Engaging in Transactions to Incur Tax Benefit May Defeat Normal Course of Business Argument

In a recent case, Cantu Enterprises, LLC v. Hegar, the Third Court of Appeals applied the “normal course of business” standard to invalidate the taxpayer’s claim of a sale for resale exemption. Texas Tax Code § 151.006(a)(2) states that an exempt “sale for resale” includes a sale of tangible personal property within the U.S. or Mexico to a purchaser for the sole purpose of the purchaser leasing or renting the property in the normal course of business to another person. Thus, if the purpose of the underlying sale is not to facilitate leases or rentals that are part of the normal business operations of the purchaser, but instead, the purpose is merely to create a tax benefit, the underlying sale is illegitimate and not exempt.

In the Cantu case, the court analyzed a related-party aircraft lease under former sales tax statutes which, following Legislative changes, are not applicable to present day transactions. The Cantu opinion is useful, however, as guidance for taxpayers interpreting the “normal course of business” standard for sale-for-resale exemptions.

To determine whether the transactions motivating the sale of the Cantu aircraft were part of Cantu’s normal business operations, the Court considered evidence that Cantu Enterprises had denied requests from third parties to lease the aircraft, failed to market the aircraft for lease or collect payments from Cantu Consulting for its lease of the aircraft, and leased the aircraft for less than fair-market value. On this basis, the court found that the aircraft was not purchased for the purpose of enabling leases that were part of the normal course of Cantu Enterprises’ business. Accordingly, Texas businesses should consider how third-party relations, marketing tactics, payment collection, and pricing can affect a court’s view of a renting or leasing relationship facilitated by an allegedly exempt sale-for-resale.