Divergent Use - The Real-Life Tale of Little Red Riding Hood

Don't play Little Red Riding Hood to the Big Bad Wolf, i.e. divergent use.  Divergent use is a big gotcha for companies that expand lines of business without reconsidering Texas sales and use tax consequences.

Divergent use occurs for Texas  equipment rental companies when equipment purchased tax-free is used in  a taxable manner.  When an equipment rental company issues a resale certificate in lieu of paying sales/use tax and uses the equipment to perform services divergent use has occurred.  It is common for equipment rental companies to decide to lease equipment with an operator.  But when a resale certificate is issued in lieu of paying sales or use tax, a company may not use the equipment to perform services for clients without paying sales or use tax on the divergent use.  Sales or use tax is owed on the fair market rental value for the “normal” term of a rental to third parties or the original purchase price.

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