In this 5 part series, Clarus Partners discusses the sales tax implications and nuances around renting property.
Part 1: Renting vs. Selling – Explained the difference between sales tax on rentals and purchased goods. Owning equipment in another state (even for rental purposes) creates a “physical nexus” requiring sales tax collection regardless of revenue thresholds.
Part 2: Equipment with an Operator – Dived into situations where the line between renting equipment and providing a service blurs. The key factors are operational control by the customer and separate billing for the equipment and operator. Examples were provided to illustrate the taxable vs non-taxable scenarios.
Part 3: Software Sales Tax in Texas – Presented a recent case highlighting the distinction between a software sale and a software license. While both might seem similar, software licenses are considered more like rentals, creating a physical nexus in Texas even without a physical presence. This can have significant sales tax implications.
Introduction
Sales Tax on Rentals: While sales tax thresholds often come to mind, there are important distinctions for businesses renting equipment across state lines. Specifically, if the sale of a widget is taxable, the rental of that same widget will typically be taxable as well. However, there are some material differences between these two transactions that the astute seller and purchaser would be well advised to consider.
Part IV – When is a Temporary Transfer a Short-Term Rental, a Long-Term Rental, or Even a Nontaxable Transaction?
Occasionally, even though there may be a temporary transfer of tangible personal property, the length of that transfer may affect taxability. A good example of this is the rental of motor vehicles in Texas.
Definition of Motor Vehicles
Motor vehicles are defined as self-propelled vehicles designed to transport persons or property on a public highway. They include trailers, semi-trailers, and house trailers. Technically, the rental of a motor vehicle in Texas is not subject to sales tax. The rental of a motor vehicle is subject to (wait for it) motor vehicle tax. Clever.
Motor Vehicle Rental Tax Rates Based on Rental Duration
Short-Term Rentals (1-30 Days)
When a motor vehicle is rented for 1 – 30 days, the Texas motor vehicle rental tax rate is 10%.
Medium-Term Rentals (31-180 Days)
When a motor vehicle is rented for 31 – 180 days, the Texas motor vehicle rental tax rate is 6.25%.
Long-Term Rentals (More than 180 Days)
When a motor vehicle is rented for longer than 180 days, no Texas motor vehicle rental tax is due.
Local Jurisdiction Taxes
Complicating things further, local jurisdictions may come into play with their own taxes. As an example, there are five jurisdictions in Texas that impose their own motor vehicle rental tax. The local tax applies to passenger cars, vans, sport utility and light trucks, but is not imposed on trailers or trucks having a manufacturer’s rating of more than one-half ton.
Resale Exemption and Taxability
Eligibility for Resale Exemption
As you might anticipate, the resale exemption on the front end depends on the taxability on the back end.
Rentals for 180 Days or Less
When a motor vehicle is rented for 180 days or less, the owner of the motor vehicle is eligible for the resale exemption since the subsequent rentals are taxable.
Rentals for Longer than 180 Days
But when a motor vehicle is rented for longer than 180 days, the owner of the motor vehicle is not eligible for the resale exemption since the subsequent rentals are nontaxable.
Airport Rentals and Motor Vehicle Rental Tax Rates
Incidentally, have you ever noticed that in some cities, you pay a higher tax rate for vehicles rented from the airport than for vehicles rented from other locations? Why? A government employee’s favorite tax is the one his constituents don’t have to pay. So, if you live in a particular city, you probably aren’t going to fly home and rent a car. Almost all car rentals at airports are paid by those who don’t live there and are visiting (and don’t vote there).
As you can see, the differences between sales vs. rentals of personal property can be substantial depending on the specific property rented and the period of rental.
Do You Have Questions About Motor Vehicle Rental Tax?
If you have any questions about motor vehicle rental tax or any other sales tax issues, please reach out to Clarus Partners.
R.E.N.T. Series – Sales Tax on Rentals
Steve Hanebutt, CPA, MST, Fort Worth-Dallas office