In this 5 part series, Clarus Partners discusses the sales tax implications and nuances around renting property.
Recap of Part 1: Why Renting Can Trigger Sales Tax Obligations
In Part 1 of this series, we explored a common misconception about sales tax compliance for businesses operating across state lines. If you missed it, you can read Part 1 here. We met a business owner who mistakenly believed his low revenue in remote states meant no sales tax filing obligations. However, upon closer examination, it turned out the business rented expensive equipment nationwide, creating a physical nexus (ownership of property) in many states. This triggered sales tax filing requirements well below the usual $100,000 economic nexus threshold. This scenario highlights the crucial distinction between selling and renting tangible personal property when navigating sales tax compliance across state borders.
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 II – Possession vs. Operation
The Rental vs. Service Distinction
For the most part, rentals tend to be pretty straightforward. You are asked to be in a wedding, so you rent a tuxedo (and pay sales tax on it). You’re on vacation, so you rent an e-bike and some water sports equipment (and pay sales tax on it).
In each case, the recipient of the goods/services has operational control over that which is rented. But what if a purchaser engages in a transaction that clearly involves tangible personal property, without the care, custody, and control of that property transferring from the seller?
Equipment with an Operator: Taxable Rental or Nontaxable Service?
A phrase popular in sales tax circles is “equipment with an operator.” The distinction being, a strict rental of tangible personal property will be taxable. But when the seller provides equipment that is controlled and maintained by the seller, this transaction is more akin to a service – often nontaxable.
Presumption of a Service When Operator Included
In an “equipment with an operator” situation, the presumption is you’re essentially renting the service and expertise of the operator to operate the underlying equipment, which is generally not taxable. But you have to be careful with how the agreement is worded.
Separate Charges and Tax Implications
A transaction in which tangible personal property is furnished with an operator, and the seller separates the charges for the tangible personal property and the operator, could very well be presumed to be the rental of tangible personal property and the separate furnishing of an operator. This could result in the receipts from the charge for the tangible personal property being taxable. And the separate charge for the operator to be a nontaxable service.
Examples: When the Operator Makes the Difference
Example I: Crane Rental or Moving Service?
A construction company needs heavy materials moved around a construction site. They reach out to a crane company. Now, I don’t know about you. But I wasn’t on the “craning team” in high school. If I sat in a crane, I wouldn’t know how to turn it on. This is the case where, even though the seller may hold itself out to be a crane rental company, they are more than likely providing a worker to operate the crane. So rather than renting a crane (taxable), the seller is actually providing a basic service of moving things around – a nontaxable transaction in most states.
Example II: Renting Equipment vs. Hiring Cleanup Services
Invoices involving personal property and nontaxable services. Let’s say you’re doing some cleanup at a facility. You go into an equipment rental company and you need to rent a blower, a dehumidifier, and a dryer. These are all, of course, taxable rentals of personal property. Contrast that with this scenario – your home gets flooded, so you call a water extraction company. They itemize their invoice to you:
- Furniture moving
- Water extraction services
- Blower rental
- Dehumidifier rental
- Dryer rental
You will note that the same three items from the stand-alone rental are also listed on the invoice from the cleanup company. But in the second case, it is the cleanup company that is actually operating the items of personal property. They maintain the care, custody, and control of the property – it isn’t as though the homeowner is operating these. Therefore, many states will look at the essence of the transaction to determine taxability.
- Was it the homeowner’s desire to rent equipment? Of course not.
- Or did the homeowner really just want the water removed from their residence and the home back to normal? Clearly.
In a case like this, the essence of the transaction may control, rather than just a line item on an invoice.
If you have any questions about sales tax on rentals 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