United States

Alabama: Services Provided with Scaffolding Rentals not Subject to Rental Tax

Oct 19, 2015
From KPMG TaxWatch

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Recently, the Alabama Tax Tribunal ruled that services provided with scaffolding rentals were not subject to Alabama’s rental tax. The taxpayer at issue was in the business of renting scaffolding, as well as providing various scaffolding-related and miscellaneous services to customers. Certain of the taxpayer’s customers only wanted to rent scaffolding. Others only simply needed scaffolding-related services. Additionally, certain customers wanted to both rent scaffolding and have the taxpayer’s employees provide related services. The parties agreed that rental tax was not due if the taxpayer merely provided scaffolding services. The issue before the Tribunal was whether the proceeds from the scaffolding services were subject to rental tax when the taxpayer rented scaffolding and provided services together.

Under Alabama law, rental tax is levied on gross proceeds from the rental or lease of tangible personal property. “Gross proceeds” is defined as the “value proceeding or accruing from the leasing or rental of tangible personal property, ... without any deduction on account of the cost of the property so leased or rented, the cost of materials used, labor or service cost, interest paid, or any other expense whatsoever, ...” The Tribunal first reviewed its previous decisions and the regulations addressing whether proceeds paid for services performed in conjunction with leasing property were subject to Alabama’s rental tax. The general rule that could be gleaned from the prior decisions and the regulations was that the proceeds for labor or services performed in conjunction with the leasing of tangible personal property were subject to Alabama rental tax if (1) the labor or services were incidental to the renting or leasing of the property, and (2) the lessor was required to perform the labor or services pursuant to the rental agreement. After reviewing these authorities, the Tribunal Judge stated that, upon further reflection, he felt it was irrelevant whether the services were required by the lease agreement or were agreed to in a separate contract. In his view, the substance of a transaction must apply over the form and having the taxability of the transaction turn on whether the contract was separate or not, allowed evasion of the taxing statutes. Rather, the rule to be applied is that "if the lessor also performs a separate service that is apart from and not incidental to the leasing of the property, the fee for that service is not derived from the lease, and thus is not subject to lease tax." This rule applies regardless of whether the separate labor services are included in the rental agreement or in a separate contract. The Tribunal concluded that the scaffolding services at issue—although necessary—were separate from the rental of scaffolding. This conclusion was supported by the fact that certain customers only purchased scaffolding services. The Tribunal also concluded that the labor services were not “incidental” to the scaffolding rental because the set-up and dismantling services were performed before and after the lease period. In addition, over 75 percent of the total proceeds from the contract related to the services. Please contact Patrick Loynes at (713) 319-3948 with questions on Brock Services, LLC v. Alabama Dep’t of Revenue.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.