Published: May 21, 2024

R.E.N.T.S.
Rental Expenditure Nuances or Taxation, a Series
Part 5: Taking a Look at Real Property Rentals

real property rentals tax

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.

Part 4: Temporary Transfers and Rental Tax in Texas – Explored how the length of a temporary transfer can impact tax implications in Texas, specifically for motor vehicle rentals. Rental duration determines the applicable tax rate (short-term, long-term, or no tax for leases exceeding 180 days). Local jurisdictions may also impose additional motor vehicle rental taxes. The resale exemption for purchasing a motor vehicle also depends on whether subsequent rentals will be taxable.

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 V – Taking a Look at Real Property Rentals

At Clarus Partners, we frequently discuss sales tax related to tangible personal property transfers. However, we also manage Hotel Occupancy Tax (“HOT”) compliance for clients in the hotel and hospitality space and offer no-risk refund reviews for multifamily housing owners/property management companies. This fifth and final segment focuses on real property rental tax and related issues.

Hotel Occupancy Tax (HOT)

Most states impose HOT or a similar transient/lodging tax on temporary lodging stays. The variation in these taxes includes:

  • The tax rates for these stays at the state level can vary significantly, ranging from 15% in Connecticut to 1.5% in Oregon.
  • Many states permit local jurisdictions to add their own HOT, while some states prohibit this practice.
  • Nevada lacks a state-level HOT but authorizes local jurisdictions to impose their own.
  • Among the five states without a sales tax, only Alaska doesn’t have HOT.

Exemptions and Nuances to Real Property Rental Tax

  • As HOT applies to temporary lodgings, most states offer exemptions for longer stays, ranging from as low as 29 days to as high as 186 days.
  • However, Oklahoma does not provide a de minimis exemption for any structure holding itself out as a hotel; all room rentals are taxable.

Texas-Specific Nuances

  • Renting a meeting/conference/banquet room in a hotel subjects the rental to state HOT.
  • Conversely, renting the same room in a non-hotel venue, like a conference center, is nontaxable.
  • Remarkably, while such a room’s rental in a hotel incurs state HOT, it is exempt from local HOT, which applies only to rooms ordinarily used for sleeping.

Multifamily Housing

Multifamily housing entails fewer complexities, yet it offers significant opportunities for industry insiders:

  • Owners/operators of apartment complexes, senior living facilities, etc., can benefit from multiple sales tax exemptions, saving substantial tax dollars and securing refunds on past payments.
  • These exemptions cover various expenditures, including both recurring expenses and capital projects, although the specifics vary by state.
  • If you own or operate multifamily housing structures, a risk-free sales tax review could yield considerable benefits.

Have Any Questions about Real Property Rental Tax?

If you have any questions about real property rental tax or any other sales tax issues, please reach out to Clarus Partners.

R.E.N.T. Series â€“ Sales Tax on Rentals

Steve Hanebutt, CPA, MST, Fort Worth-Dallas office