provide some type of work or service using the worker’s own
equipment. As your letter and the
accompanying documentation indicate, in the income tax area it is important to
deter mine which part of the payment is allocated to the worker’s wages. However, with regard to sales tax, we offer
the following advice:
If
the contract or arrangement in question calls for the worker to perform a
service and to provide the tools or equipment used to perform the service, the
use of the tools or equipment is not a separate transaction. The total charge is either taxable or
non-taxable, depending upon whether the service itself is taxable. For instance, if the work entails the repair
of tangible personal property, the entire amount charged for repair service is
taxable. The fact that the repairman
uses his own tools has no impact on that outcome. On the other hand, if the worker is hired to install permanent
landscaping, the installation is not taxable, even if the worker provides the
backhoe used in the process. By
contrast if the contract or arrangement calls for you or your client to deliver
tools or equipment to a job for use or operation by a customer, the transaction
is deemed as taxable equipment rental.
Because
your request contains no particular details of the type of tools or work
involved, we cannot offer an opinion as to whether your transactions are
taxable or non-taxable. If you need
more explicit direction, please provide us with additional details.
For
the Commission,
Joe
B. Pacheco,
Commissioner