In this 5 part series, Clarus Partners discusses the sales tax implications and nuances around renting property.
Introduction
Rentals & Sales Tax: 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 I – Rentals Across State Lines
A business owner recently reached out to Clarus Partners about his multi-state sales tax compliance responsibilities. His business was about to be acquired, the purchaser indicated they would exercise due diligence prior to the acquisition, and the seller wanted to get ahead of this project.
He said he was not concerned about his sales tax compliance situation, because his revenues were consistently below the $100,000 threshold in all states in which he had remote revenues. In other words, he knew he had physical nexus in the state in which he was domiciled, had an office, and maintained inventory. But with his revenues being below the sales thresholds in other (remote) states, he felt comfortable that he would have no sales tax compliance obligations in them. Since his economic nexus was so low in the remote states where he did not office, he would not be required to file returns in these states.
As we talked about his business, he explained that he had high-end, expensive testing equipment that he shipped all over the country. This elicited the question from Clarus: “If the equipment is so expensive, why are your revenues below all other state thresholds?” He responded, “Well, businesses can’t really afford to buy this equipment. We just rent it to them.” (Cue alarm bells.)
By now, you’ve probably connected the dots on this. When a business sells personal property, it transfers all rights of ownership. But when a business rents personal property, they retain rights of ownership. This business – which was only filing sales tax returns in one state – actually had a responsibility to file returns in roughly 40 states. Again, the reason being, it had tangible personal property engaged in its business in 40 states. The economic nexus thresholds for filing in remote states begin at $100,000 annually and increase in many states. But if a business has physical nexus in a state (owning personal property, even if it is rented) and is engaging in taxable transactions, that first dollar of revenues is subject to sales tax.
This was quite an unwelcome learning experience in the distinctions between selling and renting personal property across state lines for this taxpayer.
If you have any questions about rentals & sales tax or any other sales tax issues, please reach out to Clarus Partners.
R.E.N.T. Series
Steve Hanebutt, CPA, MST, Fort Worth-Dallas office