Sales Tax on Rentals and Leases of Tangible Personal Property

by | Apr 23, 2020

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.

 

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!

 

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.

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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 rather 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.

 

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 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 in. 

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?

State Are Rentals and Leases Subject to Sales Tax in This State?
Alabama 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.
Arizona 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.
Arkansas 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.
California California generally does charge sales tax on the rental or lease of tangible personal property unless a specific exemption applies. As a lessor, you may have the option to pay sales tax up-front on the asset purchase, rather than charge your lessees sales tax. Learn more here.
Colorado Colorado generally does not charge sales tax on the rental or lease of tangible personal property if the rental is less than 3 years. For rentals that are three years or less in duration, the lessor is considered the end-user. Therefore, there is no sales tax due on rental payments (except as otherwise noted immediately below), but the lessor must pay sales or use tax on the acquisition, use, storage, or consumption of the property. Learn more here.
Connecticut Connecticut generally does charge sales tax on the rental or lease of tangible personal property unless a specific exemption applies. Learn more here.
District of Columbia 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.
Florida 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.
Georgia Georgia generally does charge sales tax on the rental of tangible personal property unless a specific exemption applies. Learn more here.
Hawaii Hawaii generally charges general excise tax (commonly referred to as sales tax) on all leases and rentals unless a specific exemption applies. Learn more here.
Idaho 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. 
Illinois Illinois generally does not charge sales tax on rentals or leases of tangible personal property. Rental purchase agreement occupation or use tax may apply for the consumer. Please note that Chicago DOES have a tax for personal property leases.
Indiana Indiana does generally charge sales tax on rentals and leases of tangible personal property unless a specific exemption applies. Learn more here.
Iowa Iowa does generally charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Kansas Kansas generally does charge sales tax on rental and lease of tangible personal property, though some exemptions may apply. Learn more here.
Kentucky Kentucky generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Louisiana Louisiana generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
Maine Maine generally does charge a service tax on the renting and leasing of tangible personal property, though certain exemptions could apply. Learn more here.
Maryland Maryland generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Massachusetts Massachusetts generally does charge sales tax on rentals and leases of tangible personal property unless a specific exemption applies. Learn more here.
Michigan 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.
Minnesota Minnesota generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
Mississippi Mississippi generally does charge sales tax on renting and leasing tangible personal property unless a specific exemption applies. Learn more here.
Missouri Missouri generally does charge sales tax on renting and leasing tangible personal property unless a specific exemption applies. In general, payments for the lease of tangible personal property are subject to tax unless the lessor paid tax on the purchase of the property. Payments for the lease of tangible personal property are exempt from tax if the sale of the tangible personal property would be exempt. Learn more here.
Nebraska Nebraska generally does charge sales tax on rentals and leases of tangible personal property unless a specific exemption applies. Learn more here.
Nevada 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.
New Jersey 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.
New Mexico 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.
New York New York generally does charge sales tax on the rental and lease of tangible personal property, unless an exemption applies. Learn more here.
North Carolina North Carolina generally does charge sales tax on the renting and leasing of tangible personal property, unless an exemption applies. Learn more here.
North Dakota 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.
Ohio Ohio generally does charge sales tax on rentals and leases of tangible personal property, unless an exemption applies. Learn more here.
Oklahoma Oklahoma does charge sales tax on the renting and leasing of tangible personal property, unless an exemption applies. Learn more here. 
Pennsylvania Pennsylvania does charge sales tax on the renting and leasing of tangible personal property, unless an exemption applies. Learn more here.
Puerto Rico Puerto Rico generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Rhode Island Rhode Island generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
South Carolina South Carolina generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
South Dakota South Dakota generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Tennessee Tennessee generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here. 
Texas Texas generally does charge sales tax on the rental and lease of tangible personal property unless a specific exemption applies. Learn more here.
Utah Utah generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Vermont Vermont charges sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Virginia Virginia generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Washington 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.
West Virginia West Virginia generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Wisconsin Wisconsin generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Wyoming Wyoming generally does charge sales tax on the renting and leasing of tangible personal property unless a specific exemption applies. Learn more here.
Disclaimer: Our attorney wanted you to know that no financial, tax, legal advice or opinion is given through this post. All information provided is general in nature and may not apply to your specific situation and is intended for informational and educational purposes only. Information is provided “as is” and without warranty.

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