Summary: This blog discusses the state-by-state intricacies of sales tax in regards to rentals and leases of tangible personal property.
Please Note: If you are renting or leasing vehicles, machinery, heavy-duty equipment, or lodging, then this blog post is not for you. If you are in a rent-to-own relationship, or a capital lease relationship, this blog post may also not apply.
Understanding sales tax, and issues of nexus, is complicated. When a product isn’t sold but leased or rented, it’s still complicated – sometimes more so.
Thankfully, we’ve put together a guide to help you navigate each state’s requirements so you can determine when and how to collect (and when to pay) sales tax on rentals and leases of tangible personal property. Read on…
Where Do Rental Companies Owe Sales Tax?
One nasty side-effect of renting tangible personal property is that since the title of ownership is not transferred (meaning, the rental company still owns the property), having the property in another state creates sales tax nexus there. This means that if you are renting out property to other states, then you instantly have a sales tax collection responsibility there. Sales tax “nexus” is just a technical term that means you have crossed some sort of “invisible line” and therefore have a sales tax collection responsibility in that state.
This creates a real challenge for any products that are easily movable, especially in states like Colorado that have home-rule taxation requirements. Also keep in mind that having property in other states could also create income tax nexus, and potentially create a property tax obligation, depending on what is being rented out.
So if you rent products out to customers to other states, you could very well have a sales tax collection responsibility in just about every state in the United States. Yikes!
Do Leasing and Rental Companies Need a Sales Tax Permit in Every State They Lease Property in?
Unfortunately, yes. You will need to get a sales tax permit to collect and remit sales tax in every state where you are leasing or renting tangible personal property. This is because states require you to have a sales tax license if you are “engaged in business” in their state, and states include maintaining tangible property in the state within their definition of being engaged in business.
If you’re leasing property in a state, it doesn’t matter if you haven’t crossed the economic nexus threshold in that state or have no other presence in the state; you’ll still need to get a sales tax permit.
Take Texas, for example. They include the following in their definition of being “engaged in business” in the state:
- “You lease equipment or other tangible personal property to others in Texas.
- You own or use tangible personal property (including computer software) in Texas.”
Practically every state in the country has language that is similar, or similar in effect to the above.
We have many leasing clients who are shocked and surprised that they have a sales tax obligation and haven’t been collecting sales tax where they should for many years. We’ve found Voluntary Disclosure Agreements (VDAs) to be a useful tool to minimize past-due tax penalties. TaxValet’s team can help you with this - schedule a free initial consultation with our team to get started.
What Technically Constitutes a Rental or Lease of Property for Sales Tax Purposes?
When we talk about rentals and leases in the context of sales tax, the terms can generally be used interchangeably. A lease or rental occurs any time there is a transfer of possession without a transfer of ownership. For example, if I rent you a VHS tape (I promise I’m not that old) I am giving you possession of the tape, however, I, as the lessor, maintain ownership of the tape.
Within each rental transaction, there are at least two parties: the lessor and the lessee. The lessor maintains ownership of the item and temporarily transfers possession of the item to the lessee. The lessee pays the lessor a periodic payment for the right to enjoy use of the product.
With an operating lease agreement, at the end of the rental period the property is returned to the lessor. The lessee may have an ability to purchase for the fair market value of the property, however, it is not a rent-to-own situation. This distinction is important because sales tax is handled differently in rent-to-own scenarios.
How Is Sales Tax Paid on Rentals or Leases of Tangible Personal Property?
In brief, sales tax is typically due on the rental stream (the rental payments) of products or property. This is because most states have included rentals or leases within the definition of what constitutes a “sale”. But even if states do not take rental streams, then the initial purchase of the rental item would be subject to sales tax. So speaking in broad terms here, tax is going to be paid, one way or another, at some point during the rental of the product. The issue here is when that occurs.
In almost every state, the periodic payments that the lessor charges the lessee are subject to sales and use tax. However, some states have given lessors the option to pay sales tax on the purchase of the property up-front, which waives their requirement to collect sales and use tax on the periodic payments from the lessee.
For some businesses, it will be advantageous to pay sales tax on the initial purchase price of the product. For other businesses, it will be more prudential to not pay the tax up-front, and instead collect and remit sales tax from customers.
If you, as the lessor, decide that you would instead collect and remit sales tax from your rental customers, then you can use an exemption certificate to purchase the inventory tax-free from your suppliers. But if you decide that you want to pay the tax up-front, then you cannot use an exemption certificate.
Yes, but where does the transaction occur for sales tax purposes? Is it where the customer uses the product, or where they pick it up?
With rentals, sales tax is typically collected and remitted based on where the transfer of property occurs. If you ship the product to another state, for example, then the state where the item is transferred to is where sales tax is due. If, however, the customer picks up the property at one location and then transports it to another location, then that can impact which tax authority should be paid. All Streamlined Sales Tax (SST) member states have indicated that if a product is picked up in one state and then transported to another state, then the initial rental payment’s sales tax will be due in the first state, and the rest of the rental payment’s sales tax will be due in subsequent states.
Sales Tax Sourcing for Leased or Rented Products
Understanding where a transaction takes place is important so that you know what tax rate you should use, and which jurisdiction should be paid sales tax. Where a transaction is sourced will vary based on whether or not there are recurring payments.
Sales Tax Sourcing for Leases/Rentals with Recurring Payments
If your lease or rental has recurring payments, then where the transaction will be sourced will depend on whether the transaction is for the initial payment, or for subsequent payments:
- First Payment: The initial periodic payment is sourced like a retail sale (as described above).
- Subsequent Payments: These are sourced to the main property location for each period the payment covers. This is typically the place where the leased item is mainly used, based on an address provided by the lessee, and known to the lessor through ordinary business records. Temporary use in other locations (like tools used on business trips) doesn’t change this.
Remember, if the lessee gets the leased item at the lessor's business spot but uses it at their own business place, the tax on the first payment is sourced to the lessor's location, but the following payments are sourced to the lessee's place.
It's advisable for lessors to ensure that the address they have for the lessee reflects where the leased item is primarily used.
Sales Tax Sourcing for Leases/Rentals without Recurring Payments
If a lease or rental doesn't involve periodic payments, the payment's sourcing is the same as a retail sale. You would use the address based on the following priorities (with the top of the list being the highest priority):
- Business Location of Seller: If a product is picked up by the buyer at the seller's business spot, the sale is sourced to that place. This is typical for brick-and-mortar businesses.
- Shipping Address: If the product isn't collected by the buyer at the seller's location, the sale is sourced to the place where the buyer receives it, like the shipping address provided by the buyer.
- Address from Business Records: If the first two scenarios don't apply, the sale is sourced based on the buyer's address available from the seller's business records.
- Billing or Payment Address: If the above conditions don't apply, the location is determined by the buyer's address obtained during the sales transaction, often the billing or payment address. This applies unless using this address is in bad faith.
- Product's Origin: If none of the previous scenarios are applicable, the location is determined by where the product was shipped from, where digital goods were first available for transmission, or where the service was provided.
How Do Ancillary Charges (like Insurance and Maintenance Charges) Impact Sales Tax on Rentals?
Ancillary charges such as finance charges, insurance, and maintenance charges play a role as well. What’s important is trying to determine if these ancillary charges are included in the rental of the property, or if they are separately stated. If they are included with the rental of the property, they will usually be subject to sales and use tax. If they are separately stated, they have a better chance of being exempt from sales tax.
Another factor here is if the ancillary charges are mandatory. Mandatory charges are more likely to be subject to sales tax, while optional charges aren’t. We would need to look at copies of the rental agreement and invoices, as well as examine specific state statutes, to make a determination on which charges would be subject to tax.
Practical Sales Tax Audit Tips for Rental Companies
Know in which states your inventory is located at all times. Since your company has sales tax nexus (owes sales tax) in any state where your rental property is located, you need to be particularly careful if your property will move across state lines. This is particularly important for anything easily transportable like machinery and vehicles. You might consider adding something to your rental agreement that states that the rented property can only be used or possessed in the original state it was rented.
Be mindful of how long you keep records/invoices. Even if a state’s sales tax audit lookback period is only 3 years, you may need to have copies of invoices that are older than that. This could happen if you have open rental agreements that started before the audit lookback threshold. You should always keep original purchase documents on file for the lifetime of the assets.
Be mindful of sales tax rate changes. If you are leasing property and the sales tax rate changes, your existing contract will likely be able to use the old rate under a “grandfather” provision. However, if you modify the contract, you may need to begin using the new sales tax rate.
Where are Rentals and Leases Subject to Sales Tax?
Does Alabama Subject Rentals and Leases to Sales Tax?
Alabama generally does charge a privilege or license tax (rental tax) on the rental or lease of tangible personal property unless a specific exemption applies. An alternative tax rate can apply depending on the category of product sold. Learn more here.
Does Arizona Subject Rentals and Leases to Sales Tax?
Arizona generally does charge sales tax (transaction privilege tax or TPT) on the rental of personal property unless a specific exemption applies. Learn more here.
Does Arkansas Subject Rentals and Leases to Sales Tax?
Arkansas generally does charge sales tax on the rental or lease of tangible personal property unless a specific exemption applies. If the rental period is less than 30 days, the tax is due regardless of whether the lessor paid sales or use tax at the time of the original purchase of the property. Learn more here.
Does California Subject Rentals and Leases to Sales Tax?
In California, the rental or lease of tangible personal property does come with specific sales tax implications. Generally, the state charges sales tax on such rentals or leases. However, lessors are presented with a choice: they can decide to pay sales or use tax based on the initial purchase price of the property or opt to collect and remit use tax from the lessee with each lease payment. It's crucial to understand that selecting both is not permissible. You can find full details on how sales tax works for leases and rentals in California in the state’s handbook. But if you really just want someone to take care of all this for you, consider signing up for TaxValet.
The tax's nature often depends on how the lease is categorized. If the lease is deemed a "sale" and "purchase," then the tax is gauged by the payable rentals. Commonly, a use tax, based on the property's use by the lessee in the state, is applicable. The lessor's responsibility is to collect this tax during lease payments and provide the lessee with an appropriate receipt. Once the lessee is furnished such a receipt or the tax is directly submitted to the state, their liability for the tax ends.
In situations where the tangible personal property is leased in essentially the same form as it was acquired and the sales tax reimbursement or use tax (based on the purchase price) has been duly paid, no additional sales or use tax is imposed on the lease payments. If this isn't the case and the lessor wishes to pay tax pegged to the purchase price, it needs to be reported and settled with their return when the property is first introduced to the rental service.
Furthermore, if tax reimbursement is paid at the acquisition time for property ultimately leased in its acquired form, this locks in an irrevocable decision not to pay tax influenced by rental receipts. After this decision, the lessor cannot change their stance by reporting tax on rental revenue and seeking a tax-paid-purchase-resold deduction.
In essence, while California typically taxes rentals and leases, there are pivotal decisions and details that lessors must be wary of, primarily regarding how and when the tax is paid. Lessees should also be in the loop about these specifics to ensure they're remitting the appropriate tax amount.
Does Colorado Subject Rentals and Leases to Sales Tax?
In Colorado, the landscape for sales tax concerning rentals and leases of tangible personal property is distinct, especially when we discuss short-term rentals lasting three years or less. Colorado generally refrains from levying a sales tax on the rental or lease of tangible personal property if the rental duration is under 3 years. In such scenarios, the state considers the lessor, not the lessee, as the final consumer. This translates to no sales tax being due on the lease payments themselves. However, the onus falls on the lessor to pay the sales or use tax during the acquisition, usage, storage, or consumption of the said property.
To sum it up, while Colorado's treatment of sales tax on rentals and leases might seem straightforward, it's essential to know that the primary responsibility often falls on the lessor, particularly for short-term leases... Learn more here.
Does Connecticut Subject Rentals and Leases to Sales Tax?
Connecticut generally does charge sales tax on the rental or lease of tangible personal property unless a specific exemption applies. Learn more here.
Does Washington, D.C. Subject Rentals and Leases to Sales Tax?
Washington, D.C. generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. All tangible personal property and certain selected services sold or rented at retail to businesses or individuals delivered in the District of Columbia are subject to sales tax. Learn more here.
Does Florida Subject Rentals and Leases to Sales Tax?
Florida generally does charge sales tax on the rental of tangible personal property unless a specific exemption applies. An additional discretionary surtax may apply. Learn more here.
Does Georgia Subject Rentals and Leases to Sales Tax?
Georgia generally does charge sales tax on the rental of tangible personal property unless a specific exemption applies. Learn more here.
Does Hawaii Subject Rentals and Leases to Sales Tax?
Hawaii adopts a unique approach when taxing property that's acquired for the purpose of leasing. Here's a breakdown of the process:
- Initial Purchase for Lease: When tangible personal property is procured with the intention to lease it out, the transaction is taxed at the wholesale rate, which is currently set at 0.5%. This means that lessors pay a sales tax on their acquisition of the property.
- Subsequent Lease Payments: As the property is leased out and lease payments are made by the lessee, these payments are then subject to tax at the retail rate of 4%. This essentially means that over the duration of the lease, every payment made by the lessee is taxed.
Reference to this double-tiered taxing mechanism can be found in the Hawaii Tax Facts under the code 37-1(10).
In essence, Hawaii's system results in a two-step taxation process for leased properties: first, at the point of acquisition by the lessor, and then continuously through the tenure of the lease as payments are made by the lessee. Businesses and consumers in Hawaii should be keenly aware of this structure to accurately account for the applicable taxes.
Does Idaho Subject Rentals and Leases to Sales Tax?
Idaho generally does charge sales tax on the renting and leasing of tangible personal property. An exemption may apply for “fully operated equipment rentals.” Learn more here.
Does Illinois Subject Rentals and Leases to Sales Tax?
In Illinois, the approach towards sales tax concerning rentals and leases of tangible personal property is different than in many other states. Broadly speaking, Illinois does not levy a sales tax directly on the lease or rental payments for tangible personal property. Instead, the sales tax is applied to the lessor’s acquisition of the property. Consequently, the lessee doesn't directly pay sales tax on their lease payments. However, the lessor does have the right to seek reimbursement for the tax they have already paid from the lessee.
Specifically, as per the Illinois Administrative Code, the sales tax is imposed on the property at the time the lessor acquires it. Once this tax has been paid by the lessor, the lessee's payments remain exempt from tax.
A notable insight from an Illinois state auditor emphasizes that the correct approach to compute the tax owed is by evaluating the equipment's depreciated value when it first enters Illinois, adjusted by any sales tax previously paid on that equipment in other jurisdictions. For clarity and compliance, businesses need to maintain comprehensive documentation, like invoices, that explicitly link the sales tax payments made in other states to the specific equipment in question.
For businesses that have already paid sales tax on a purchase in another state, Illinois acknowledges this. If the business can provide concrete evidence of the sales tax payment in another state, it neutralizes any use tax liabilities they might have in Illinois for that specific product.
Interestingly, the intricate nature of discerning the exact amount of use tax owed to Illinois has led to certain strategies. Some businesses, perhaps due to the daunting task of navigating the complexities, often bypass paying the use tax upfront. Instead, they await a potential audit and settle the evaluated tax at that juncture. Alternatively, a preemptive move businesses sometimes adopt is to remit estimated use tax payments to Illinois, in the hope that these payments will largely align with any subsequent audit assessments.
It's also crucial to be aware of local variances. Chicago, for instance, imposes its own tax on personal property leases, which stands out from the state's general policy.
All in all, while Illinois presents a distinct model regarding sales tax on leases and rentals, businesses must remain vigilant, especially if they operate across state lines, to ensure they're compliant and are employing the best strategies to mitigate potential financial burdens.
Does Indiana Subject Rentals and Leases to Sales Tax?
Indiana does generally charge sales tax on rentals and leases of tangible personal property unless a specific exemption applies. Learn more here.
Does Iowa Subject Rentals and Leases to Sales Tax?
Iowa does generally charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Kansas Subject Rentals and Leases to Sales Tax?
Kansas generally does charge sales tax on rental and lease of tangible personal property, though some exemptions may apply. Learn more here.
Does Kentucky Subject Rentals and Leases to Sales Tax?
Kentucky generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Louisiana Subject Rentals and Leases to Sales Tax?
Louisiana generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
Does Maine Subject Rentals and Leases to Sales Tax?
Maine generally does charge a service tax on the renting and leasing of tangible personal property, though certain exemptions could apply. The lessor is liable for sales or use tax when the property enters the State (generally at the beginning of the lease), based on the purchase price paid by the lessor for the property. If sales tax was not paid to the vendor when the property was purchased, the
lessor must report the use tax directly to MRS. No sales tax is charged to the lessee, and the
lease payments are not subject to sales or use tax. If the property is returned to the lessor
and leased to another Maine customer, no additional use tax is due. Learn more here.
Does Maryland Subject Rentals and Leases to Sales Tax?
Maryland generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Massachusetts Subject Rentals and Leases to Sales Tax?
Massachusetts generally does charge sales tax on rentals and leases of tangible personal property unless a specific exemption applies. Learn more here.
Does Michigan Subject Rentals and Leases to Sales Tax?
Michigan generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. A registered lessor in Michigan has the option of paying six percent Michigan Tax on the acquisition of tangible personal property that is to be leased in Michigan or to collect and remit six percent use tax on the total rental receipts. Learn more here.
Does Minnesota Subject Rentals and Leases to Sales Tax?
Does Mississippi Subject Rentals and Leases to Sales Tax?
Does Missouri Subject Rentals and Leases to Sales Tax?
Does Nebraska Subject Rentals and Leases to Sales Tax?
Nebraska generally does charge sales tax on rentals and leases of tangible personal property unless a specific exemption applies. Learn more here.
Does Nevada Subject Rentals and Leases to Sales Tax?
Nevada generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. The retailer has the option to remit the tax based on the acquisition cost of the property or to remit the tax based on the amounts it collects for lease or rental. Learn more here.
Does New Jersey Subject Rentals and Leases to Sales Tax?
New Jersey generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Different payment rules apply if the lease is for longer than six months. Learn more here.
Does New Mexico Subject Rentals and Leases to Sales Tax?
New Mexico generally does charge gross receipts tax (sales tax) on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does New York Subject Rentals and Leases to Sales Tax?
New York generally does charge sales tax on the rental and lease of tangible personal property, unless an exemption applies. Learn more here.
Does North Carolina Subject Rentals and Leases to Sales Tax?
North Carolina generally does charge sales tax on the renting and leasing of tangible personal property, unless an exemption applies. Learn more here.
Does North Dakota Subject Rentals and Leases to Sales Tax?
North Dakota generally does charge sales tax on the renting and leasing of tangible personal property, unless an exemption applies. The lessor may be able to elect to pay tax on the cost of the property upon acquisition or collect tax on the total rental/lease charges. Learn more here.
Does Ohio Subject Rentals and Leases to Sales Tax?
Ohio generally does charge sales tax on rentals and leases of tangible personal property, unless an exemption applies. Learn more here.
Does Oklahoma Subject Rentals and Leases to Sales Tax?
Oklahoma does charge sales tax on the renting and leasing of tangible personal property unless an exemption applies. Learn more here.
Does Pennsylvania Subject Rentals and Leases to Sales Tax?
Pennsylvania does charge sales tax on the renting and leasing of tangible personal property unless an exemption applies. Learn more here.
Does Puerto Rico Subject Rentals and Leases to Sales Tax?
Does Rhode Island Subject Rentals and Leases to Sales Tax?
Rhode Island generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
Does South Carolina Subject Rentals and Leases to Sales Tax?
South Carolina generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does South Dakota Subject Rentals and Leases to Sales Tax?
South Dakota generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Tennessee Subject Rentals and Leases to Sales Tax?
Tennessee generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Texas Subject Rentals and Leases to Sales Tax?
Texas generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
Does Utah Subject Rentals and Leases to Sales Tax?
Utah generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Vermont Subject Rentals and Leases to Sales Tax?
Vermont charges sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Virginia Subject Rentals and Leases to Sales Tax?
Virginia generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Washington Subject Rentals and Leases to Sales Tax?
Washington generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Washington’s Business and Occupation (B&O) tax also generally applies to leases and rentals. Learn more here.
Does West Virginia Subject Rentals and Leases to Sales Tax?
West Virginia generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Wisconsin Subject Rentals and Leases to Sales Tax?
Wisconsin generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Does Wyoming Subject Rentals and Leases to Sales Tax?
Wyoming generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Understanding sales tax on rentals and leases of tangible personal property can feel like a full-time job. Bookmarking these sites will help you stay on top of changes to the laws as they happen (and they will), but outsourcing your sales tax management can also save you time, money, and perhaps most importantly, stress!
At TaxValet, we offer clients complete peace of mind when it comes to handling sales tax. From navigating audits to understanding nexus to making accurate payments on time, we’ve got you covered. If you’re ready to take sales tax off your plate, book a no-obligation introduction today.
